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Mahesh

02/01/24 07:04 AM IST

India’s 1991 crisis and the RBI Governor’s role

In News
  • S.Venkitaramanan, an IAS officer who served as the Governor of the Reserve Bank of India (RBI) from December 1990 to December 1992 passed away recently.
1991 crisis
  • Starting in late 1990, India faced a severe balance of payments stress.
  • This had been precipitated by a slowing of inward remittances and a rise in the price of oil following the invasion of Kuwait by Saddam Hussain.
  • The current account of the balance of payments was subjected to a double whammy, a reduction of receipts and a rise in the value of imports.
  • In 1990-91 the current account deficit swelled to 3 percent of the GDP, a level highest by far in two decades.
  • The import cover afforded by India’s reserves plummeted to a historic low of three weeks at the peak of the crisis.
  • There was speculation that India would default on its external payment obligations.
  • It was at that moment that the RBI led by Mr. Venkitaramanan played a sterling role, which in effect came to pledging its gold to international banks for a hard currency loan.
India's response
  • In April 1991, the Government raised $200.0 million from the Union Bank of Switzerland through a sale (with a repurchase option) of 20 tonnes of gold confiscated from smugglers (sic).
  • Again, in July 1991, India shipped 47 tonnes of gold to the Bank of England to raise another $405.0 million.
  • This action helped the country repay its international donors and creditors, though it was not sufficient to completely absolve the country of the crisis.”
  • A country builds reserves in anticipation of using it on a rainy day. For the RBI to have used its gold to stave off a default was an act of courage. and imagination.
  • Indeed, it was the smartest economic management.
  • Not only India’s prestige but also its reputation as a reliable counterparty in business had been salvaged. It only needs to be recalled that India imports around 80 percent of its oil to recognise the practical value of the manoeuvre.
Economic reforms
  • Before its efforts to raise international loans, the RBI had begun a programme of import compression, implemented mainly via raising the cash margin on imports.
  • The cash margin was hiked four-fold between October 1990 and April 1991.
  • Supplementary measures that raised the cost of imports were implemented too, together constituting a stringent effort to rein them in.
  • This strategy turned out to be a winner, and the current account deficit flipped from a high of 3 percent in 1990-91 to a mere .3 percent of GDP in 1991-92.
  • This almost eliminated the need to raise foreign exchange to finance India’s non-debt payments.
Role of Manmohan Singh
  • In 1991, Manmohan Singh, India's Finance Minister, was pivotal in managing the Balance of Payment Crisis.
  • He executed significant economic changes termed the "New Economic Policy" or "LPG" (Liberalization, Privatization, and Globalization) to tackle the crisis.
  • Guided by Singh, the government embraced trade and investment liberalization, reduced bureaucracy, and connected India's economy to global markets.
  • Dr. Singh initiated policies to incentivize foreign investment, simplify trade rules, and boost export-oriented industries.
  • He led negotiations with international financial entities like IMF to secure loans and aid for economic stabilization.
  • Singh's reforms enhanced India's foreign reserves, attracted foreign investment, and spurred economic growth.
  • His contributions are widely acknowledged for reshaping India's economy and establishing the groundwork for its subsequent rapid progress.
Source- The Hindu

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