1991 - Causes

Why and how had India’s economic condition become as precarious as it was in 1991? There were multiple reasons, explains Sanjaya Baru in 1991. (1) Successive government policies over the previous decade had been adding to increasingly unsustainable government debt. (2) Forex reserves were falling as India continued to have few goods or services to sell abroad. (3) The USSR fell, and overnight a country with whom India traded a lot and in non-US dollars had ceased to exist. (4) Saddam invaded Kuwait, oil prices spiked and that was the straw that finally broke the Indian camel. (5) From 1989, India had a string of coalition governments. I will explain next why that last point mattered.

 

When we think of the 1989-91 period, we think of short-lived governments and unknown compromise candidates suddenly becoming Prime Ministers. (1) It also meant that no meaningful policy decisions could be made by such coalition governments as things began to slide downwards. (2) Global credit rating agencies simultaneously demoted India’s standing saying the economic situation was bad and the political situation was unstable. The second part (unstable political situation) was new for India – until then, however it was run, India had stable governments. Not anymore. This demotion in credit rating (termed a “crisis in confidence”) meant borrowing forex became that much harder and costlier, driving an already bad economic situation into an ever-worsening spiral.

 

India was now on the verge of bankruptcy. PM Chandra Shekhar, despite being a minority government, was willing to make the hard decisions. Like authorizing the mortgage of gold to avoid a default. A sidebar here: many countries have defaulted, Argentina alone has done it so many times. So why didn’t India choose to default? Because the cost of defaulting is high. Creditors can file law suits in international courts, sanctions and other forms of penalties may be imposed, and worst of all, the long term damage to a country’s reputation can become hard, if not impossible, to undo.

 

But the mortgaging of gold had just bought India time. The underlying problems remained unaddressed, which is why Chandra Shekhar had gone to the IMF seeking a loan. And as we saw in the last blog, his government fell and thus the loan or the necessary policy changes never came through.