Economic Crisis of India in the 1980s

Economic Crisis of India in the 1980s

• The government was spending a large share of its income on non-essential areas, leading to a need for efficient utilization of revenue.
• Public sector undertakings' income was not sufficient to meet growing expenditure.
• Foreign exchange borrowed from other countries and international financial institutions was spent on consumption needs, without attempts to reduce spending or boost exports.

Consequences of the Crisis

• Government expenditure exceeded revenue by large margins, leading to unsustainable borrowings.
• Prices of essential goods rose sharply.
• Imports grew at a high rate without matching growth of exports.
• Foreign exchange reserves declined to a level that could not finance imports for more than two weeks.
• There was insufficient foreign exchange to pay interest to international lenders.

Response to the Crisis

• India approached the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) for a loan.
• The loan was conditional upon liberalizing and opening up the economy, removing restrictions on the private sector, reducing government role, and removing trade restrictions.
• India agreed to the conditionalities and announced the New Economic Policy (NEP).

New Economic Policy (NEP)

• The NEP consisted of wide-ranging economic reforms aimed at creating a competitive environment and removing barriers to entry and growth of firms.
• The policies were classified into two groups: stabilisation measures and structural reform measures.

Stabilisation Measures

• Short-term measures intended to correct weaknesses in the balance of payments and control inflation.
• Aimed at maintaining sufficient foreign exchange reserves and keeping prices under control.

Structural Reform Measures

• Long-term measures aimed at improving the efficiency of the economy and increasing its international competitiveness.
• Involved removing rigidities in various segments of the Indian economy.

Liberalisation, Privatisation, and Globalisation

• The government initiated policies under three heads: liberalisation, privatisation, and globalisation.
• Liberalisation aimed at removing restrictions and opening up various sectors of the economy.
• Introduced in 1991, the reforms were more comprehensive and covered areas such as industrial sector, financial sector, tax reforms, foreign exchange markets, and trade and investment sectors.

Deregulation of Industrial Sector

• Regulatory mechanisms, such as industrial licensing, were enforced in various ways.
• Entrepreneurs had to obtain permission from government officials to start a firm.
• Deregulation aimed at removing these restrictions and promoting growth.