The BOP Crisis

Some 26 years ago India freed itself from the clutches of an overprotective economy. India suffered a crisis, one that felled a government, and almost destroyed another. In 1991, a new government was formed when the previous National front government collapsed and when it was revealed that it approved shipping of gold from RBI to the Bank of England.

The issue, the solution and the budget that changed it all.

From 1985, itself signs were being seen that economic reforms will be required. The number in the total of Current Account was red and was getting bigger year on year.

The crisis was escalated by the Gulf war which made the prices of crude oil skyrocket and the Indian Economy loves Crude oil.

In 1989 a document was created, claimed to be co-authored by the then Finance Secretary, Montek Singh Ahluwalia.

It had all policies that were to be implemented to prevent escalation of the crisis. Somehow, the document under name “Towards a Restructuring of Industrial, Trade, and Fiscal Policies”, was leaked and it helped in encouraging discussion in the public domain of a crisis which revealed that the RBI had shipped 41.69 tonnes was transported for a loan of $ 406 million . This was required as India was left with only two- three weeks of imports .

P.V. Narasimha, a staunch socialist got to know the scale when Cabinet Secretary, Mr. N. Chandra gave an eight page note on the economic crisis two days before his inauguration. After reading the note the Staunch Socialist became the greatest Liberalizer of Indian Economy. The solutions were fixed the first step, the war bugle was to be the devaluation of rupee to make it competitive which was a suicide in its own sense.  

At that time the Rupee exchange rate was declared by the RBI, it was decided that 20% would be the required devaluation, due to political and economic reasons it was decided that the devaluation will take place in two parts with the first being used to test the market. On July 1, RBI announced the first devaluation of 9%, the finance ministry said that it was realignment not devaluation. The next took place on July 3rd. It is said that, the whole experiment was code named ? Hop, Skip, Jump.

This devaluation increased the competitiveness of the rupee.

Did you know that; the RBI still declares reference rates once a day for SDR trading?

The Budget:

The most important event happened on the day when India, once again woke up at the stroke of the Parliament bell, a “First Timer” delivered a speech that changed the Indian Economy forever. The “First Timer”, was then Finance Minister Manmohan Singh and the event was the 24th July budget of India.

A budget that changed India, like any other speech. This one is also long. So, what I am going to do, is give the Changes and try to explain them in basic language.

Change no 1:  Foreign Direct Investment (FDI) of 51% was to be given prompt approval for certain high priority industries if the equity inflow is sufficient for import of capital goods and the dividends provided are balanced by exports in a period of time. In simpler terms, Foreign Companies can gain an equity of 51% of an Indian firm if and only if the money paid to them is balanced by a firm’s foreign earnings i.e. the Foreign Exchange that will be drained from India, should be balanced by Foreign exchange earned by the company.

Change No 2: SEBI will be given statutory powers required to regulate the market. (This change was implemented in 1992 due to the Harshad Mehta Scam.)

Change No 3: Interest rates of Debentures Convertible or Non will be decided by market forces.

Change no 4: Fertilizer which is important for farmers is removed from price controls and the price will be decided by market forces.

Change No 5: Custom duties were reduced from 300 %to 150%.

These were some of the important changes .

This budget, and the initiatives that were taken before it saved India from a financial crisis unfortunately many of the changes proposed took years some of them took place in the 21st century .

I would like to end this article by a quote:

Victor Hugo once said, “No power on earth can stop an idea whose time has come.” I suggest to this August House, that the emergence of India as a major economic power in the world happens to be one such idea. “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.” Dr. Manmohan Singh (24th July 1991)

By Aviraj Singh Mehta

Image Source: TutorialsPoint

This article is from  India section of ‘The Economic Transcript’, October 2017. To subscribe click here.

 

 

 

 

 

       

 

  

        

 

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