India’s 1990-91 Crisis: Reforms, Myths and Paradoxes

Abstract

For most people the story of Indian reforms starts in the nineties, following the BOP crisis of 1990-91. There was a detectable increase in the rate of growth of the Indian economy in the 1980s arising from the liberalisation initiated in the eighties.1 Two significant elements of this liberalisation were gradual decontrol of industry and liberalisation & rationalisation of the import regime for exporters. Expansionary fiscal policy may also have played a role though its net effect is controversial.2 Nevertheless our analysis of reforms focuses on the nineties because their scope was much wider and deeper than that seen in the eighties. This was particularly so in the case of the external sector which is the focus of the current paper. The next section (II) analyses the BOP crisis of 1991-1992 as a backdrop to the external sector reforms that followed. A BOP crisis results from a combination of underlying weakness & policy inconsistencies and a shock that triggers the crisis.