Figure 1.--It was not 40 years of economic failure and no meaningful progress in reducing India's endemic povety that cused a change in India's economic policy. Only the specter of nationl bankruptsy forced the India Government to go hat in hand to the IMF, an institution they had severly criticised for years, to plead for a bail out. The crisis came duing the short primership of Chandra Shekhar. He was forced to mortgage the country's gold reserve to avoid loan payment defaults. The gold was secretly air lifted out at night to England and Switzerland. Only this nationl humiliation led to a reversal of economic policy and the intrduction of 'market reforms' (meaning capitalism).

India's economic failures were coming to a serious situation by the early 1990s. A serious ballance of payments problem was developing. Foreign countries had no interest in low quality, high priced Indian goods. The stagnant Indian economy could not create the high-quality, high tech products that Indians desired. State-owned companies were a disater and the private sector was shackled by regulation and red tape. Thus a serious balance of payments problem developed (1980s). The situation was worsened by India's exchange rate system. The rupee was pegged to the value of a basket of currencies of major trading partners. The only problem was that the economic policies of independent India was that they did not work. The Indian economy did not develop and grow at the expected rate. Or the needed rate to have any real impact in the country's widespread poverty. India's GDP per capita grew at an annual rate of only 3.5 percent in the years prior to the 1980s. [Kotwal] While reasonable for a developed country like the United States, given how poor India was, this was not going to lift the Indian people out of poverty After four decades, the per capita GDP was only US $447 (1985). This was an embarrassment given the stunning successes being reported early by the Asian Tigers. And like many countries that are unable to generate enough revenue finance government projects or welfare programs through taxation, India turned to the debt market and it borrowed heavily. India's government debt reached $70 billion (1991). India had to face the specter of bankruptcy. The optimistic dreams at independence simply did not materialize. Industries that did develop like the Soviet financed steel system, proved to be inefficient. This meant that like the Soviets, significant sales outside the controlled domestic market were very limited. Indian business that had no choice but to purchase Indian steel, meaning high prices for an inferior product. Similar ripples flowed throughout the economy. This made Indian products noncompetitive in world markets. It also meant that Indian companies could not pay high salaries to their workers. And Indians to a substantial degree has shut ed themselves off to technological advances in the West. Few Western companies had any incentive to invest in India. The economic crisis forced Indian leaders to do something they had reject at independence and which they did not want to do, even after the failure of the economic policies which they had endorsed with a passion. The balance of payments problem began to threaten the economic stability of the Indian state. Some feared that India would default on the country's debt. [Ghosh] The Reserve Bank of India (RBI) began refusing new credit. Foreign exchange reserves virtually disappeared. The Government could barely manage to finance 3 weeks of imports. The Government was forced to appeal to the Internstionsl Monetary Fund (IMF) to bail them out. This was a painful appeal because the IMF was an instution Indian leaders had harshly criticized. As part of the IMF assistance pckage, the Indian Government had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England. That way the Indian Government could nominally hold ownership of its gold reserves. This was important because for the Indian public, gold has a special appeal. Many observers believe that the ecomomic crisis essentially forced market reforms in India. ["Economic crisis ...."]

Sources

Ghosh, Arunabha. India's Pathway through Financial Crisis (Global Economic Governance Programme).

Kotwal, A., B. Ramaswami, and W. Wadhwa. "Economic Liberalization and Indian Economic Growth: What’s the Evidence?" Journal of Economic Literature Vol. 49, (2011), pp. 1152–99.

"Economic crisis forcing once self-reliant India to seek aid," New York Times (June 29, 1991).

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Created: 11:00 PM 9/8/2022
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