India's Economic Crisis of 1991 and the Road to Reforms part 5

 Okay, here are the notes from the Telugu audio lecture on the background and causes of India's 1991 economic crisis and the subsequent reforms:

Subject: India's Economic Crisis of 1991 and the Road to Reforms

I. Background: Pre-1991 Industrial Policy (Recap)
* Previous lecture covered Industrial Policy Resolutions before 1991.
* Key Feature: High priority given to Public Sector Undertakings (PSUs).
* Problem: By 1991, these PSUs became a significant financial burden on the government, contributing heavily to the crisis.

II. The 1991 Economic Crisis
* Definition: A situation where the government lacks:
* Sufficient Foreign Exchange Reserves (Forex) to pay for necessary imports.
* Sufficient funds (Dravyam/Money) to service (repay principal & interest) its existing domestic and foreign loans.
* India's Situation:
* Could not afford essential imports.
* Could not meet loan repayment obligations.
* Resulted in India falling into a deep debt trap.

III. Key Indicators & Causes of the Crisis:

      *   **A. Soaring Fiscal Deficit (Kosha Lotu - Government Debt):**
    *   Measures the government's total borrowing in a year.
    *   1980-81: 5.1% of GDP.
    *   1990-91: Rose significantly to 7.8% of GDP.
    *   By March 31, 1991: Reached **8.4% of GDP**.
    *   *Significance:* Deficits above 3.5-4% are considered unhealthy. 8.4% indicated severe financial mismanagement and impending government failure.

*   **B. Burden of PSUs:**
    *   Loss-making PSUs required government bailouts, consuming large parts of the budget.
    *   This left less money for essential government functions (salaries, development, other payments).

*   **C. Declining Foreign Exchange Reserves:**
    *   Fell to a critically low level of **$1.2 billion**.
    *   Sufficient only for **1 to 3 days** of imports.
    *   *Risk:* Stoppage of essential imports like petrol, fertilizers, machinery, electronics, leading to economic paralysis.

*   **D. High Inflation (Dravyolbana Rate):**
    *   Reached **13%** (measured by Wholesale Price Index - WPI).
    *   *Significance:* Ideal inflation is much lower (often cited < 5-6%). 13% indicated severe economic distress and erosion of purchasing power.

*   **E. Mounting Total Debt:**
    *   Reached **49.7% of GDP**.
    *   **Foreign Debt Component:** Constituted **23% of GDP** within the total debt. Repaying this required scarce Forex.

*   **F. Heavy Debt Servicing Burden:**
    *   **30%** of earnings from exports were spent just paying *interest* on foreign loans.
    *   **22%** of the government's tax revenue was spent on overall loan servicing (interest and principal).

*   **G. High Current Account Deficit (CAD):**
    *   The gap between imports and exports reached **3.69% of GDP**.
    *   *Significance:* Shows imports were far exceeding exports. A CAD above 2-2.5% is generally considered worrying.
    

IV. Pre-1991 Reform Attempts (Largely Unsuccessful):
* Rajiv Gandhi Govt: Recognized the emerging problems.
* VP Singh (as FM & later PM): Attempted industrial reforms (e.g., 1986), but they were ineffective. Kept the Industry portfolio as PM to tackle the crisis directly.
* Chandrashekhar Govt: Also attempted major industrial policy changes, including promoting foreign investment, but failed to avert the crisis. Also held the Industry portfolio.
* PV Narasimha Rao (Initially): Also kept the Industry portfolio, showing the severity of the industrial sector's problems.
* Key Point: Direct control of the Industry Ministry by successive PMs highlighted the depth of the crisis.

V. External Influences:
* Latin American Debt Crisis: Showed the dangers of state-led, inward-looking policies leading to debt traps. International lenders shifted focus, contributing to India's debt.
* Collapse of the USSR (1990-91): India lost a major political ally and trading partner; failure of the socialist model became evident.
* China's Economic Reforms (from 1978): Demonstrated that even a communist state could achieve rapid growth through market-oriented reforms.
* East Asian Tigers (Singapore, Taiwan, S. Korea, Hong Kong): Their success with export-oriented, private-sector-driven growth provided an alternative model.

VI. Desperate Measures in 1991:
* Gold Sale (May 1991): Chandrashekhar government sold 20 tonnes of gold in Switzerland for $247 million.
* Gold Pledge (July 1991): Rao government pledged 47 tonnes of gold with the Bank of England and Bank of Japan to secure emergency loans.
* Reason: World Bank and IMF had effectively stopped lending due to India's poor creditworthiness ("raised their hands").

VII. Approaching the IMF & The LPG Conditions:
* PM P.V. Narasimha Rao & FM Manmohan Singh approached the IMF (led by Michael Camdessus).
* India needed an emergency loan (approx. $7 billion) to manage the Balance of Payments crisis.
* IMF agreed to lend only if India implemented structural reforms (LPG):
* L - Liberalization: Dismantle the 'License Raj' (LPQ System). Relax strict government controls on industry and investment. Simplify laws.
* P - Privatization: Reduce the role of the state in business. Sell loss-making/inefficient PSUs to the private sector.
* G - Globalization: Open up the Indian economy. Integrate with the world economy through freer trade, foreign investment (inward & outward), technology transfer, etc.

VIII. The Shift: From LPQ to LPG
* Pre-1991 System: LPQ (License, Permit, Quota)
* License: Required government permission to start/expand industries.
* Permit: Required for various operations, including large investments.
* Quota: Restrictions on production levels and foreign company investments (requiring deposits/guarantees).
* Impact: Stifled private enterprise and competition.
* Post-1991 System: LPG (Liberalization, Privatization, Globalization)
* A direct result of the crisis and IMF conditions, aimed at revitalizing the economy.

IX. Conclusion & Transition:
* The severe economic distress, marked by multiple failing indicators and external pressures, forced India to abandon its old protectionist policies.
* India accepted the IMF's conditions and received the loan, paving the way for fundamental economic reforms.
* The pre-1991 PSU-dominated, controlled economy ("Ting-Ping" metaphor used) shifted towards a more open, market-oriented, 'Laissez-faire' approach.
* Next Video: Will delve deeper into the meaning and implementation of Liberalization, Privatization, and Globalization (LPG).