Daunting Challenges Ahead – Indian Economy

1 Jul 1991

Daunting Challenges Ahead – Indian Economy copyWith P.V. Narsimha Rao assuming office as the ninth premier of the country, quite a few record-of-sorts have been created. Never before has any citizen hailing from the south of Vindhyas made it to this coveted post.

Also, this is the first time that a non-MP has been sworn in as Prime Minister, giving rise to many a debate on the constitutional validity of the same. But most important, this would probably be the first time in the land of the largest functioning democracy on this planet that a newly elected government would not enjoy the euphoria of any ‘honey-moon’ period of sweet vibes with all the sundry, to speak of. The government was expected to be, and has, seemingly got down straight to business.

Though the grass does look green from here for those basking in the glory of power, not many would be ready to trade places with Narasimha Rao and his men in the prevailing circumstances. A plethora of problems and virtually no solutions in sight is the scenario on almost all the fronts. However, the situation is most bleak and grim on the economic front. With depleting foreign exchange reserves, the spiral rise of inflation, alarming balanced-of-payments position, seemingly insurmountable debt burden and yawning budget and fiscal deficit; the country is faced with problems unprecedented in the 44 years since independence.


Unlike the mythological Abhimanyu taking all at once, it would be better and more fruitful to ponder separately over the major contributories to the catastrophe we face today, on the economic front.

The government has an option to re-acquire this gold after six months at the then prevalent prices or repay the amount with 6.3 % interest.

Foreign exchange reserves: While in June 89, our foreign exchange (also called forex) reserves stood at Rs. 6500 cr in June 90 they had dropped down to Rs. 5800 cr and by January 91 forex reserves were barely good for 10 days lingering only at Rs. 1500 cr. Frantic appeals were made, panic buttons pressed and after a lot of pleading, the International Monetary Fund (IMF) bailed us out temporarily with a loan of 1.78 billion US dollars (Rs 3275 cr. Approx). This loan consisted of two parts. The first, of 0.77 billion US dollars given under ‘CCFF’ scheme at 9%interest to be repaid completely within five years. The second part of 1.01 billion US dollars was given as for import of petroleum products as emergency relief arising due to the Gulf crisis.

But this relief was very sort lived. By beginning of June 91, we were again hand-to-mouth down to Rs. 2500 cr forex reserves, when the government resorted to swapping 20 tonnes of gold seized from smugglers with the Union Bank of Switzerland for around Rs 500 cr hard currency. The government has an option to re-acquire this gold after six months at the then prevalent prices or repay the amount with 6.3 % interest. Though this move of the caretaker government has been lambasted and questioned by many, some arrangements do exist in favour of this action. Firstly, the gold pledged (and not sold, as misunderstood by some) is not out of the official monetary gold reserves but the seizures made of smuggled gold. Secondly, it was imperative for the government to acquire forex almost immediately else India would have defaulted for the first time in history in interest payment abroad. Also, assuming that the country does not re-acquire the gold, to have managed hard currency loans at just 6.3 % interest is a very good bargain. Of course, many people have equated this action as signifying to the world of the nation’s bankruptcy. No doubt, such an action is justified only in the extreme circumstances but let us not harbour any false pretensions of the country’s present economic position either.

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