The 1991 Crisis Explained in Economics

You have seen how certain factors affect individuals or organisations! This is Microeconomics!

Let's now take a macroeconomic view and learn about the 1991 crisis which changed the face of the Indian economy! 

You learnt from Debopam how India was earlier a closed economy till the late 1980s.  India's exports were very low and most of the goods and services were imported from outside economies. It was then that the Indian economy faced a Balance of Payment crisis. The government was unable to increase its revenues and was spending too much money on subsidies for farmers. This led to an increase in the fiscal deficit in the economy. Domestic production was at an all-time low, unemployment levels were at an all-time high, inflation was rising and the economy was not growing. The government had to find a way to rebuild the economy.

The World Bank bailed out the Indian economy with the condition that India had to open its doors to the outside world. This led to the commonly known 'LPG reforms' led by the then Finance Minister - Dr. Manmohan Singh and Prime Minister Narsimha Rao.

LPG Reforms included Liberalization, Privatization and Globalization.

• Liberalization helped the economy free itself from the infamous license raj that was prevalent in those times.
• Privatizations helped increase the productivity and competitiveness of many producers in the economy by turning public sector units into private organizations and withdrawing control and ownership over most public sector units.
• Globalization helped India open its doors for trade with outside economies. These reforms helped in bringing the economy out of the crisis it was facing and then helped the economy grow more.

These reforms made India an open economy and improved the ease of doing business within the nation with other nations. Post these reforms, India saw steady growth within the economy with the unemployment and inflation levels under control.