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Balance of Payments Crisis 1991: How LPG Reforms Saved India

Introduction

In 1991, India had forex reserves to cover only 2 weeks of imports. This crisis forced India to abandon the "License Raj" and integrate with the global economy.

1. Causes of the Crisis

• Gulf War (1990): Oil prices shot up; remittances from Gulf dropped.
• Fiscal Indiscipline: High deficits led to inflation.
• Over-valued Rupee: Hurt exports.

2. Steps Taken: LPG Reforms

Under PM Narasimha Rao and Finance Minister Dr. Manmohan Singh:

• Liberalization: Abolished industrial licensing (except for 18 sectors then, now 5).
• Privatization: Disinvestment of PSU shares. Opened sectors to private players.
• Globalization: Devalued Rupee, reduced import tariffs (from >100% to <10%).< /li>

Conclusion

The reforms shifted India from the "Hindu Rate of Growth" (3.5%) to one of the fastest-growing major economies in the world.