The Origin of Economic Crisis-1991

Unsustainable fiscal deficit of the government caused the crisis Internal imbalances in the fiscal situation and external imbalance in balance of payment situation was responsible for the crisis of 1991Gulf crisis of the late 80s worsened the fiscal deficit and current account deficit dituation of India

The fiscal imbalance

Main indivcators of fiscal desicit are The budgetory deficitThe revenue Deficit

Gross Fiscal Deficit GFD

Revenue Deficit denotes the difference between revenue receipts and revenue expenditure. The conventional deficit (budgetary deficit) is the difference between all receipts and expenditure, both revenue and capital. The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts.

Indications of Crisis-1991Budgetary deficit was 2.1% of GDP as against 0.9% in 80-91Revenue deficit was 3.3% from 0.2 % in !980-81

Most alarming rise in GFD which rose up to 6.6 %Internal debt was 49.8%of GDP

Interest payment was 3.8 % of GDP and 39.1 % of total government expediture

The Balance of Payment Situation

The Current Account

The current account is the difference between a nation's exports of goods and

services and its imports of goods and services, if all financial transfers and

investments and the like are ignored. A nation is said to have a current account

deficit if it is importing more than it exports.

I

The Capital Account

The capital account records all transactions between a domestic and foreign resident that involves a change of ownership of an

asset. It is the net result of public and private international investment flowing in and out of

a country. This includes foreign direct investment,

Balance of Payment Situation-1991

Current Account Deficit- 2.1 Billiollon $ or 1.25 % of GDP

External Debt- 23 % of GDP23% of Current Account Receipts were being

used for debt servicingForiegn Exchange to finance 10 days of inport

The Economic Reforms

Macr economic StabilisationStructural Reforms

Macroeconomic StabilisationFiscal Adjustments Fiscal readjustment programme were started by the government

under which fiscal deficit was to be reduced to 5.37 % of GDP but the problem has not really been solved and fiscal deficit remains at 7% of

GDP. If fiscal deficit is to be redused government expenditure should be at at 25% but

in 2005-06 38 % of GDPTo solve this problem resourse mobilisation is

important

Macroeconomic Stabilisation

Balance of Payment Adjostment The balance of payment adjustment programme has been satisfactory. current accont deficit is around 0.4% of GDP and foruegn exchange reserve is more than 200 bn $

Structural Reforms

Trade and Capital Flows ReformsDevaluation of RupeeCurrent Account Convertibility of RupeeLibralisation of Import RegimeLowering of Tariff and custom rates

Rupee was devalued by 18% in 1991Peak rate of import duty was gradually reduced

from 300% to 10%Imports have been decentralised

Capital flows have libralised in form of foriegn direct investment

FERA has been replaced by FEMA

Structurel Flow Reforms

Industrial Deregulation Limits on size of the companies have been removed. Scrapping of MRTP actCore industries reduced from 17 to 3Private sector allowed in core sectors like iron, steel, Air transport, Ship building, Telecommunication, electricity etc

Structural Reforms

Public Sector Reforms and Disinvestment Equitu amounting to Rs 4921403cror was disinvested to Public Sector Financial Institutes, Mutual funds and General Public.

Policy was to sell of burdainsome psu's but gob=vernment seems to be blindly selling prime PSU's with a one sided aim of bridging gaps in

gbudgetory deficit.

Structural Reforms

Financial Sector Reforms

Commision on financial system was set under chairmenshio of M Narsimah to examine to examine the country's financial system and its various components.

The commision was to make recommendation with respest toImproving the efficiency and effectiveness of the financial systemTo infuse greater compitiionMeans of Better Supervision

The report of CFS was placed before the parliament in December 1991 and has sib=nce than become ab=n important document toundertake reforms in the financial sector

Major reforms suggested by CFS wereSLR reduced to 25 %The CRR to be brought down to 3% ( it was 7.5 % in November 2007)CRAR ( capital to risk weight asset ratio) minimum fixed at 9%Revision of balance sheet provisions of banksbanks allowed to go publicCommercial banks compling with capital adequecy norms allowed to ppen new branchesSupervisory aspects of Rbi has been strengthened