Indian Economy 2012 Crisis - Is It Repeat Of 1991?

Posted in Finance Articles, Total Reads: 4727 , Published on 27 August 2012

India, one of the world’s fastest growing economies in the world, and the 8th largest in terms of nominal GDP is in an economic crisis. Hit by the slowdown in the US and financial turmoil in the Eurozone, India’s growth engine has hit a bump in its high-speed growth rate. There are also myriad internal factors which are contributing to the low GDP growth forecast.

The current economic crisis in India is very reminiscent of the 1991 crisis in India which eventually led to the end of the license raj and economic liberalization took place. While some argue that the current economic crisis is a repeat of the 1991 crisis, others put the counter argument that the economy is very different in 2012 from 1991.

Resemblance to the 1991 Crisis

The points of resemblance with respect to the macroeconomic indicators are unmistakable.

  • The government borrowings for 1991 increased by 12 % annually while the government borrowings increased by 32 % in the last 5 years (Source: FICCI Report).
  • Average increase in non-plan expenditure in 1981-90 was 20% while the non-plan expenditure is rising by 30% presently (Source: FICCI Report).
  • Fiscal deficit & revenue collection shows a similar trend. The tax revenue as a percentage of GDP when compared between 1990 and present is comparable. The deficit is fueled by high quantity of oil import as the demand is rising. A similar high import for oil occurred in the pre-1991 crisis period.

Rise in Oil Imports ( CAGR )

Trade Deficit ( CAGR )

1988-89 to 1989-90

25.2 %

-17 %

2009-10 to 2010-11

22 %

-10 %

(Source: RBI Database)

Current Account Deficit ( as a % of GDP )                                        Tax Revenue ( % of GDP )


  • The currency depreciation shows a remarkably similar trend just before the 1991 crisis and in the present situation. The data below shows the INR depreciation versus the USD. From Jan 2011 to Jul 2012 the INR depreciated by 21.7 % while the INR , from Jan 1989 to Jul 1991, depreciated by 23.5 % against USD


  • India continues to battle high inflation. The inflation has been stubbornly high over the last two decades as seen from the data below. The data below shows the annual change in CPI which is hovering around the double-digit mark.

The Other Side

Although there are stark similarities in the macroeconomic indicators, the Indian economy has undergone structural changes to an extent.

  • The financial markets are more robust and more resilient than in the 1991 crisis period. The Indian equity market is more developed and mature. The financial markets are more diverse than in 1991 and are more resilient.
  • The share of the service sector has increased from 43.7 % in 1990-91 to 57 % in 2011-12. The variability of the service sector is much less than the agriculture and the industry. As the Services sector boosts the exports and also the trade balance, the government policies tend to be very pro to the services sector. Agriculture is heavily dependent on rainfall, and deviation in the monsoons like less rainfall or a delayed monsoon causes havoc with the agri-productivity. This is very evident in the current fiscal year.
  • Forex Reserves are much larger in the present day versus the forex reserves just before the 1991 crisis. High forex reserves serves two purposes –
    1. For a high import country like India, a high forex reserve serve as source to fund imports. The forex reserves are also stated in terms of months of import that it can fund. In 1990, India had forex reserves worth 1.8 months of imports while in the present scenario forex reserves are worth 9 months of imports.
    2. High forex reserves also serves as a protection against speculative attacks against a currency. Speculative currency attacks played a major role in the 1997 Asian currency crisis.

(Source: RBI Database)

  • The exchange rate is now market determined unlike in 1990-91 period. Thus the INR which was overvalued in 1990-91 is not the case in the present day as the market determines the exchange rate and overvaluation/undervaluation is corrected and represented by the market determined exchange rate.
  • Present external vulnerability indicators of Indian economy are better than those that existed in around the 1991 crisis period. Some of the parameters that are used to track external sector vulnerability are Debt/GDP ratio, Debt service ratio, short-term debt and concessional debt as a percentage of GDP. Foreign inflow of funds is also an accepted measure of estimating the external sector vulnerability. This would include both FIIs and FDI. Concessional debt have terms more lenient than the general market loan structure like lower interest rates and extended grace period.

Both Debt Service ratio and Debt/GDP ratio should be lower - Lower the ratios, better they are.

(Source: RBI Database)

Challenges for the Policymakers

The challenges that the policymakers faced in 1991 was very different than the problems in the present day scenario.  The primary challenges for the government in 1991 was funding the growing current account deficit by boosting capital inflows which led to liberalization, manage currency exchange rate & reduce pressure on its forex reserves and to reduce its external debt.

Now that all the low hanging fruits have been taken, it is time for the government to focus on some structural bottlenecks in the economy.

The major challenge for the Indian economy policy lies in managing the twin-track inflation, boosting India’s agriculture and industry output which will lead to enhanced business and consumer confidence.

  • Twin-track Inflation: The core inflation, which does not include fuel, processed food & primary articles, has seen a decline over the last months. The core inflation in June 2012 stood at 4.85%. The headline inflation which includes primary articles, fuel & food is substantially high at 7.23% June. Although it is lower than last two years headline inflation of 9+ % but it is more than the decade average of 5.4%. This twin-track problem prevents RBI from slashing the policy rates and boost business and consumer confidence. Looking at core inflation, if the RBI does drop the policy rate then there will be an imminent rise in headline inflation as fuel and food form a major part of household spending. Rising headline inflation will again curb consumer/private spending & the GDP as it contributes close to 62% of India’s GDP.
  • Boosting organic growth: The growth of manufacturing, infrastructure ad power industry has not kept pace with the GDP growth which has been boosted by the burgeoning service sector growth. The result is a heavily supply-constrained economy.

GDP per unit of energy use ( PPP dollar per kg of oil equivalent )


The data above clearly demonstrates the strain that the Indian economy is under from the lack of organic growth and the galloping service sector which has boosted the GDP values.


This article has been authored by Shovik Kar from MDI Gurgaon.



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