How the Crisis Unfolded
The story of how India shed its command economy and embraced markets begins with a series of economic and political crises. Here are the key events leading to Singh's famous July 24 budget speech.
See the 1966 Devaluation Timeline
Political and Economic Turmoil
August-November 1990
Moody’s places India on a credit watch with the possibility of a ratings downgrade because of unfolding political and economic events. In the aftermath of communal tensions Prime Minister V.P. Singh's government falls in November, 1990. His successor Chandra Shekhar forms a politically fragile minority government.
IMF supports India
December 1990
Senior bureaucrats along with Gopi Arora, India's representative at IMF, mobilize support to manage India’s balance of payments crisis. Their efforts lead to an agreement that the Indian government will implement reforms to liberalize the rupee and manage the fiscal deficit, with the IMF supporting a US$ 1.8 billion loan.
Government of the day falls
March 6, 1991
Prime Minister Chandra Shekhar resigns after 5 months in office, precipitating fresh elections.
S&P downgrades India
March 7, 1991
S&P downgrades India’s sovereign rating to BBB- for long term credit risk, and A- for short term credit risk.
An assassination
May 21, 1991
Rajiv Gandhi, the front-runner in the elections, is assassinated while campaigning, resulting in a leadership vacuum and a power struggle within the Indian National Congress.
India sells its gold
May 24, 1991
With only two weeks worth of foreign exchange reserves available, India sells 20 tons of gold (with a repurchase option) for $234 million to urgently raise foreign exchange reserves to tide over the balance of payments crisis.
P.V. Narasimha Rao forms a minority government
June 21-28, 1991
Resolving the leadership crisis in the Congress, P.V. Narasimha Rao forms a fragile minority government. He appoints Manmohan Singh as finance minister, assembles a team of liberal-minded economists and technocrats, and builds political consensus across the aisle to end the command-and-control economic policies.
Devaluation of the Rupee
July 1-3, 1991
Manmohan Singh’s first step as finance minister is to devalue the rupee in two stages. The first devaluation of 7-9% is announced on July 1. Under pressure, Rao calls Singh on July 3 to retract the policy, but a second devaluation of 11% was already initiated.
Trade policy reforms announced
July 4, 1991
Prior to 1991, nearly all imports were tightly controlled. Commerce Minister P. Chidambaram announces a new policy, removing all import restrictions except on 71 goods. The policy incentivizes exports, reduces trade licensing controls, replaces controllers with regulators, and embraces trade openness.
Narasimha Rao's address to the nation
July 9, 1991
Narasimha Rao addresses the nation, expressing the belief that government regulations and controls have outlived their utility, stifling creativity and breeding corruption.
No Confidence Motion
July 15, 1991
Opposition parties call for a no-confidence motion against Rao’s government. Rao defends his market-friendly reforms. The government survives with the Left and National Front staging a walkout.
Industrial delicensing announced
July 24, 1991
The government announces a new industrial policy, bringing 80% of Indian industry out of the License Raj. The government also announces disinvestment of government equity and opens up the economy to foreign investment.
Budget speech by Manmohan Singh
July 24, 1991
Manmohan Singh delivers a landmark budget speech, marking a break from socialism and embracing free exchange and private enterprise. The government dismantles price controls, abolishes subsidies, and establishes a committee on financial markets.
