Introduction
Launching its first five year plan (April 1, 1951), India started its journey to economic development treading the path of socialistic pattern of society. By far, India has completed eleven five year plans and six one year plans. During the period between first and sixth plans, public sector was assigned the leading roles in the process of growth and development. Private sector was to play only a subordinate role. Industry and trade were subjected to many restriction including quotas of production and permits of export and import. The basic idea was not only to allow the growth of private monopolies but at the same time to protect the domestic industry from international competition. It is not denying the fact that policy of license, permits and quotas yielding some good results initially, but the end result was definitely disappointing. While the public sector enterprises became the breeding center of corruption and bloating inefficiencies, in absence of competition in the private sector it failed to diversify and modernize. As a whole cumulative effect on the economy started slipping into stagnation by the end of June 1991. The situation was so alarming that our reserves of foreign exchange almost dried up.
There was an erosion of confidence of international investors in the Indian economy. Industrial growth was scraping the bottom while the prices of the essential goods were increasing. Indeed there was a wake-up call for an impending economic collapse.
CAUSES THAT LED TO THE CRISIS
POLITICAL STRUCTURE
In 1970s, political and economic relations started growing between India and USSR. A Treaty called ‘India USSR friendship Treaty’ was signed between the two countries. In 1971, a war broke out between Pakistan and India, the two major countries of South Asia, started by Pakistan. USSR proved to be helpful and effective by providing training and defense Technology. They prove to be loyal to the country and this trust grew over the period of time. USSR was also a major supplier of Petroleum products in 1980s. In the early 1980s, almost 70% of the imports from USSR was petroleum products.
India started facing political disturbance and turbulence after the assassination of the Prime Minister Mrs Indira Gandhi. From 1988 until 1991, India had four different Prime Ministers and four different Union Cabinet of ministers. Mrs Indira Gandhi had extremely good relations with USSR. Due to these relations, it helped the country in acquiring the technology, defense equipment and petroleum at easier and convenient terms for the country. After the assassination of Indira Gandhi, her son Rajiv Gandhi took over, that is, became the new Prime Minister. During his regime, India witnessed modernization, acquisition of Western Technology, reforms in trade, due to which there was a rise in fiscal deficit and balance of trade.
In 1989 elections, Congress did not get the required majority to form the government. Janata Dal won the elections and Mr V P Singh became the new Prime Minister. This government also did not last for even a year. The country witnessed economic instability like slow growth, rising fiscal deficit, depleting foreign exchange, widening Balance of payment gaps were visible. These problems were not handled properly by the government of Mr VP Singh. In November 1990, Mr Chandra Shekhar established a government with congressional support and became Prime Minister, but Congress immediately withdrew its support and in 1991 called for new elections. Because of the country’s political uncertainty, the government could not focus on core activities because they were involved in defending their government. After the assassination of Indira Gandhi, no government could achieve the same warmth with the USSR’s politicians. Due to the economic and political instability of the Soviet Union, India-Soviet relations did not grow as desired.
ECONOMIC STRUCTURE
Since its independence, India has always been proud to maintain its economic self-reliance in many respects. However, there have been fundamental shortcomings in the economy, such as low productivity, the encouragement of trade and trade in the private sector, and excessive government control over the economy. Due to low productivity, low employment, high cost of capital, low domestic technology, lack of business environment and lack of innovation, the economy could not grow as it should have grown post-independence, which has made the Indian economy vulnerable to external shocks. India was a structure of a socialist economy and many businesses led the government to meet the needs of the country’s goods and services. Prices are adjusted to serve the mass of goods and services, which is the principal of socialism. The private sector has been subjected to strict licensing, which has led to a slow and inefficient growth of the private sector. Many public sector companies were unable to fulfill their economic interests as well. The government feared that stimulating the private sector could lead to capitalism and the government did not want to fail the people. For foreign companies, the doors were closed by limiting FDI. The government felt that if the doors were opened to foreign companies, Indian companies would not be able to compete with foreign companies. But after liberalization, exactly the opposite of this happened. Many Indian companies have emerged as global giants in software, technology, pharmacy, and many Indian manufacturing companies have been able to perform better than some of their global competitors after the implementation of the LPG model by the Rao Government.

Various conditions were imposed by the IMF to provide credit limits in the future. This reform helped economic growth in India. We strongly agree that the economic structure is not good and reforms are needed. However, economic reform after 1991 was not enough to overcome future uncertainties. Some major structural changes were needed with long predictions that protect the economy from unexpected events. Despite the shortcomings in the economy are responsible for the 1991 balance of payments crisis, many economists believe that the crisis is not a direct result of India’s economic mistakes. The crisis can be avoided by economic vigilance with the same economic structure.
India’s Trade and Balance of Payments
In the 1980s and 1990s, India’s largest exports were in the United States. After the United States, significant exports were made to the Soviet Union, Japan and Britain. In the 1980s, the Soviet Union faced political and economic problems, and in 1991 the problem was serious and the Soviet Union broke into 15 countries. As a result, many Rupee trade agreements ended. As a result, exports from India to the Soviet Union declined between 1991 and 1992. In 1990-91 India exported more goods to the USSR than the US. Due to some economic weaknesses, India was not prepared to face international political and economic uncertainty. After the fall of the Soviet Union, India had to rely on other countries to fulfill the need to pay in hard currency. Since 1991, India has continued to increase its exports to the UK, US, Hong Kong, Germany, etc. In the 1980s, the major destination of Indian exports was Germany, Japan, the US and the Soviet Union. The fall of the Soviet Union in 1991 led to a decline of Indian imports to USSR. The Soviet Union was a major supplier of defense technology, and oil is in India and payments were made in comfortable rupees. Since 1991, India has seen significant growth in Saudi Arabia, the UAE and Iran, because of the Gulf War, rising oil prices. The emergence of the Gulf War and oil prices due to the Rupee devaluation became severe. All payments for oil imports must be made in hard currency. During the Gulf War, imports from Kuwait continued to increase. In the mid-1990s, trade moved south. In the 1980s, there was a lack of trade in India, and the problem caused severe damage to foreign exchange reserves and the loss of rupee trading partners.
Since India’s independence, India’s balance of payments has always been negative with a few exceptions. In most cases, the unfavorable balance of payments is caused by an unfavorable trade balance. India always imported more products than exported. Low efficiency, lower domestic technology, labor intensive industries, excessive government regulations, the overall business environment led to a reduction in productivity and the economy is still remained a deficit economy.
Gulf Crisis
Since the beginning of 1980, political instability was observed in the gulf. Iran was invaded by Iraq in September 1980. The oil prices were high during the years 1980 and 1981 because OPEC countries restricted oil production in early 1980s. After 1985 the prices of oil started coming back to normal since the OPEC countries increase the production but this adversely affected the north European countries and Soviet Union. Due to the reduced oil prices economic disruptions were caused in USSR and not even a war was required to break it into pieces. Even though petroleum and oil products were available at a slightly higher price in USSR, India should have increased the imports. Here, government could have intervened since the oil and gas industry was dominantly looked over by the government enterprises. In this case neither of the countries would have suffered. Gulf War resulted in a slight increase in the price of oil. Gulf War is held responsible to a huge extent for the Balance of payments crisis of 1991 and rise in oil prices. But it has been observed that the

rise in the price of oil was not very huge after the Gulf War. India could have avoided the crisis if it would have worked on economic intelligence.
Balance of Payment Crisis of 1991
Indian companies had taken short-term external loans at lower rates. With fluctuations in interest rates and devaluation of rupee, higher amount was payable to service debt. In 1991 current account deficit was 3.1 % of GDP, fiscal deficit was high and there was higher inflation in the economy. Several Credit rating agencies downgraded India’s credit rating. Because of these reasons borrowing more loans became a task. Because of low credit rating, International Financial Institutions and banks were not ready to lend money to India. India also made attempts to raise foreign exchange from International Monetary Fund; even they were initially not willing to provide required assistance and insisted on changing economic policies. Foreign investor confidence and foreign investment were the lowest in the year 1991. The non-resident Indians who kept their deposits in India suddenly started moving their deposits out of the country in March 1991. There was huge media coverage on Falling Forex reserves, rising fiscal deficit, high inflation. These factors were the reason why nonresident Indians started losing confidence on India and started moving their deposit out of the country in 1991 which contributed to further reduction of foreign currency assets.
According to Dr. Y. V. Reddy economic crisis could have been anticipated much earlier as a result of depleting foreign exchange reserves from USD 3.1 billion in August 1990 to USD .98 billion in July 1991. Country witnessed constant fall in foreign exchange reserves for a longer period and problem became serious when foreign exchange reserves came down.

Conclusion
The adversities in the balance of payment have been a constant phenomenon in the Indian economy as a result of which the Indian Rupee is depreciating and the inflation is rising. Soviet Union was one of the prime exporters of oil and defence equipment to India. Heavy fiscal deficit, economic crisis and Political instability in USSR during 1980s led to economic instability in USSR in 1991. The fall of foreign exchange reserves happened because India relied heavily on very few trading partners which include Germany and Soviet Union in order to maintain debt rate for necessary commodities. The fall of USSR and GRD merging into Germany distorted rupee trade with these countries; as a result the country needed liquid currency to maintain for similar commodities.


References

MADAAN, D., & MADAN, D. (1995). India’s New Economic Policy – A Macro Study. Indian Journal of Asian Affairs, 8/9(1/2), 104-113. Retrieved fromhttp://www.jstor.org/stable/41950393 Joshi, V., & Little, I. (1993).

Macro-Economic Stabilisation in India, 1991-1993 and Beyond. Economic and Political Weekly, 28(49), 2659-2665. Retrieved from http://www.jstor.org/stable/4400490

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