Major Economic Crises in India: 1966 and 1991 Devaluations

India has navigated through several economic crises throughout its history. The most significant among these were the devaluations that occurred in 1966 and 1991. Both events were pivotal moments that reshaped the economic landscape of the nation.

The 1966 Devaluation: A Crisis of the Foreign Exchange Reserves

The 1966 devaluation was a major turning point in India's economic history. It was a response to a series of crises, including food shortages, forex crises, and the need to devalue the Indian Rupee (INR).

As a developing economy, India often imported more than it exported, leading to consistent balance of payments deficits since the 1950s. By 1966, these deficits had become severe enough to necessitate an intervention. Inflation had also driven up domestic prices above world prices at the pre-devaluation exchange rate, making export goods expensive and import goods cheap.

Moreover, the 1965 war with Pakistan had pushed India into a financial crisis. The US and other countries friendly to Pakistan withdrew foreign aid, exacerbating the need for devaluation. Additionally, a major drought hit the nation, further straining resources.

During Indira Gandhi's tenure, the government took decisive action. The rupee was devalued on June 6, 1966, which helped stabilize the economy. However, this devaluation was not enough to completely resolve the underlying issues. The devaluation delayed the rupee's final reckoning, but it was a crucial step in addressing the economic imbalances.

The 1991 Devaluation: A Catalyst for Economic Reform

While the devaluation of 1991 was economically necessary to avert a financial crisis, it marked a significant shift in India's economic policies. This event is often cited as the year of economic reform in India.

India had been gradually liberalizing its economy since the 1970s when restrictions on imported capital goods were relaxed as part of its industrialisation plan. The ImportExport Policy of 1985-1988 replaced import quotas with tariffs, marking a major overhaul of Indian trade policy. After 1991, the government further reduced trade barriers by lowering tariffs on imports, and quantitative restrictions have not been a significant issue since then.

While the 1991 devaluation was driven by external economic pressures, the government under P V Narasimha Rao was determined to implement more significant reforms. According to Srinivasan and Bhagwati, 'Conditionality played a role for sure in strengthening our will to embark on the reforms. But the seriousness and the sweep of the reforms... demonstrated that the driving force behind the reforms was equally... our own conviction that we had lost precious time and that the reforms were finally our only option.'

The 1991 devaluation was a crucial step that marked the beginning of a new era in India's economic history. It paved the way for greater integration with the global economy and laid the foundation for the country's current economic strength.

Conclusion

The two major devaluations in 1966 and 1991 were not just monetary events; they were strategic responses to deep-seated economic challenges. These events underscore the importance of foreign exchange reserves and the impact of trade policies on a nation's economic stability.

While many other economic crises may have been part of India's history, these two devaluations were critical turning points that shaped the country's future. The lessons learned from these crises continue to influence India's economic policies today.