Deterring The Future Economic Crisis For Developing Nations: Lessons From 1991 And 2013 Balance Of Payment Crisis Of India

Abstract

Since its independence, India has witnessed 2 major economic crisis on the external front, also referred to as the Balance of Payment (BOP) crisis. The most severe one was witnessed in the year 1991 when several problems were faced by the country on Economic, Political and External sector .The crisis manifested due to Balance of Payment difficulties, because of scarce foreign exchange reserves for making payments. The crisis went so deep that the country was forced to take a bail-out package through loans made by International Monetary Fund (IMF), for which they imposed stringent conditions to India for opening up its economy to the world and maintain fiscal discipline. This resulted in the country adopting the economic reforms through Liberalisation, Privatisation and Globalization (LPG) policy. The other major crisis on BOP front was experienced in the year 2013 when the country witnessed a significant  fall in its currency value from INR 54 in May 2013  to over INR 68 a USD till August 2013 (in a span of 4 months). This paper makes an analysis as to the factors which were responsible for this payment crisis and provides traditional as well as innovative solutions to prevent a BOP crisis in future which includes fiscal discipline, reducing unnecessary imports, diversification of export destinations, barter, abolishment of inverted duty structure, and a truly free and flexible exchange rate system. The paper calls for a truly, free and flexible exchange rate system and providing better investment climate for foreign direct investment (FDI) inflows.