India: Crisis and Response

Abstract

The first signs of India’s most recent balance of payments crisis became evident in the second half of 1990–91 when foreign exchange reserves began to fall. The immediate cause of the loss of reserves, which started in September 1990, was the rise in world oil prices following the annexation of Kuwait. This led to a sharp escalation in India’s oil import bill, from an average of $287 million per month in June–August 1990 to $671 million per month in the following six months. The effect of the increase in oil prices was aggravated by the events that followed. Indian workers employed in Kuwait had to be airlifted back to India and their remittances ceased to flow in. Further, the UN trade embargo on Iraq led to the stoppage of exports to Iraq and Kuwait, imposing a loss of approximately $280 million on the economy. Thus, from a level of $3.11 billion at the end of August, India’s foreign exchange reserves had dwindled to $896 million on 16 January 1991.