In the early 1990s, India was gripped by a balance-of-payments crisis. The situation was triggered by a slowdown in inward remittances and a sharp rise in oil prices following Saddam Hussein's invasion of Kuwait. As a result, the current account of the balance of payments came under severe strain, hit simultaneously by a fall in foreign currency receipts and a rise in the value of imports.
The impact of these pressures was clearly visible in 1990-91, when the current account deficit widened to 3 per cent of GDP, the highest level recorded in nearly two decades at the time.
Forex Reserves On The Edge.
The pressure soon spilt over into India's foreign exchange reserves. By mid-1991, the country's reserves were sufficient to cover only about three weeks of imports of essential commodities such as oil and fertilisers.
It was at this juncture that the Reserve Bank of India (RBI) stepped in, playing a decisive role by pledging gold with international banks in exchange for hard-currency loans.
Gold Pledges
The emergency steps taken in 1991 have been documented in the RBI's official history. It notes that in April 1991, the government raised “$200.0 million” from the Union Bank of Switzerland through a sale of “20 tonnes of gold confiscated from smugglers,” structured with a repurchase option. The move was followed just months later by an even larger operation.
According to the RBI's account, “In July 1991, India shipped 47 tonnes of gold to the Bank of England” to secure “another $405.0 million” in foreign currency. Together, these transactions provided urgently needed funds that helped India “repay its international donors and creditors” at a moment when external payments were under severe stress.
The gold pledging, RBI clarified, was a stopgap rather than a solution. While the measures eased immediate pressure, they were “not sufficient to completely absolve the country of the crisis,” highlighting how close India had come to a full-blown external payments default.
1991 Budget: India's Economic Reset
The new government, sworn in June 1991 under PV Narasimha Rao with Manmohan Singh as finance minister, faced an urgent foreign exchange crunch.
The 1991 Budget laid the foundation for change: liberalisation, privatisation, deregulation, foreign investment up to 51 per cent, easier foreign technology rules, lower import tariffs, rupee devaluation and privatisation of state-owned enterprises.
Presenting the Budget on July 24, 1991, Singh warned reserves were “in the range of Rs 2,500 crore,” enough for “a mere fortnight” of imports.
“There was no time to lose,” he said. Ending the licence raj was essential to boost competition, productivity and efficiency.
Defending the reforms was a trial by fire, yet Singh pressed through changes that reshaped India's economic path.
