Q.Explain the balance-of-payments (BoP) crisis of 1991 and why it forced the Government of India to introduce economic reforms.

The BoP crisis of 1991 arose because India's foreign-exchange reserves fell so low that they could barely cover essential imports for about two weeks, forcing the government to pledge gold reserves abroad to avoid default.

In the years leading up to 1991, India's government spending consistently outpaced its revenue, producing a large and growing fiscal deficit financed mainly through borrowing. At the same time, the country's imports — especially crude oil, whose price spiked sharply after the 1990-91 Gulf War — far exceeded its export earnings, widening the current-account deficit. India had also built up substantial external debt through earlier borrowing, and confidence among foreign lenders and investors weakened as the country's fiscal position looked increasingly fragile.

By mid-1991 these pressures converged into a full balance-of-payments crisis: foreign-exchange reserves fell to a level that could finance barely about two weeks of essential imports. With no other means to raise emergency foreign currency quickly, the Government of India had to pledge a part of its gold reserves to the Bank of England and the Union Bank of Switzerland to avoid defaulting on its external obligations. This was a national emergency that exposed the structural weaknesses of the pre-1991 economy — an over-regulated industrial sector, inefficient public enterprises, and an economy too closed to respond flexibly to shocks.

It was this crisis that gave the government both the motive and the political urgency to announce the New Economic Policy in July 1991, built on the three pillars of Liberalisation, Privatisation and Globalisation — a decisive break from four decades of an inward-looking, tightly-controlled economic model.

Students often say reforms began simply because "the government wanted growth" without naming the actual 1991 BoP crisis (low forex reserves, gold pledge) as the immediate trigger — always cite the specific crisis, not a vague motive.