Q.Explain the background and causes of the 1991 economic crisis in India.

The crisis grew out of years of fiscal strain and a closed trade regime, then was triggered sharply by an external shock.

Explain each contributing factor and the resulting reserve collapse.

India's 1990-91 economic crisis grew out of long-building weaknesses in the pre-1991 mixed-economy model, brought to a head by an external shock:

1. Persistent fiscal deficits through the 1980s, financed increasingly by borrowing, pushed India's external debt and debt-servicing burden to unsustainable levels.
2. The Gulf War (1990-91) caused a sharp spike in global crude oil prices (India is a major oil importer) and disrupted remittances from Indian workers in the Gulf, both major drains on foreign exchange.
3. Weak, inward-looking export growth, held back by years of import-substitution policy, meant export earnings could not keep pace with the import bill.
4. A credit-rating downgrade, reflecting the mounting debt and reserve depletion, made foreign borrowing costlier and harder to access, exactly when it was needed most.

Together, these factors caused foreign exchange reserves to collapse to barely two-to-three weeks of essential imports, forcing the government to pledge part of the country's gold reserves abroad and to seek an emergency structural-adjustment loan from the IMF and World Bank — a loan that came with conditions requiring economic reform. This is the direct background to the New Economic Policy announced in July 1991.