FISCAL POLICY
1991 Economic Reform
The root problem with India's macroeconomic started in the early eighties when its revenue surpluses were starting to turn into deficits mainly because of the lack of fiscal policies. To finance its investment and current consumption, the government had to borrow externally from multilateral lending institutions, other government external aid, capital market, and non-resident Indians (NRIs). Coming into the 1990s, the external debt had tripled from $22.8 billion in 1983-84 to $69.3 billion in 1990-91. Also by 1990-91, the gross fiscal deficit had grown to about 10% of GDP, of which 4.3% of GDP was for interest payment.
In addition, in 1990, the external investors, including the NRIs, started to lose their confidence in India's economy and political stability. The political instability in 1990 shown by two changes of prime minister within a year led to the lack of confidence in government's ability to build and manage any improvement in the economy. Two external events also played major roles in triggering withdrawal of capital and deposits in Indian banks by investors and NRIs. First, the steep rise in oil price during the Gulf crisis in 1990 put pressure on the exchange rate, thus causing expectation of rupees devaluation. Second, the collapse of the Soviet Union fueled the call for reconsideration of India's economic strategy that was largely inspired by the Soviet Republic. As one of the result of this lack of confidence, the foreign exchange reserves had gone down to the level of less than the cost of 2-1/2 months worth of imports.
These serious macroeconomic and balance of payments crisis prompted the creation of 1991 economic reforms with the following agendas: fiscal consolidation and limited tax ref ...