Economic reforms

The “downward adjustment of the rupee” in July 1991 continues to attract attention and excitement. In his recent book, Jairam Ramesh provides a the decision-making process and the political convulsions[kun'vúl-shun(disturbance,खलबली)] associated with the decision.

The deterioration[di,teer-ee-u'rey-shun(worsening,बिगड़ना)] in India’s balance of payments (BoP) during 1990 and 1991 is well-documented. The acute[u'kyoot(sharp,तीखा)] rise in crude prices due to the Gulf crisis was a severe jolt[jówlt(shock,झटका)] to India’s BoP situation, already under stress. From mid-1990, financing the CAD became arduous[aa-joo-us(difficult,कठिन)].RBI had urged[urj[force,मजबूर)] the government to approach the IMF as early as in August 1990. By end-December 1990, foreign exchange reserves were adequate[a-di-kwut(enough,पर्याप्त)] for only three weeks of imports.
As the new government took over in end-June 1991,The first decisive[di'sI-siv(crucial,निर्णायक)] action of the new government was with respect to the exchange rate.  the situation had deteriorated to a point that it had become inevitable[necessary,आवश्यक)]. the rupee depreciated by 10.8 per cent vis-a-vis the dollar between March 1990 and March 1991. Given the situation, a sharper one-time adjustment was needed. Of course, devaluing the currency has a political connotation[kó-nu'tey-shun(intension,इरादा)].

A sharp downward adjustment would take it even further outside the limit. Since the adjustment was to be made in two stages, the code name for the exercise was “Hop, Skip and Jump”.

On July 1, 1991,first change, The foreign exchange market welcomed the move but was a bit shaken. on July 3, the next adjustment was made. The depreciation worked out to 17.38 per cent against the intervention currency, the pound sterling. Rbi is not cognizant[kóg-ni-zunt(aware,जागरूक)] of the government having second thoughts in the intervening period. Somehow, devaluation is always regarded as a quasi[kwó-see(similar,समान)] political decision. After the announcement on July 3, the market had to be assured that there would be no further sharp downward adjustments. This was necessary to prevent exporters from postponing bringing in receipts or NRIs from delaying sending deposits. Rbi reiterated[ree'i-tu,reyt(repeat,दोहराना)] that there would be no further sharp changes.

The decision to make the downward adjustment was bold.  What was, in fact, bolder was the ushering[ú-shu(show,दिखाना)] in of reforms in general and particularly in the external sector. The dismantling[dis'man-tu-ling(break,विखंडन)] of quantitative controls on imports, reduction in import tariffs, introduction of EXIM scrips, adoption of a dual exchange rate, and switch to a market-determined exchange rate system all happened in a short span of 18 months, and transformed the external sector regime. The rupee became convertible on the current account in 1994.

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