The rupee is linked to the British pound, resulting in "sterling balances" from India's trade surplus, which are kept under British control in London.
India nationalizes the Reserve Bank and devalues the rupee by 31 percent. The Reserve Bank formulates and administers a restrictive monetary policy to fight off inflationary pressures and promote stable prices and higher production.
The government seeks to revamp the banking system to stimulate development and forms several specialized institutions to provide credit to industry, agriculture, and small business. Inflation remains low.
India's macroeconomic policy is geared toward low monetary growth and moderate public sector deficits. Inflation remains low, and the current account registers a surplus. For the most part, capital entering the country takes the form of official aid. Indira Gandhi nationalizes the banking system, which expands rapidly.
The rupee is overvalued as part of an import-substitution strategy. The government tightly controls foreign exchange transactions, and the Central Bank closely manages the exchange rate.
While export growth is slow, an increase in domestic petroleum production and reduced petroleum imports keep the trade deficit in check. The current account deficit stays low. Tax receipts rise when comprehensive tax reform tightens enforcement, and taxpayers respond to lower taxes with greater compliance. The rupee is allowed to depreciate sharply in conjunction with economic liberalization.
Progress in tax collection is undermined by renewed tax evasion and insufficient coordination among authorities. The government responds to the growing deficit by borrowing. Foreign debt doubles. India becomes increasingly vulnerable to external shocks. Increasing oil prices, slow growth in countries trading with India, and political uncertainty put India on the verge of a currency crisis.
India undertakes broad fiscal reform, including reforms to the tax system and cuts in the public sector deficit. To boost exports, the government devalues the rupee by 19 percent and moves it toward partial convertibility to foreign currency. In 1993, the government devalues the rupee again and introduces a market-determined exchange rate. Inflation rises to 11 percent.
The fiscal situation deteriorates. The public-sector deficit rises sharply due to weak revenue performance and a lack of expenditure control at both the central and state government levels. Inflation falls to 3.5 percent in 1999, but then rebounds. Public-sector debt exceeds 80 percent of the GDP.
The rupee is under pressure in early 2002 as relations with Pakistan deteriorate, but it rebounds later in the year on improved political news and reasonable growth forecasts. The Unit Trust of India, the state-run mutual fund system, is bailed out and restructured following a near collapse after a panic run on one of its funds.
back to top