IVEy | Publishing THE INDIAN ECONOMY: A MACROECONOMIC TURNAROUND Tulsi Jayakumar wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder, Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, NGG ON?; (t) 519.661.3208, (e) cases@ivey.ca; www.iveycases.com. Version: 2017-07-28 Copyright @ 2017, Richard Ivey School of Business Foundation In 2016. India celebrated the 25th anniversary of its economic reforms. Initiated in 1991 as a result of a severe fiscal deficit-driven balance of payments (BOP) crisis, the economic reforms comprised three pillars: privatization, liberalization, and globalization. The reforms saw India gradually break free of the low- growth trap that had characterized it up to the 1980s-euphemistically called the "Hindu growth rate"- and join the league of the fastest-growing nations of the world. In 2016, with an annual growth rate of 7.6 per cent. the Indian economy emerged as the fastest-growing economy in the world, outpacing China's 6.9 per cent annual growth rate. In April 2016, India's finance minister addressed a meeting of investors in New York and spoke of India achieving an 8.5 per cent annual growth rate in 2016/17. The movement in the country's macroeconomic indicators in the past 25 years pointed to a macroeconomic turnaround. What elements constituted this turnaround? How strong was this turnaround story? Was it sustainable? Could internal or external factors affect the positive growth? BACKGROUND India had remained a closed economy until 1990/91. A severe fiscal deficit-driven BOP crisis in 1991 had reduced India's foreign exchange reserves to less than US$1 billion' in July 1991-not enough to sustain two weeks of imports'- and brought India to its knees.' The sharp increase in oil prices following the Gulf War led to the first signs of the crisis in the second half of 1990/91. The immediate cause for the decline in foreign exchange reserves from September 1990 arose from the current account side of the BOP. Oil import prices rose sharply from $287 million per month in June-August 1990 to $671 million per month in the following six months, accounting for the rise in trade deficit from $356 million per month to $677 million per month over the same period. The rise in the cost of oil imports was aggravated by the cessation of exports to Iraq and Kuwait worth more than $280 million, following the United Nations trade embargo on Iraq, and the loss in remittance flows, as Indians working in Kuwait had to be air-lifted following developments in the region. The changes to the capital account, accompanying changes in the trade account, exacerbated the situation and reflected a crisis of confidence in the government's ability to manage the situation. Both short-term credit and medium-term commercial loans dried up and became costlier as India's credit rating decreased. April-June 1991 saw an outflow from the country of non-resident Indian deposits worth $952 million. This document is authorized for educator review use only by RAMANNA SHETTY, Alliance Business School Bangalore until Sep 2022. Copying or posting is an infringement of copyright. Permissions@hosp.harvard edu or 617.783.7860