<P> The crisis was caused by currency devaluation; the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation . </P> <P> The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s . During the mid-eighties, India started having balance of payments problems . Precipitated by the Gulf War, India's oil import bill swelled, exports slumped, credit dried up, and investors took their money out . Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis . By the end of the 1980s, India was in serious economic trouble . </P> <P> The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of GDP in 1980 - 81 to 10.4 percent in 1985 - 86 and to 12.7 percent in 1990 - 91 . For the centre alone, the gross fiscal deficit rose from 6.1 percent of GDP in 1980 - 81 to 8.3 percent in 1985 - 86 and to 8.4 percent in 1990 - 91 . Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the end of 1980 - 81 to 53 percent of GDP at the end of 1990 - 91 . The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports . </P> <P> In mid-1991, India's exchange rate was subjected to a severe adjustment . This event began with a slide in the value of the Indian rupee leading up to mid-1991 . The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value . However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp devaluation that took place in two steps within three days (1 July and 3 July 1991) against major currencies . </P>

Causes of economic crisis in india in 1991