Over the last decade, India has transformed itself, with more startup companies emerging in highly profitable sectors like mobility, e-commerce, I.T., etc. And this transformation is only likely to continue as towns urbanize, goods and services consumption rises and employability increases. Today, the Indian economy is the seventh-largest in the world (measured by nominal GDP) and the third-largest by purchasing power parity (PPP).
Yet, back in 1990, India faced a serious economic crisis; one which could have left the country financially crippled. The government was close to defaulting, leaving it unable to meet its balance of payments (BOP). Foreign reserves had fallen so low that India was unable to finance three weeks’ worth of imports! The primary reason for the economic crisis was the large fiscal imbalances accumulated throughout the 1980s, worsened by the Gulf War, leaving the country with a large oil import bill, plummeting exports and dried-up credit. By the end of the decade, India was in serious economic trouble.
In 1991, the Chandra Shekhar government approached the International Monetary Fund (IMF) for BOP assistance. Yet assistance would need to come with a guarantee, as expressed by C Rangarajan, former chairman of the Economic Advisory Council and Reserve Bank of India (RBI) Governor in an article in a leading publication said that, “In the course of talking with various market players, one question that came up frequently was: What was India doing on its own to tide over the crisis? The insinuation was simple. India had a fairly large stock of gold as reserves. Why could not India use it?”
The view was not lost on the IMF, who insisted India put up its gold resources, to show her earnestness in fulfilling her obligations. India had no option but to accept IMF’s suggestion.
The country proceeded to secure a loan of $2.2 billion by pledging 67 tonnes of India's gold reserves to the Bank of England (47 tonnes) and Union Bank of Switzerland (20 tonnes). In a country that took extreme pride in its gold reserve, national and political outrage ensued; collapsing the Chandra Shekhar government. Even as most politicians agreed, this was the right move. In an article, S. Venkitaramanan, former RBI Governor spoke of a conversation with Rajiv Gandhi, where the late Prime Minister stated: “Of what use is gold if it does not serve the national purpose in assisting the country in its difficulties?”
With a new government in place, P. V. Narasimha Rao the Prime Minister reaffirmed the previous government's stance, stating that he believed India must open door to foreign investment, reduce red tape that often cripples initiatives and streamline industrial policy. It was the appointment of Dr. Manmohan Singh as the Finance Minister that kick-started an economic reforms process which continues to benefits India even today.
When India needed it, our gold reserves came in handy. 18 years later, the entire episode came full circle, with the RBI bringing three times the amount of gold from the IMF to diversify its assets and using it as a risk mitigator. Today, India holds 557.8 metric tonnes of gold, much higher than in 1991. But even more important, keeping India’s credibility intact.