Global Governance 12 (2006), 413– 429

Pathways Through Financial Crisis: India
Arunabha Ghosh

India survived near-crisis situations twice in the 1990s. How did internal and external constraints shape that country’s ability to respond to the crises? This article argues that India’s success can be attributed to four sets of decisions taken during the period 1991–1997: devaluation, involvement of the IMF, partial liberalization of the domestic financial sector, and gradual opening up of the external sector. The article analyzes the options, political opposition, and eventual outcomes for each set of decisions. India’s ownership of its reform program helped set the pace of reform, while close interaction between technocrats and the IMF added
By the time a new government took over in June, reserves could cover only two weeks of imports. India was close to defaulting on its sovereign debt for the first time in its history.13

The 1997 Crisis In 1997, India was much less vulnerable, both relative to 1991 and to most East Asian economies.14 The fiscal deficit, although still high, had declined since the early 1990s. The current account deficit had fallen to 1.25 percent of GDP in 1996–1997. External debt as a proportion of GDP (24.7 in 1996– 1997) was a fraction of that of Indonesia (61.3) or Thailand (62). The debt service ratio had fallen fourteen percentage points since 1990 to 21.2 percent in 1996–1997. The predominantly state-owned banking sector had nonperforming loans that were only 8 percent of total loans. And while many countries were exposed to a common creditor country, this was not the case with India. The better fundamentals influenced expectations of crisis. In 1996, the IMF calculated that East Asian countries had balance-of-payments (BOP) crisis probabilities ranging from 25 percent for the Philippines to 65 percent for Thailand. India’s probability was just 11 percent.15 But as in 1990–1991, India was again experiencing political instability. A minority coalition government twice lost parliamentary support of the Congress Party during 1996–1998. In May 1998, the two-month-old BJP-led government engineered nuclear tests, inviting widespread