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Gold is often held for the future – for retirement, for the next generation or for the day when you really need something valuable to fall back on. <\/p>\n\n\n\n
And sometimes it\u2019s needed to get you out of a precarious situation – as India found out in 1991, when it came extraordinarily close to running out of foreign currency.<\/p>\n\n\n\n
With few options left and international payments still to make, India needed to find a way of raising money fast.<\/p>\n\n\n\n
So it called on its gold reserves, some of which literally needed to be airlifted out of the country to get it out of trouble.<\/p>\n\n\n\n
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This story is less of a \u2018gold crisis\u2019 and more a story of unbalanced books. Throughout the 1980s, India was spending more foreign currency than it was earning and plugging the gap with borrowing and other capital inflows. Essentially, its current account deficit was growing, while its external debt was rising.<\/p>\n\n\n\n
The country had borrowed from the IMF and had already severely restricted imports.<\/p>\n\n\n\n
But it still needed dollars \u2013 and other hard currencies \u2013 to pay for essential imports such as oil and fertiliser, as well as service the debt it was accumulating. And it needed them fast.<\/p>\n\n\n\n
By mid-1991, its usable foreign-exchange reserves had fallen to the equivalent of only a few weeks of imports, and the risk of external default<\/a>.<\/p>\n\n\n\n In hindsight, the roots of the crisis lay in the high and growing fiscal deficits of the 1980s, according to the IMF<\/a>. <\/p>\n\n\n\n But several factors pushed an already vulnerable economy towards crisis.<\/p>\n\n\n\n When Iraq invaded Kuwait in August 1990, oil prices rose sharply. For an economy heavily dependent on imported oil, that meant India suddenly needed substantially more foreign currency<\/a> simply to keep buying energy.<\/p>\n\n\n\n At the same time, the Middle East disruption affected remittances from Indian workers. So India was hit on both sides; there was more foreign currency going out for oil and less foreign currency coming in<\/a>. <\/p>\n\n\n\n India’s economic problems<\/a> were accompanied by considerable political instability. Credit ratings deteriorated, international commercial borrowing became much harder to obtain and non-resident Indians began withdrawing deposits.<\/p>\n\n\n\n India needed internationally accepted currencies to buy oil, other essential imports and service foreign debt. At this point the IMF described India as being on the \u2018brink of default<\/a>\u2019.<\/p>\n\n\n\n As India’s foreign-exchange position collapsed, there was one thing which remained constant: a tonne of gold was still a tonne of gold.<\/p>\n\n\n\n That made gold one of the few assets India could call upon and mobilise as collateral to obtain the foreign currency it desperately needed.<\/p>\n\n\n\n Across two separate transactions, roughly 67 tonnes of gold were mobilised, raising around $600 million in foreign exchange. The two transactions explain why you’ll see apparently conflicting figures of 20 tonnes, 47 tonnes and 67 tonnes in accounts of the crisis.<\/p>\n\n\n\n The first transaction involved approximately 20 tonnes of confiscated gold held by the Indian government. The State Bank of India arranged a transaction with Union Bank of Switzerland, raising roughly $200m\u2013$215m in foreign exchange<\/a> but that wasn’t enough.<\/p>\n\n\n\n The RBI then turned to its own gold reserves, pledging 46.91 tonnes with the Bank of England and Bank of Japan and raising approximately $400m. This time, the gold had to physically leave India.<\/p>\n\n\n\n There were practical complications too. Some of the RBI’s gold wasn’t in the form required for international bullion<\/a> transactions, so bars<\/a> had to be selected, weighed, packed, insured and transported.<\/p>\n\n\n\n Given the financial and political sensitivity of what was happening, the operation was carried out discreetly<\/a>, with the gold transported to London by chartered plane in 1991. <\/p>\n\n\n\n When news emerged that the government had been forced to pledge part of the country’s gold reserves to secure the borrowing, it outraged national sentiment and caused a public outcry.<\/p>\n\n\n\n Sometimes you’ll see this shorthand online, but it conflates two different parts of the rescue. India did borrow heavily from the IMF during the crisis, but it didn’t give or pledge its gold to the IMF. In fact, the IMF has not been permitted to accept gold as collateral for loans since changes to its rules took effect in 1978.<\/p>\n\n\n\n The gold transactions were separate. They involved Union Bank of Switzerland, the Bank of England and the Bank of Japan, while IMF<\/a> financing provided India with additional support during 1991. <\/p>\n\n\n\n In India, gold has enormous cultural significance, with gold jewellery traditionally held by families as both a store of wealth and something to pass down through generations. But this wasn\u2019t heirlooms being handed over: these were national reserves.<\/p>\n\n\n\n Having to physically ship sovereign gold abroad because the country was struggling to meet its international payments therefore became a powerful symbol of just how serious the crisis had become.<\/p>\n\n\n\n It was widely perceived as humiliating. For a country that had gained independence only four decades earlier, physically sending part of its sovereign gold reserves to London was an extraordinarily potent symbol of just how little financial room India had left.<\/p>\n\n\n\n While the exchange of gold didn’t fix India’s underlying economic problems, it did buy the country some much-needed breathing room. <\/p>\n\n\n\n The mobilisation of India’s gold stocks, alongside other emergency measures, ultimately helped restore external confidence and stem the loss of reserves, according to the World Bank’s contemporary assessment. (The World Bank Documents).<\/p>\n\n\n\n That breathing room was hugely important when India\u2019s new government took office in June 1991. Prime Minister P. V. Narasimha Rao appointed economist Manmohan Singh as finance minister \u2013 and what followed transformed the Indian economy.<\/p>\n\n\n\n This isn’t simply a story about a country nearly going bust but a prologue to one of the most important economic turning points in modern Indian history.<\/p>\n\n\n\n The government responded with a combination of immediate stabilisation measures and longer-term structural reforms. <\/p>\n\n\n\n The rupee was devalued in two stages<\/a> on 1 and 3 July 1991, amounting to roughly an 18-19% adjustment.<\/p>\n\n\n\n Then, on 24 July 1991, Manmohan Singh delivered the Budget associated with the reform programme.<\/p>\n\n\n\n What followed included industrial deregulation, reduced licensing requirements, liberalisation of foreign investment, trade liberalisation and fiscal reform, as India began a gradual move towards a more market-oriented economy.<\/p>\n\n\n\n The reforms marked a decisive break with India’s previous interventionist economic model<\/a>. <\/p>\n\n\n\n The IMF reported<\/a> that during the first five months of the subsequent programme, India’s net international reserves increased by more than $3 billion, restoring foreign-exchange cover to around three months of imports. <\/p>\n\n\n\n The RBI’s pledged gold was also repurchased relatively quickly<\/a> as conditions improved, with contemporary retrospectives putting the repurchase in the months following the crisis. <\/p>\n\n\n\n Ultimately, India\u2019s gold wasn’t permanently surrendered \u2013 but it did its job as a liquid reserve asset that could be mobilised in an emergency.<\/p>\n\n\n\n <\/p>\n\n\n\n Read more blogs in our Metals made history series:<\/strong><\/p>\n\n\n\n Silver Thursday explained: The Hunt brothers and the 1980 silver crash<\/a><\/p>\n\n\n\n Gordon Brown\u2019s gold sale: what happened and what we learned<\/a><\/p>\n\n\n\n The day the dollar left gold: Why Nixon ended the gold standard in 1971<\/a><\/p>\n\n\n\n1. The Gulf War pushed up India’s oil bill<\/strong><\/h4>\n\n\n\n
2. Money coming in from the Gulf fell<\/strong><\/h4>\n\n\n\n
3. Foreign lenders were losing confidence<\/strong><\/h4>\n\n\n\n
4. India’s foreign-exchange reserves collapsed<\/strong><\/h4>\n\n\n\n
How did gold help bail out India?<\/strong><\/h3>\n\n\n\n
May 1991: 20 tonnes<\/strong><\/h4>\n\n\n\n
July 1991: 46.91 tonnes<\/strong><\/h4>\n\n\n\n
Was the gold given to the IMF?<\/strong><\/h3>\n\n\n\n
Why was sending the gold abroad such a big deal?<\/strong><\/h3>\n\n\n\n
Gold bought India time<\/strong><\/h3>\n\n\n\n
From crisis to the 1991 economic reforms<\/strong><\/h3>\n\n\n\n
What happened afterwards?<\/strong><\/h3>\n\n\n\n