IMPACT OF DEVALUATION OF INDIAN RUPEE ON …

Ankit Puri et. al., Journal of Management Research and Analysis (JMRA)

Available online at http://jmraonline.com

ISSN: 2394-2770, Impact Factor: 4.878, Volume 05 Issue 01, March 2018, Pages: 149-161

Homepage: http://jmraonline.com, Email: [email protected] Page 149

IMPACT OF DEVALUATION OF INDIAN RUPEE ON

INTERNATIONAL TRADE

1 Ankit Puri,

2 Steeve John Mathew

1, 2 (BBA F&A student, Department of Professional Studies, Christ University, Bengaluru, Karnataka, India)

Abstract: The Indian Rupee is considered to be one of the most stable currencies across the Globe; however,

the currency had been fluctuating in the 1960s decade and during the period of liberalization (1991). At the time

of India’s inception (1947), the US Dollar and Indian Rupee were valued at $1=₹1. However, due to unstable

periods in the Indian and Global economy, the currency has devalued and depreciated considerably. India, being

a founding member of the IMF, had been following the Bretton Woods System of exchange rate until it

collapsed in 1971 where it valued its currency against the US Dollar. After the collapse of the Bretton Woods

System, the Indian Rupee was valued against the British Pound and a basket of currencies. In June, 1966, India

conducted its first devaluation of 57% due to a severe balance of payments deficit and because the foreign

exchange reserves had plunged. Being an ever-growing population, India was unable to the meet the food

requirements of its population which put the country on the verge of a famine. Additionally, the Indo-Pak war

also led to exhaustion of valuable resources for the country which forced the government to devalue the Indian

Rupee as an agreement with the US for aid in terms of wheat. In 1991, the government again devalued the

Indian Rupee by 20% in two phases as the foreign exchange reserves were at an all-time low, there was an oil

crisis due to the Gulf war and the split of the Soviet Union aggravated the situation extensively. The devaluation

of the Indian Rupee reduced the price of exports in the international market making them more competitive and

acted as an import-substitution policy for domestic producers as it made imports more expensive. This led to an

increase in the foreign exchange reserves and helped to bring in stability of balance of payments.

Keywords: Devaluation, exchange rate, depreciation, Indian Rupee, export-import

1. INTRODUCTION The exchange rate of a currency is an integral economic indicator of the country’s balance of payments

position, trade position, and economic growth. It can be defined as the price of one currency in terms of another

currency for trade-offs to happen.

The Indian Rupee emerged at par with the US Dollar as soon as India gained Independence from the

British on 15th

August 19471. However, since 70 years of India’s Independence, the value of the Indian Rupee

has fallen from $1=₹1 to $1=₹64.52, a decrease in its value by more than 64 times2.

Devaluation refers to the intentional or deliberate act of a government to reduce the value of its

currency against other currencies. However, depreciation is a fall in the value of a currency against another

currency in a floating exchange rate system, due to the market forces. Those economies which have a fixed

(pegged) or managed floating exchange rate system use the monetary policy to devalue or revalue their own

currency, usually to combat imbalances in trade or to stabilize the balance of payments by regulating import and

export of goods and services.

By the year 1966, Indian Rupee had already been devalued to about $1=₹4.76 before the Indira

Gandhi government further devalued it to $1=₹7.503. Indira Gandhi was elected as Prime Minister in January

1966 after the sudden death of her predecessor, Lal Bahadur Shastri who had set the foundation for devaluation.

In the same year of her election as Prime Minister of India, she decided to devalue the Indian rupee over 57%.4

Post-liberalization the Indian Rupee has risen from being one of the most volatile currencies of Asia to

one of the most stable now.

1 http://www.jagranjosh.com/general-knowledge/devaluation-of-indian-rupee-reasons-history-since-1947-

1475640486-1 2 http://www.xe.com/currencyconverter/

3 http://www.forbesindia.com/article/independence-day-special/economic-milestone-devaluation-of-the-rupee-

(1966)/38407/1 4 http://www.forbesindia.com/article/independence-day-special/economic-milestone-devaluation-of-the-rupee-

(1966)/38407/1





The researchers evaluate the consequences of exchange rate fluctuations between the US Dollar and

Indian Rupee leading us to the research question- “Impact of devaluation and depreciation of the Indian

Rupee on international trade of India”

2. LITERATURE REVIEW 2.1 First Devaluation of the India Rupee (1966)

The Sino-Indo War and Indo-pak war which broke out in the year 1962 and 1965 respectively caused a

huge balance of payments deficit for India which rose by about 84%5 from 1962-1966. However, exports in

India only increased by 14% during the same time period (1962-1966)6.

2.1.1 Yadav et.al, Devaluation of the Indian Rupee against US $: A historical perspective, (2013)

Yadav et.al (2013) reviews that, in the year 1965, the government of India began observing

consequences of an upcoming famine and decided to take social measures which included encouraging common

people to clean their backyards and start growing crops, asking farmers to grow more than one kind of crop a

year and also campaigning for motivating people to skip a meal in a day to reduce food consumption. India

received extensive support from the United States of America which has been reported to supply as large as

20,000 tons of crop on a daily basis. The food shortage situation in India accelerated borrowings from

International Organizations and other countries (External sources) which caused a severe deficit in India’s

financial account. After the Soviet Block dismantled, many eastern European countries that was once a part of

the Soviet Union terminated their Rupee-payment agreements with India. Furthermore, there was substantial

decrease in India’s exports to the eastern Europeans countries from 22.1% of total exports in 1980 to 19.3% in

1989 and plunged to 10.1% in 1991.

2.1.2 Johri, et al, Devaluation of the Rupee: Tale of Two Years, 1966 and 1991,

According to Johri, et al, India had a problem of trade deficits since the 1950s and moreover due to

poor credit ratings in the international market, it was difficult for the government to borrow from international

organizations and other countries. In order raise revenue for government expenditure, the government began

issuing bonds to the Reserve Bank of India which caused an increase in the money supply in the economy. As

the supply of money increased in the market, the value of money reduced causing inflation in the domestic

economy. The inflation rate in India had reached about 5.8% during the period of 1961-1965 and increased to a

staggering 10% in 1966 which made exports substantially more expensive than the international market price

leading to a diminishing demand for them in the international market.

2.2 Second devaluation of the Indian rupee (1991)

The second devaluation of the Indian Rupee occurred in 1991 which was a relatively unstable period in

the history of the country as the country was preparing itself for liberalizing the economy and dealing with a

severe balance of payments deficit including plunging foreign exchange reserves.

Table 1: Inflation in the Indian economy from 1988 to 1995

Source: Johri, Miller: Devaluation of the Rupee: Tale of two years, 1966 and 1991, Centre for Civil Society

2.2.1 Shaji Vikraman, on this day 25 years ago, an invaluable devaluation (2016)

In order to increase exports and discourage import of goods and services, the Indian government

decided to execute the second devaluation of the India Rupee; however, in order to be precautious of the move,

it decided to execute it in two steps. Many policy-makers suggested a devaluation of at least 20% in order to

5 http://www.economicsdiscussion.net/government/debt/public-debt-before-and-after-independence-in-

india/21261 6 http://www.economicsdiscussion.net/government/debt/public-debt-before-and-after-independence-in-

india/21261





adequately stabilize the balance of payments7. Under the guidance of Prime Minister P.V Narsimha Rao, the

devaluation was executed in two stages-the rupee was first devalued by about 9% against a basket of currencies

on 1st July, 1991 and by another 11% on the 3

rd of July decreasing its value to $1=₹25.79. In about two days,

the value of the rupee was devalued by 18.5% against the US Dollar8. The devaluation was also done to prevent

huge capital flights and reduce the balance of payments deficit.

2.2.2 Arora, et al, What determines us dollar- Indian Rupee exchange rate movements, Indian institute of IIT

Kanpur

The research paper, “Arora, et al, What determines us dollar- Indian Rupee exchange rate

movements, Indian institute of IIT Kanpur”, provides an insight into the econometric perspective of the

depreciation of the Indian Rupee from the year of liberalization (1993) till 2013. It has observed and calculated

the impact of several variables such as differential interest rate, differential inflation rate, differential money

supply, differential output growth rates, and trade-offs with other currencies to calculate statistical measures

using various econometric tools. They have modelled the fluctuations in the exchange rate from 1993 to 2013

through multivariable regression analysis (OLS). Through the research paper, they have described the open

interest parity theory as the effect of the interest rates on the exchange rate mechanism. The theory suggests that

the domestic interest rate must be higher than the international interest rate by an amount equal to the expected

depreciation or appreciation of the domestic currency. Similarly, they have also explained the purchasing power

parity theory which suggests that the exchange rate between one currency and another is in equilibrium when

their domestic purchasing powers at that rate of exchange are equivalent.

Rekha, Chandra, Impact of Rupee devaluation on the growth of India Economy- a Study on Rebounding

Strategies

The research paper evaluates the impact of the depreciation of the Indian rupee on balance of payments

and trade deficit of India. It states that the depreciation of the Indian rupee is leading to a rise in imported

inflation as depreciation is causing imports to become more expensive. It also highlights the impact of

depreciation on foreign direct investments (FDIs) and foreign institutional investments (FII). It also suggests

strategies to recover from the negative impacts of devaluation.

3. RESEARCH DESIGN 3.1 Objective

To evaluate the impact of devaluation of the Indian Rupee on India’s inflation rate

To evaluate the impact of devaluation of the Indian Rupee on India’s balance of payments deficit and current

account position

To determine the viabilities of the devaluations and depreciations for the macro-economic aims of the

government and India’s international trade

3.2 Scope

The study is primarily an exploratory research with an in depth analysis into the situations causing the

devaluation and depreciation of the Indian Rupee. The information collected is primarily qualitative and

descriptive as it is based on the economic and political, causes and consequences of devaluation. However, to

explain the relationship between exchange rate fluctuations, interest rates, inflation rates and various other

indicators, the researchers have also collected some quantitative data.

The period of study for the research ranges from 1966 to 2017 by focusing on certain important events

that impacted the position of the Indian Rupee in the exchange market.

3.3 Source of Data

The foundation of the research work is based purely on secondary data collected from a diverse collection

of research papers, research banks and a plethora of articles. In order to collect information about the first

devaluation of the Indian rupee, which was executed in 1966 by the Indira Gandhi government, references were

made to online articles published by Forbes India and the Indian Express. Similarly for the other time periods in

which the Indian rupee was devalued against the other currencies, the research made extensive use of article

pools and research papers by various online published resources. Depreciation which took place over the years

post liberalisation was documented in a series of economic journals such as the Economic Times and LiveMint.

Through the information that was collected from research journals and various articles, a comprehensive,

interpretative, evaluative and critical analysis of the devaluation executed by the Reserve Bank of India (RBI)

and depreciation over the post liberalisation period, was formulated.

7 http://indianexpress.com/article/explained/on-this-day-25-years-ago-an-invaluable-devaluation/

8 http://indianexpress.com/article/explained/on-this-day-25-years-ago-an-invaluable-devaluation/

http://indianexpress.com/article/explained/on-this-day-25-years-ago-an-invaluable-devaluation/






4. DATA ANALYSIS 4.1 Impact of Devaluation of the Indian Rupee (1966)

4.1.1 Impact of devaluation on export (1966)

(DATA COLLECTED FROM PLANNING COMMISSION REPORT OF 4TH

FIVE YEAR PLAN OF INDIA)

The devaluation led to a significant rise in the exports of India by approximately 57.5% from the period

before the devaluation. The growth of aggregate exports before the devaluation was very gradual as can be

viewed in the graph. In the year 1960-61, the value of exports was 660.2 crores, which increased to 679.7 crores

in 1961-62, to 713.6 crores in 1962-63, 793.2 in 1963-64 and 816.3 in 1964-65. The recorded value of aggregate

exports by The Planning Commission in the period before devaluation was 805.6 crores which increased to

1268.9 crores post devaluation. However, there was a sudden fall in the value of exports in 1966-67 to about

1156.5 crores but again increased in 1967-68 and 1968-69 to 1198.7 crores and 1260 crores respectively.

4.1.2 Impact of devaluation on import (1966)



Under a ceteris paribus situation, a devaluation of the Indian Rupee in 1966 would have made imports

more expensive and in turn would have led to fall in their demand in the Indian economy, however, the Indian

government introduced a liberal import policy for 59 priority industries to meet the requirements of raw

materials. Under this policy, there was an embargo placed on the import of 260 items which were being

sufficiently supplied by the domestic manufacturers to prevent excessive competition as a protectionist move.

This led to a temporary increase in imports in 1965-66 (post devaluation), however, the impact of the

devaluation can be seen from 1966-67 onwards when the imports began to decrease constantly. The level of

imports reduced from 2218.4 crores in 1965-66 to 2078 crores in 1966-67, then to 2007.6 crores in 1867-68 and

further down to 1861.6 crores in 1968-69.

4.1.3 Impact of devaluation on net export (1966)



1139.7 1107.1 1490.9 1222.9 1349 1408.5 2218.4 2078 2007.6 1861.6

020004000

Imp

ort

val

ue

(Cro

res)

Years

IMPORT (Y)

-479.5 -427.4

-777.3

-429.7 -532.7

-602.9

-949.5 -921.5 -808.9

-601.6

-1000

-500

0

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

NET

EX

PO

RTS

(C

RO

RES

)

YEAR

Net Exports (X-M)

660.2 679.7 713.6 793.2 816.3 805.6 1268.9 1156.5 1198.7 1260

0

1000

2000

1 9 6 0 - 6 1 1 9 6 1 - 6 2 1 9 6 2 - 6 3 1 9 6 3 - 6 4 1 9 6 4 - 6 5 1 9 6 5 - 6 6 1 9 6 5 - 6 6 1 9 6 6 - 6 7 1 9 6 7 - 6 8 1 9 6 8 - 6 9

EXP

OR

T (C

RO

RES

)

YEAR

EXPORT (X) TREND





Although the devaluation of the Indian Rupee did increase the Indian exports, the import liberalization

move of the Government led to a significant rise in imports which worsened the current account position of

India as can be reflected in the fall in next exports by about 54.48% in the period after devaluation. However,

after 1966, there was a consistent growth in net exports of India to about -921.5 crores in 1966-67, then to -

808.9 crores in 1967-68 and further to -601.6 crores in 1968-69. This trend is seen due to a gradual decrease in

imports and a gradual increase in exports.

4.1.4 Impact of devaluation on gross domestic product (1966)

(DATA COLLECTED FROM PLANNING COMMISSION REPORT OF 4

TH FIVE YEAR PLAN OF INDIA)

India’s GDP significantly increased during the third plan and the decade of 1960-69. In the year 1961-

62, the GDP value was about 17,992 crores which gradually increased to 19,238 crores in the year 1962-63, to

21,986 crores in 1963-64, then to 25686 crores in 1964-65 and finally to 26896 crores before devaluation in

1965-66. Post-devaluation and import liberalization, India’s GDP rose rapidly to about 30613 ccrores in 1966-

67, to 35976 crores in 1967-68 and 37938 crores in 1968-69. This could be seen as a result of an increased

demand for exports in the international market which would compel domestic manufacturers to increase their

output and also due to the import liberalization move which made procurement of raw materials easier.

4.1.5 Impact of devaluation on various industrial sectors (1966)

The researchers also evaluated the impact of devaluation on various different industries of export and

import such as Textiles, Crude rubber, iron ore etc.



Textiles have been an important export commodity for India as can be seen by the high export values.

India has been a major exporter of textile products since early times with handloom forming a significant share

of the nation’s GDP. The devaluation of the Indian rupee provided a huge growth opportunity for textile exports

which became less expensive in the international market. As can be seen in the graph, the textile exports were

relatively constant with a negligible rise of only 48 crores between 1960 and 1965 (before devaluation),

however, devaluation gave the textile exports a boost as they increased to 435.1 crores in the period after

devaluation from 258.3 crores in the period before devaluation indicating a rise of 68.44%.



17992 19238 21986 25686 26895

30613 35976 37938

0

10000

20000

30000

40000

1 9 6 0 - 6 1 1 9 6 1 - 6 2 1 9 6 2 - 6 3 1 9 6 3 - 6 4 1 9 6 4 - 6 5 1 9 6 5 - 6 6 1 9 6 6 - 6 7 1 9 6 7 - 6 8 1 9 6 8 - 6 9

GD

P (

CR

OR

ES)

YEAR

GROSS DOMESTIC PRODUCT

210.2 219.7 221.9 233.3 247.7 258.3

435.1 373.6 355.3 363.2

0

200

400

600

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

TEXTILE INDUSTRY (EXPORT)

106 85.2 73.5 59.1 74.6 63.3 99.7 91.4 101.7 118

0

200

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

IMP

OR

T V

ALU

E (C

RO

RES

)

YEARS

TEXTILE INDUSTRY (Cotton, jute, synthetic materials, synthetic yarn) (IMPORT)





The textile import industry was not severely impacted by the devaluation as can be seen in the

increasing textile import trend over the years post-devaluation. The import liberalization policy of the

government reduced the protectionist measures such as the import substitution policies which the government

had implemented in the early 1960s to promote exports. As the government reduced protectionism by

withdrawing import substitution policies like import entitlements and tax credits post-devaluation, the import of

textiles began to rise showing a 57.5% increase post-devaluation in the year 1965-66. In 1959, the government

introduced import entitlements in the cotton textile industry as an export promotion strategy. The import

entitlements allowed exporters to receive import licenses for dyes, intermediates and spare parts of machinery

up to twice the quantity of imported inputs used in manufacture of exports. The import entitlements presented

restrictions on imports which led to a fall in imports of textiles through the early 1960s. As can be seen in the

graph, textile imports in 1960-61 were about 106 crores which reduced by 19.6% in 1961-62 to about 85.2

crores. Textile imports reduced further to 73.5 crores in 1962-63 and further decreased to 59.1 crores in 1963-

64. After the government devalued the rupee and simultaneously reduced import substitution polices, the

imports of textiles increased by 86.4% between pre-devaluation of period in 1965-66 and 1968-69.



The crude rubber imports drastically decreased between the years 1963-64 and 1964-65 by about 41.88

% in response to the strict import restrictions and import entitlements on raw materials. Throughout the early

1960s, in the pre-devaluation period, there has been a negative trend in the import of crude rubber; however, as

the devaluation of the rupee which involved simultaneous removal (partial) of import entitlements and other

restrictions on imports, there was a sudden rise in import of crude rubber. Post-devaluation, the import of crude

rubber increased by 115% between 1965-66 and 1966-67 from 6 crores to 12.9 crores respectively.

However, there was a sudden drop in imports of crude rubber from 1966-67 to 1967-68 due to the

reintroduction of import restrictions and import entitlements as protectionist measures to boost exports of crude

rubber.



India, being a significant export of raw materials, also exported iron ore to several countries for

producing finished products. There was a sudden increase in exports from 1960-61 to 1961-62 by approximately

108.23 % which can be attributed to the introduction of import entitlements in 1959 and export promotion

measures in the early 1960s. However, the following years, from 1961-62 to 1965-66 (pre-devaluation) saw a

relatively constant export of iron ore with an insignificant increase of 18.93 % over 4 years. As the government

of India devalued the Indian Rupee, exports became less expensive and the value of exports grew by 57.48 %

between the years 1965-66 (post devaluation) and 1966-77. Following the devaluation in 1966, the export of

iron ore is seen to have grown gradually over the second half of the 1960s.

14 13.6 12 11.7

6.8 6 9.4

12.9

6.2 7.8

0

5

10

15

Year 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

(CR

OR

ES)

YEARS

CRUDE RUBBER (IMPORT)

17 35.4 35.3 36.4 37.4 42.1

66.3 70.2 74.8 88.4

0

50

100

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

OF

IMP

OR

T (C

RO

RES

)

YEARS

IRON ORE (EXPORT)







Tea has been an integral commodity of export for India since early times. India has a wide variety of

teas that are produced in different parts of the country. During the 1960s, tea was one of the two most important

sources of foreign exchange along with jute, however, the tea exports reached a peak during the year 1962-63

and then began to gradually decrease before facing a vertical drop of over -90.68 %. Post-devaluation in 1965-

66, the export value decreased substantially but began rising gradually again over the latter half of the 1960s.

The export quantity of tea did not see much fluctuation during the decade of 1960s; however, it was the price of

tea which fell drastically that led to a fall in the export revenue from the tea exported. As the export quantity

remained stagnant due to inelastic demand for tea, constantly falling prices in India and across the World

decreased the export revenue too. Moreover, the devaluation put more downward pressure on the price of tea as

it led to a fall in the price of exports further reducing the tea industry’s revenue from exports.



India had not been a major exporter of coffee in the 1960s as other developing economies dominated the market

including Brazil and other South-American countries. The value of coffee exports was relatively stagnant from

1960-61 to 1965-66 with slight fluctuations. During this period, the coffee exports averaged at 9.1 crores,

however, saw a spike post-devaluation of the Indian Rupee in June 1966. As devaluation led to a fall in the price

of exports, coffee exports also became more competitive in the international market and created an increased

demand for them. The rise in coffee exports was substantial and is measured to be at 1291.64 % as the coffee

export value in 1965-66 (pre-devaluation) was only crores which increased to approximately 180.9 crores in

1965-66 (post-devaluation). Growing demand for coffee in the 1960s was also a major factor that imposed an

upward force on the coffee exports.



123.6 122.6 129.8 123.4 124.6 114.8

10.7 17.5 18 22.2

0

50

100

150

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

TEA EXPORT

7.2 9 7.6 8.3 13.4 13

180.9 158.4

180.2 156.5

0

100

200

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

COFFEE EXPORT

150 71 112

173 225 268

422.1 302 287

130

0

200

400

600

1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1965-66 1966-67 1967-68 1968-69

VA

LUE

OF

IMP

OR

T (C

RO

RES

)

YEARS

PL 480 FOOD GRAINS (IMPORT)





PL 480 Food grains were the food grains which India imported from the United States under the Public

Law 480 scheme. India needed to import American wheat under the PL 480 scheme which would allow India to

import at relatively low prices for Rupee payments as India’s foreign exchange reserves had plunged. Indira

Gandhi visited the United States and met Lyndon B Johnson, 36th

President of the US. The deal which they

struck was that India had to devalue its currency in order to receive American wheat at cheaper prices.

4.2 Impact of Devaluation of Indian Rupee (1991)

4.2.1 Effect of devaluation (1991) on the GDP

(DATA COLLECTED FROM RESERVE BANK OF INDIA HANDBOOK OF STATISTICS 2016-2017)

Even though India was facing a severe economic crisis, with sky-rocketing oil prices and geo-political

instability, the GDP kept increasing at a rapid rate. As can be seen in the diagram, the GDP in 1985-86 was

around ₹2,89,524 Crores, which increased to ₹3,23,949 crores in 1986-87 and kept increasing rapidly. In 1987-

88, the GDP increased by 13.66 % to ₹3,68,211 crores and then in 1988-89 by 18.65 % to ₹4,36,893 crores. In

the year 1989-90, the GDP had reached ₹5,01,928 crores, showing a rise of 14.89 %. In the year 1991, the

Indian government brought in many economic reforms including the devaluation of the Rupee and liberalization

of the economy. Post-devaluation the GDP increased by 16.79 % and began rising at an increased rate. In 1992-

93, it had increased by approximately 15%. By the year 1994, the GDP had reached ₹10,45,590 crores and had

increased by about 78.36 %.

4.2.2 Effect of devaluation (1991) on total export


Exports are directly impacted by a change in the currency’s value in the international market. As the devaluation

of 1991 reduced prices of exports, their demand increased post-1991 and can be seen as a steep rise in exports in

the diagram. Before devaluation, the increase in exports was gradual and gentle. In 1988-89, the value of exports

was approximately ₹20,232 crores which increased by 36.7 % to ₹27,658 crores in 1989-90. In 1990-91, the

value of exports had increased by another 17.7 % to ₹32,553 crores. After the devaluation, the value of exports

increased at a rapid rate continuously. In the year 1991-92, the exports had risen by 35.29 % to 44,041. The

steepest rise in exports can be seen between the years- 1992-93 to 1993-94 where exports increased by ₹16,063

crores. In 1994-95, the exports had reached ₹82,674, showing a percentage increase of 153.97% since 1990-91,

and the year before devaluation.

289,524 323,949 368,211 436,893 501,928 586,212 673,875 774,545 891,355 1,045,590

0

500,000

1,000,000

1,500,000

1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

GD

P (

CR

OR

ES)

YEARS

Gross Domestic Product (GDP)

10,895 12,452 15,674 20,232 27,658 32,553 44,041 53,688

69,751 82,674

0

50,000

100,000

1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

TS

(CR

OR

ES)

YEARS

TOTAL EXPORT (CRORES)





4.2.3 Impact of devaluation (1991) on total imports


There was a constant increase in the value of imports before and after devaluation of the Indian Rupee

in 1991. Imports were continuously increasing since 1987-88 as the population was growing and the national

income was increasing with the standard of living. In 1988-89, the total imports had risen by 27% and rose by

another 25.12% in 1989-90. In the year before devaluation (1990-91), total imports further increased by 22.26%.

After devaluation in 1991-92, imports increased at a slower rate of 10.78% as they were impacted by the

devaluation which made imports more expensive for Indian consumers. In the year 1992-93, imports had

increased by 32.44% and increased further by 15.34% in 1993-94. Imports showed an increasing trend and rose

by another 23.08% in 1994-95.

4.2.4 Impact of devaluation (1991) on export of various commodities


Agricultural commodities are one of the primary commodities of export for India. As seen in the

diagram, the agricultural export had been increasing consistently before the devaluation in 1991; however, after

the devaluation there was rapid growth seen in its exports. In 1987-88, the agricultural export was only ₹33.2

crores which increased by 5.45% in 1988-89 to ₹35.01 crores and further to 47.5 crores in 1989-90 showing an

increase of 35.68%. In the year 1990-91, there was an increase of 26.72% in agricultural export. After the

devaluation, the agricultural export in 1991-92 was ₹78.95 crores and had increased by 31.17%. The increase in

agricultural export was not so substantial in 1992-93 and had risen only by 15.03%. However, in 1993-94 there

was a sudden spike in agricultural export from India which can be attributed to favorable weather conditions,

liberalization of the economy and rising national incomes in importing countries as the export of agricultural

products had increased by 39.1% to ₹126.33 crores. In 1994-95, the agricultural export was up by only 5.03%.


33.2 35.01 47.5 60.19 78.95 90.82

126.33 132.69

0

50

100

150

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

AGRICULTURAL EXPORT

6.01 6.09 9.17 10.7 12.12

9.77 10.59 9.76

0

5

10

15

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

TEA EXPORT

222.44 282.35 353.28 431.93 478.51 633.75 731.01

899.71

0

500

1000

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

IMP

OR

TS

(CR

OR

ES)

YEARS

TOTAL IMPORTS (CRORES)





Tea has been one of India’s primary export commodities as India exports one of finest quality teas and

the highest variety of tea available in the market today. As seen in the diagram, the devaluation of 1991 did not

affect tea exports drastically due to the relatively stagnant demand of tea in the international market. Before the

devaluation, tea exports were increasing due to a combination of increasing prices and demand, however, post-

devaluation prices of tea fell in the international market which caused a decrease in the export revenue from tea.

After devaluation the export had increased to its peak of ₹12.12 crores in 1991-92, however, decreased by

19.39% to ₹9.77 crores in 1992-93. It increased slightly by 8.39% to ₹10.59 crores in 1993-94, but then again

decreased to ₹9.76 crores in 1994-95.


Coffee exports responded gradually to the devaluation as they increased at a relatively constant rate till

1992-93 and then showed a hike. Before devaluation, the fluctuation in coffee exports was very minimal as can

be seen in the diagram. The export of coffee was valued at ₹2.62 crores in 1987-88, which increased by 12.2%

to ₹2.94 crores in 1988-89. In 1989-90, it had reached ₹3.47 crores but decreased by 27.38% in the next year

(1990-91). Post-devaluation, there was a rise in coffee exports as the exports became less expensive. The value

of coffee exports in 1991-92 was ₹3.32 crores showing an increase of 31.75% which further increased by

13.25% to ₹3.76 crores in 1992-93. From 1993-94, there was a substantial rise in coffee exports. In 1993-94,

the exports were ₹5.46 crores showing an increase of 45.21%. In 1994-95, there was a huge spike in coffee

exports as they increased by 92.85% to ₹10.53 crores.


India is a major exporter of textiles as manufacturers prefer to produce in the country for its low cost

labor, abundant availability of labor and low cost factors of production. During the period of 1985-95, textile

exports fluctuated greatly due to the low producer confidence in India’s economic and political stability.

Between 1987-88 and 1988-89, textile exports reduced by about 80.9% but increased by 509.5% in 1989-90. In

the year 1990-91, exports of textiles increased dramatically by 560.94% due to liberalization policies of the

government that enabled more production of textiles for exports. In 1991-92, textile exports were down by

63.95%. In 1992-93, textile exports had fallen further by 40.33%. There was a sudden hike in textile exports in

1993-94, as textile exports had increased by 259.34% but again decreased in 1994-95 by 78.59%.

2.62 2.94 3.47 2.52 3.32 3.76 5.46

10.53

0

5

10

15

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

COFFEE EXPORTS

1.1 0.21 1.28

8.46

3.05 1.82

6.54

1.4

0

5

10

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

TEXTILE EXPORT





4.2.5 Impact of devaluation (1991) on import of specific commodities


Petroleum products have been an important import for India as it fuels all the other industries in the

country. Post-liberalization, India started to become a focal point for important manufacturing industries which

increased the need for fuel. Higher employment and increasing living standards also caused an increase in the

demand for automobile vehicles which led to an increase in the demand for petroleum products. In 1987-88, the

value of the import of petroleum products was ₹40.43 crores which increased by 7.79% to ₹43.58 crores in

1988-89. It further increased to ₹62.73 crores in 1989-90 showing an increase of 43.94%. In 1990-91, the year

before the devaluation of the Indian Rupee, the import of petroleum products rose by 72.42% to ₹108.16 crores.

In 1991, India devalued its currency and began to import higher amounts of petroleum products to meet the

shortage occurring from the current level of import due to the Gulf war. After 1991, the economy was

liberalized which led to an increased amounts of foreign direct investments by MNCs creating a larger demand

for petroleum products. Even though, the price of petroleum products would have increased after the

devaluation, the quantity imported did not decrease due to its highly inelastic demand. In 1991-92, the import of

petroleum products increased by 21.37% and further increased by 5.27% in 1992-93. In the year 1993-94, the

import of petroleum products had increased by another 3.14% since the previous year (1992-93).


Capital goods are defined as goods which are used to manufacture other goods. Capital goods are

integral for the growth of the secondary sector of any economy as they boost the production potential of the

economy. The imports of capital goods have consistently increased throughout the period of 1987-88 to 1994-95

as the GDP was growing at a rapid rate. In 1988-89, there was a 5.94% growth in the import of capital goods. In

1989-90, the import of capital goods increased by 26.56% to about ₹88.04 crores which further increased to

₹104.71 crores in 1990-91, showing a percentage increase of 18.93%. After the government of India devalued

the Indian Rupee in 1991-92, the import of capital goods reduced slightly by 0.35% due to the increase in price

of imports after devaluation. However, the Indian economy was growing at a rapid rate as can be seen by a

steady growth in the GDP, for which it was necessary to import of capital goods and increase production. Post-

liberalization, the economy was opened to several markets which increased the productive potential of the

economy. This led to an increased import of capital goods as domestic producers began targeting export markets

and foreign direct investments increased in the economy. Therefore, there was a steeper rise in the import of

capital goods post-devaluation. In 1992-93, the import of capital goods increased by 25.79% and increased

further by 49.19% in 1993-94. In 1994-95, the import of capital goods was as high as ₹239.82 crores which can

be attributed to the increase in GDP. The increase in import of capital goods can be corresponded with the

40.43 43.58 62.73

108.16 131.27

171.42 180.46 186.13

0

50

100

150

200

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

VA

LUE

OF

EXP

OR

T (C

RO

RES

)

YEARS

PETROLEUM PRODUCTS (IMPORT)

65.66 69.56 88.04 104.71 104.34 131.25

195.81 239.82

0

100

200

300

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95VA

LUE

OF

IMP

OR

T (C

RO

RES

)

YEARS

CAPITAL GOODS (IMPORT)





increase in GDP along the years with the liberalization of the economy as capital goods are an important

indicator of an increase in the productive potential of an economy.

4.3 China’s devaluation practices China has been an export-led economy by being a manufacturing hotspot for industries across the

Globe. In the past, China has devalued its currency several times for a variety of reasons, majorly to increase

export and decrease import. The balance of payments of China is facing a surplus because of its huge surplus in

the current account. In 2015, China devalued its currency by 2% for a variety of reasons such as to join the

International Monetary Fund, maintain its value against other major trading partners and to also boost its

exports. When China devalues its currency against the US Dollar, there is a sudden increase in exports as they

become cheaper and more competitive in the international market. Devaluation also acts as an import-

substitution policy for the domestic producers as it enables them to become more competitive in the domestic

market. China had a current account surplus of $62.2 Billion due to its export-led trade position and currency

valuation.

Devaluation may lead to a more stable balance of payments situation in the short-run, however, in the

long-run it can lead to capital flight from the country as foreign institutional investments would be drawn out of

the country and import of necessities, and raw materials would become more expensive causing an increase in

the cost of production for domestic producers.

5. FINDINGS 1. The Indian government devalued the Indian Rupee by 57% in 1966 after concluding a deal with the United

States to provide the country with necessary wheat supplies as aid.

2. India was facing a huge balance of payments deficit and the foreign exchange reserves had plunged which

led the government to devalue the currency.

3. India was also facing a severe drought, had just fought an intense war with Pakistan and was on the verge of

a famine which forced it to devalue the currency and introduce the farmers to green revolution.

4. The devaluation of the Indian Rupee in 1966 led to a fall in imports as they became expensive and rise in

exports as they became relatively less expensive in the international market.

5. The gross domestic product increased constantly during the period of 1960 to 1970 as the devaluation

enabled a recovery of foreign exchange reserves and balance of payments stability for the economy.

6. The second devaluation executed by the Indian government was in 1991 when it devalued the Indian Rupee

by 20% in two phases.

7. During the 1980s, the foreign exchange reserves had plunged and there was a substantial instability in the

economy due to the oil crisis and the disintegration of the Soviet Union.

8. The devaluation of the Indian Rupee in 1991 led to a rise in exports as the exports became less expensive.

9. Contrary to the belief that devaluation would cause a fall in imports, imports of India rose during the period

as the economy was liberalized which increased choices for consumers, employment, national income and

foreign direct investments.

10. The devaluation of 1991 did not decrease India’s imports (while a devaluation would cause a decrease in

imports due to them becoming more expensive) as the economy was liberalized which increased the need

for resources for the secondary sector.

11. The devaluation of the Indian Rupee was essential in both the time periods as the foreign exchange reserves

had plunged substantially and while India did have some Rupee-payment contracts for imports, there were

not substantial resources to meet the demands of the ever-growing Indian population.

6. CONCLUSION Referring back to the research topic- “Impact of devaluation of the Indian rupee on international trade

and the macroeconomic aims of the government in India”, it can be concluded that the devaluation of the Indian

Rupee conducted in 1966 and 1991 stabilized the economy which was facing a severe economic crisis in both

the years. In 1966, there was a severe food shortage when the country was on the verge of a famine; the war

with Pakistan had created a shortage of resources for the country which caused a huge balance of payments

deficit for India. The BOP deficit rose by about 84%9 from 1962-1966. However, exports in India only

increased by 14% during the same time period (1962-1966). In 1991, the government again devalued the Indian

Rupee by about 20% as the foreign exchange reserves had plunged and there was not enough reserves left to

import necessities for the ever-growing Indian population. Both the devaluations substantially impacted the

9 http://www.economicsdiscussion.net/government/debt/public-debt-before-and-after-independence-in-

india/21261





export and import of India’s important export-import commodities as it caused a change in the valuation of the

currency in the international market. In 1966, the devaluation reduced imports and increased exports of the

country and the simultaneous introduction of the green revolution heavily cleared India’s shortage of food.

China has been devaluing its currency which has led to benefits in terms of increasing foreign exchange

reserves, and an increasing current account surplus. However, India’s approach to devaluation may not be the

same as the devaluation would lead to capital flights for the economy, and would substantially increase the cost

of importing raw materials for the manufacturing sector.

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http://www.economicsdiscussion.net/government/debt/public-debt-before-and-after-independence-in-india/21261

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https://en.wikipedia.org/wiki/Economic_history_of_India#GDP_post-Independence

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