Need for economic reforms in 1991 arose because of the following factors:

1. Slow and unsatisfactory economic growth due to *protectionist policy of the government. The growth of industries during the period 1950-51 to 1990-91 showed impressive achievement.

The proportion of GDP contributed by the industrial sector increased from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91. The annual growth rate of the industrial sector during the same period was 6 per cent. The Indian industry was no longer restricted to cotton textiles and jute, but was well diversified by 1990.
The need to obtain a license to start an industry was misused by some industrial houses. The big industrial houses would get a license not for starting a firm but to prevent competitors from starting new firms. The excessive regulation of what came to be called 'Permit License Raj prevented certain firms from becoming more efficient.

2. The public sector enterprises were suffering losses, due to inefficiency and poor management. Thus, the role of the public sector had to be redefined.

Other factors included a balance of payment crisis due to heavy dependence of imports, continued inflationary pressures, excessive government spending leading to deficit, rising corruption etc.