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