Need for economic reforms or the New economic policy was felt mainly because of the following measures:
1. Mounting fiscal deficit: Prior to 1991, fiscal deficit of the government had been mounting year after year on the account of continuous increase in its non-development expenditure. Fiscal deficit means difference between the total expenditure and total receipts .Due to persistent rise in fiscal deficit there was corresponding rise in public debt and interest payment liability. There was possibility that the economy might lead to debt-trap situation. Thus it becomes essential for the government to reduce its nondevelopment expenditure and restore fiscal discipline in the economy.
2. Adverse balance of payment: Balance of payments is the systematic record of country's exports and imports with rest of the world. When receipts of foreign exchange fall short of their payments, the problem of adverse balance of payment arises. Despite the restrictive policy adopted by the government till 1990 import substitution and export promotion the desired result could not be met. Our export could not compete in terms of price and quality in the international market. As a result there was slow growth of export and rapid increase in imports. Accordingly, the burden of foreign debt services increased tremendously and led to depletion of foreign exchange reserves.
3. Gulf Crises: On account of Iraq war in 1990-91 prices of petrol shot-up. Besides, India used to receive huge amount of remittances from gulf countries in terms of foreign exchange which stopped due to this war. Gulf crisis thus further accentuated the already adverse balance of payments position.
4. Poor performances of PSUs: Due to poor performances of public sector undertakings, they degenerated in to a liability. Most of public sector undertakings were incurring loss and their performance was quiet satisfactory.
5. Rise in price: Due to rise in prices of foodgrains there was pressure of inflation prior to 1991, which deepen the economic crisis from bad to worse.
6. Fall in foreign exchange reserves: In 1990-91 India's foreign exchange reserves fell to such a low level that there was not enough to pay for an import bill of even 10 days. The situation grew so acute that Chandrashekhar had to mortgage country's gold to discharge its foreign debt servicing obligations. In such situation the government had to helplessly resort to policy of liberalisation as suggested by international institutions, in order to secure loans from them. On the account of the above compelling factors, it became inevitable for the govt. to adopt New Economic Policy.