Why there was need for economic reforms?
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There was a need to introduce reforms because:
- Mounting fiscal deficit: Fiscal deficit of the government had been mounting year after year on continuous increase in non-development expenditure. 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 non-development expenditure and restore fiscal discipline in the economy.
- Adverse balance of payment: 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.
- 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.
- 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. On account of these factors, it becomes imperative for the government to adopt new economic policy or to initiate economic reforms.
- 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.
- 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. In such situation the government had to helplessly resort to policy of liberalisation as suggested by the World Bank.
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