In the late 1980s, government expenditure began to exceed its revenue by such large margins that meeting the expenditure through borrowings became unsustainable. Prices of many essential goods rose sharply. Imports grew at a very high rate without matching the growth of exports. As pointed out earlier, foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needed to be paid to international lenders. Also, no country or international funder was willing to lend to India.
India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions between India and other countries.
So, the government initiated a variety of policies that fall under three heads viz., liberalisation, privatisation and globalisation.
Liberalisation: Liberalisation of the economy means its freedom from direct or physical controls imposed by the government.
Privatisation: It is the general process of involving the private sector in the ownership or operation of a state-owned enterprise.
Globalisation: It is a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.