Why was there a need for economic reforms?
Why was there a need for economic reforms?
There was a need to introduce reforms because:
1. Mounting fiscal deficit: Fiscal deficit of the government had been rising year after year with continuous increase in non-development expenditure. Due to persistent rise in fiscal deficit, there was a corresponding rise in public debt and interest payment liability. There was a possibility that the economy might fall into a debt-trap situation. Thus it became essential for the government to reduce its non-development expenditure and restore fiscal discipline in the economy.
2. Adverse balance of payments: 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 results could not be met. Our exports 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 increased tremendously and led to depletion of foreign exchange reserves.
3.Gulf Crises: On account of the 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.
4.Poor performances of PSUs: Due to poor performances of public sector undertakings, they degenerated into a liability. Most of the public sector undertakings were incurring losses. On account of this, it becomes imperative for the government to adopt a new economic policy or to initiate economic reforms.
5. Inflation: Due to rise in prices of food grains, there was pressure of inflation prior to 1991 which worsened the economic turmoil.
6. Fall in foreign exchange reserves: In 1990-91, India's foreign exchange reserves fell to a level such that there was not enough to pay for an import bill. In such a situation, the government had to helplessly resort to a policy of suggested by the World Bank.
There was a need to introduce reforms because:
1. Mounting fiscal deficit: Fiscal deficit of the government had been rising year after year with continuous increase in non-development expenditure. Due to persistent rise in fiscal deficit, there was a corresponding rise in public debt and interest payment liability. There was a possibility that the economy might fall into a debt-trap situation. Thus it became essential for the government to reduce its non-development expenditure and restore fiscal discipline in the economy.
2. Adverse balance of payments: 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 results could not be met. Our exports 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 increased tremendously and led to depletion of foreign exchange reserves.
3.Gulf Crises: On account of the 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.
4.Poor performances of PSUs: Due to poor performances of public sector undertakings, they degenerated into a liability. Most of the public sector undertakings were incurring losses. On account of this, it becomes imperative for the government to adopt a new economic policy or to initiate economic reforms.
5. Inflation: Due to rise in prices of food grains, there was pressure of inflation prior to 1991 which worsened the economic turmoil.
6. Fall in foreign exchange reserves: In 1990-91, India's foreign exchange reserves fell to a level such that there was not enough to pay for an import bill. In such a situation, the government had to helplessly resort to a policy of suggested by the World Bank.
