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Question

Why were reforms introduced in India?

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Solution

The various reasons for the introduction of economic reforms in India are:

a) Poor performance of the public sector: The overall performance of the public sector was very poor as several public sector enterprises were incurring huge losses.

b) Deficit in the BOP: Even after the imposition of tariffs and quotas, there was a sharp rise in imports. On the other hand, exports were growing slowly due to poor quality and high prices of Indian goods. This led to a rise in the deficit in the BOP.

c) Inflationary pressures: There was a persistent rise in the general price level in the economy due to an increase in the money supply and shortage of essential goods.

d) Fall in foreign exchange reserves: In 1991, the foreign exchange reserves fell to a level such that they were just not adequate to finance imports for more than 2 weeks and to pay interest to international lenders.

e) Huge burden of debt: The expenditure of the government was much higher than the revenues. As a result, the government had to borrow from banks, the public, and international financial institutions.

f) Inefficient management: The government was unable to generate adequate revenues and the expenditure began to exceed revenues by large margins.


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