India approached the International Monetary Funds (IMF) for providing a loan despite India’s continuous disability to repay the existing loans. IMF which was already sceptical about the growth and development model of Indian Economy recommended a series of reforms which India needed to made so as to be able to sought help from IMF. These reforms were clearly reflected in the New Economic Policy of 1991. The need for these reforms was felt due to several reasons the main of which are as follows.
- Imbalance in the countries Balance of Payments i.e. Balance of payment deficit: Deficit in balance of payment means when foreign payments are in excess of foreign receipts. In India, it mounted from Rs.2214 crores in 1980-81 to Rs.17367 crores in 1990-91. To meet this deficit, government had to depend upon external borrowings.
- Excessive fiscal deficit: In our planned economic development, anticipated expenditure was always in excess of anticipated receipts resulting into fiscal deficit. It increased to 8.5% of GDP in 1991 as against 5% in 1981-82. In order to meet this deficit, government had to make public borrowings involving interest burden of borrowing.
- Insufficient foreign exchange reserves. At one time, during 1990-91, foreign exchange reserves fell to a lower level of 2400 crores, which was just enough for the payments of three weeks imports. The crisis was so serious that Chandra Shekhar government had to mortgage gold reserves with other countries to pay off interest and foreign debts. It forced India to adopt a new set of measures to accumulate foreign exchange reserves.
- Rise in prices: After 1960-61, prices of all commodities continued to rise. The situation became serious when the rate of inflation arose from 6.7% to 16.7%. Thus these reforms were necessary to check the rising inflation.
- Inefficiency of the Public Sector Enterprises which resulted in losses made by the PSEs. Government of India expanded public sector in a j huge way during 1951-1991, but their return was negligible. So, it was the need of the hour to shift it to the private sector instead of public sector.