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Asked by Vinodha Last Modified
Answer 
Harpreet Kaur
IELTS, Interviewer, Spoken English trainer with 2 years of experience in IELTS industry.
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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The economic reforms were introduced in 1991 to overcome the economic crisis related to the external debt and many other factors like -
1. The national income was growing at a very slow rate of 0.8%
2. India was highly indebted and the government was unable to make repayment of loans taken from abroad.
3. Imports were more than exports, there was a balance of payment deficit and the foreign exchange reserves collapsed.
4. Inflation level was quite high and so even the prices of essential goods were increased.
5. India was indebted to IMF and World Bank up to the extent of 7 billion dollars.
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