In the middle of 1991, need for major economic reforms was felt in the country. These were ur-gently needed to bring U-turn in the economy. It was mainly due to following reasons :
(i) Excessive fiscal deficit: In our planned eco-nomic 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.
(ii) 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.
(iii) 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%.
(iv) Reduction in 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.
(v) Poor performance of public sector : 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.
(vi) Gulf Crisis : Iran-Iraq warin 1990-91, is known as gulf-crisis. It led to a sharp rise in petrol prices in the international market. Our exports to gulf countries fell sharply but there was a steep rise in import bills. It made the balance of payment position further grim. It compelled the government to introduce the new economic policy at this juncture.