The following are the reasons for economic reforms:
(i) Rise in Prices:
Price rise continuously in India. The inflation rate increased from 6.7% to 16.7%.
Due to inflation country’s economic position became worse.
Main reason for inflation was rapid increase in money supply. It was due to deficit financing Deficit financing means borrowing from Reserve Bank of India by Government to meet its deficit.
RBI provides this loan by printing new currency notes. Cost of production increases due to inflation. This affects demand for products.
(ii) Rise in Fiscal Deficit:
Due to increase in non- development expenditure fiscal deficit of the Govt. had been increasing. Fiscal deficit means difference between total expenditure and total receipts minus loans. To cover the fiscal deficit, the Govt. has to raise loans and pay interest on it. Due to rise in fiscal deficit there was rise in public debt and interest. In 1991 interest liability became 36.4% of total govt. expenditure. The Govt. caught in debt trap. So Govt. has to resort to economic reforms.
(iii) Increase in Adverse Balance of Payments:
The difference between total exports and imports of a country in called Balance of Payments. When total imports obtained from two sources.
(a) By exports
(b) Remittances by NRI’s (Non resident Indians).
When foreign exchange falls short for payment otherwise total imports exceed total exports, problem of adverse balance of payments arise. Though incentives are given for export promotion yet the desired results cannot be achieved. It is due to the fact that our export goods could not compete in price and quality.
So deficit of balance of payments had been rising continuously. In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367 crores. To cover this deficit large amount of foreign loans had to be obtained. So liability of loan and its interest payment goes as increasing. It made balance of payments adverse.
(iv) Iraq War:
In 1990-91, war in Iraq broke, and this led to rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem.
(v) Dismal Performance of PSU’s (Public Sector Undertakings):
PSU’s are enterprises wholly owned by Govt. have invested crores of Rs. in these enterprises. These are no performing well due to political interference and became big liability for Govt.
(vi) Fall in Foreign Exchange Reserves:
Indians foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks. In 1986-87 foreign exchange reserves were Rs. 8151 crores ad in 1989-90, it declined to Rs. 6252 crores. Then Chandershekhar Govt. had to sell Gold to meet the import liability. So Govt. had to think about policy of liberalisation.