question_answer 1)

Why were reforms introduced in India?

Answer:

Economic reforms initialed in India in the year 1991 wore crisis driven rather than being strategic. The following factors became the reason for economic reforms to be introduced in India (i) High Fiscal Deficit, Debt Trap and Low Foreign Exchange Reserves Government expenditure exceeded the revenue, from various sources such as taxation, earning from public sector enterprises etc due to high spending on social sector, infrastructure and defence. The government borrowed funds to finance the deficit from banks, people of the country and international financial institutions. Due to faulty policies, government was not able to make repayments on its external borrowings and starting taking fresh loans to repay the previous loans thus getting caught in a debt trap. Secondly, foreign exchange reserves borrowed from other countries and financial institutions spent on meeting consumption needs. As a result foreign exchange reserves declined to a level and that was not adequate to finance imports for more than two weeks. (iii) High Inflation Long term rise in general price level is called inflation. Prices of many essential goods rose sharply due to slow output growth and high demand, which resulted in double digit inflation (inflation at more than 10% level) in 1980-81 to 1990-91. During this critical situation no country or international lender was willing to lend to India. India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF) for loan. India was granted $7 billion as loan to manage the crisis on the condition that India would liberalize and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionalities of World Bank and IMF and thus announced the New Economic Policy (MEP) consisting of wide ranging economic reforms under three heads viz liberalization, privatization and globalization.