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Economics-CBSE-class-11-NCERT-solutions-->View question

Why were reforms introduced in India? -Economics CBSE class 11 ncert

Book: Indian Economic Development
Chapter 3: Liberalism, Privitisation and Globalisation: An appraisal
 (NCERT textbook questions)

Asked On2017-07-14 09:21:06 by:Aparna-Dasgupta

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After independence, the economic policies adopted by the government were unable to achieve the desired level of economic growth. Also, the Indian economy faced several problems such as economic recession, fiscal deficit and unfavourable balance of payments. Hence, the New Economic Policy (NEP) was initiated in 1991 to tackle economic crisis and to speed up economic growth. Main reasons for introducing economic reforms in India:
Increase in fiscal deficit: Borrowings by the government to meet excess expenditure over revenue during a particular period of time is called fiscal deficit. In 1981-82, the fiscal deficit was 5.4% of GDP which increased to 8.4% of GDP in 1991. The government of India took a huge loan from the International Monetary Fund (IMF) and World Bank to meet this deficit. This increased the burden of the government to repay the loan with interest. Thus, India was caught in a debt trap. So, India opted to draft new economic reforms to cut non-developmental programmes and policies to get out of the debt trap.
Unfavourable balance of payments: Unfavourable balance of payments is the amount which is to be paid to the rest of the world in excess of the amount to be received from them. In 1981-82, the balance of payment deficit on current account was Rs 2,214 crore which had increased to Rs 17,367 crore in 1990-91. This was because India's imports were more than its exports. Hence, it depended on external debts to make payments for imports. Consequently, it increased the burden of the foreign debt service and initiated NEP to reduce the pressure of unfavourable balance of payments.
Reduction in foreign exchange reserves: Foreign exchange reserves declined from Rs 8151 crore in 1986-87 to Rs 6252 crore in 1989-90 because of unfavourable balance of payments. This situation further worsened to an extent that the Indian government mortgaged gold reserves to the World Bank to repay borrowed loans. This resulted in liberalisation and privatisation of the economy through economic reforms.
High inflation rate: Before the introduction of NEP, the average inflation rate was 16.7% as there was excess deficit financing, i.e. government borrowing from the Reserve Bank of India to meet its deficits. So, planners introduced economic reforms to combat the inflation rate.
Restricted licensing policy: The regulatory licensing policy had restricted new firms from entering the market and thus reduced the industrial growth of the country. In July 1991, a new industrial policy was introduced to abolish the policy of industrial licensing except for liquor, dangerous chemicals, defence equipment, cigars and industrial explosives.
Therefore, economic reforms were introduced to increase the growth rate of the economy and to tackle the economic recession situation in India.

Answerd on:2017-07-17 Answerd By:milan-ransingh

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