[Commerce Class Notes] on Economic Reforms Pdf for Exam

Economic reforms were introduced in the year 1991 for faster and better economic growth. It was initiated by the Narasimha Rao Government for the sake of building people’s trust in the Indian economy.

There were many reasons to bring about such a huge change in our economy, majorly in order to give our nation a much-needed upgrade during the time. It was all required in more than one aspect of the country. 

Reasons For Economic Reforms

There were many reasons due to which economic reforms were a necessity in our country. These were:

• The Industrial Sector’s Poor Performance: Before the 1990s, the industries were mostly Government-owned. The employees did not feel the need to be either competitive or effective because their jobs were secure. The State had the ultimate authority. Thus, the industries were in the red. 

Although there were several disciplinary measures kept in place, still the vision was always on hold. It was only when the new economic reforms took place that they helped kick-start the Indian economy in a new and fresh direction.

• Adverse Balance of Payments: One of the biggest factors that played a major role in bringing about the economic reforms was the fact that India’s Balance Of Payments or BOPs were unsustainable. It was also true that the little foreign exchange there was as resources with the country were not enough. There was even an unprecedented rise of 11 percent in the BOPs. 

At this juncture, the only step that would work was to seek external help. And that was to introduce the LPG formula and bring about a New Economic Policy or NEP. All of these three were eventually done. As a result, it was even termed as the foundation for what led to the financial reforms in India.

• Rise in Fiscal Deficit: India’s current account was bleeding. The Centre did not have any funds in its hands. The reason for such a deficit was due to factors that were present both externally and internally. Suffice to say that the deficit had been a constant since the First Planning Commission’s tenure which started in 1950.  

By 1991, the rates were unsustainable. It was the time when inflation was on the rise and could not be curbed. Consequently, the Government of India took a decision that would lead to the implementation of the NEP. This was done to bring about the Indian economic reforms. 

• Galloping Inflation: The rate of inflation at the time was immense. Poor and marginalized people of the society did not have enough access to food. At a massive 13.88%, this inflation rate could not be borne anymore. Liquidity had to be poured into the economy and had to be done very quickly. 

• The First Gulf War: This is regarded as the second-most-important factor which necessitated the NEP. In 1991, Iraq, under the dictator Saddam Hussein, invaded Kuwait despite international warnings and an Armada of American warships asking Hussein not to.

When this happened, the crude oil price skyrocketed. India was already tottering and this was the straw that broke the camel’s back. Oil was necessary, but India could not procure it from any source due to the 4 factors mentioned above. 

This led to the First Gulf War. Kuwait’s oil fields would not be serviceable for several months. The decision for the new NEP was thus taken immediately.

All recent economic reforms in India follow the pattern that started in 1991. 

Were the Reforms Necessary?

Apart from the familiar LPG (Liberalisation, Privatisation, and Globalisation) formula, there was a series of brave and profitable decisions which were taken on a war footing. A loan of USD7 billion was taken from the IMF and the World Bank in anticipation of the New Economic Policy. 

• The NEP and the LPG reforms which were propounded by Dr. Singh and his team of experts laid out the following reasons for its existence.

• To decrease the exchange rate of the Indian Rupee vis-a-vis the American Dollar. This exchange rate is highly disruptive if it gets above the psychologically sensitive 75 mark. In 1991, the rate was very high and steps had to be taken.

• To help the introduction of private players in some of the most closely-guarded economic corridors. Until 1991, there were very few sectors in which the private players could compete against the government-held establishments. 

• This had led to the creation of the infamous ‘License Raj’ which is a derogatory term for the corrupt and inefficient bureaucracy. Once private players poured in, the real might of the Indian market was put on full display. This is another reason why the then PM has been hailed as the master of economic reforms in India.

• To help the economy avail the contents of the private purse, the NEP was essential. Besides, the loans from the IMF and the World Bank were directly tied to the NEP’s implementation.

• Another reason for the rollout of the NEP was to end the monopoly of certain government enterprises in specific sectors like defence manufacture and food processing. These sectors had virtually had no private competition to speak of before 1991. 

Post that, the scenario changed. Economic reforms led to a sudden glut of major private players. The government-owned companies had to tidy up their act.

A pressing reason for the reforms was to ensure that the Indian Banking Sector did not collapse. There were no private banks, and all the people’s savings and earnings were put in PSU banks. This was a recipe for disaster. 

While the RBI had done a commendable job, there was a false notion that all the PSU banks were ‘too big to fail.’ Dr Singh noted that this was not the case and the spirit of private banking, as we know it now, was ushered in.

The world business community had to know that there would be no more slow-motion economic progress. Decision making was left to talented and high-powered committees which were run mostly by technocrats like Sam Pitroda, who later became one of the driving figures of the Indian Telecom Revolution. 

Pitroda had been handpicked by the PM and his FM. Technocracy was encouraged, and this has led to such innovative programs like ‘Make in India’ and ‘Start-Up India.’ All these are legacies of economic reforms in India.

To introduce more Foreign Direct Investment or FDI, a new fiscal policy had to be put in place. This was done in 1991 and 3 special economic terms were added to the Indian lexicon- Deregulation, Privatisation and Exit Policy. Simply put, this gave an extra impetus to many foreign companies to invest in India’s economy. 

They had the liberty to take a good look at the existing laws and then take decisions that would suit them the best. Previously, the FDI norms had been rather vague. The picture sharpened after liberalisation and privatisation were adopted.

Finally, perhaps an overriding aspect that jolted the Government into action was the rationale that most of the other major South Asian countries were going past India in their growth stories. India’s per-capita GDP was still inadequate. The banking sector was lackadaisical in giving loans. Poverty was still a looming presence. If the country had to enter the new century, something drastic had to be done. This was the New Economic Policy.

Thanks to the bold decisions of the policymakers of 1991 and later, India is on its way to becoming a USD5 trillion economy. To know more about economic reforms, and find all the related details about India’s economy, visit ’s website today.