India embarked on far-reaching economic reforms in 1991 primarily due to a severe balance of payments crisis. This crisis was characterized by a significant decline in foreign exchange reserves, rising inflation, and stagnation in economic growth. Several key factors led to the 1991 reforms:
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Economic Crisis: By 1991, India faced a critical economic situation, with foreign exchange reserves depleting to levels that could barely cover a few weeks’ worth of imports. The country was on the verge of defaulting on its international financial obligations.
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Inefficient and Closed Economy: The Indian economy, under the license raj system, had become heavily regulated and closed to international markets. This led to inefficiencies, low productivity, and limited competitiveness.
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Liberalization Pressure: There was increasing pressure from international financial institutions, particularly the International Monetary Fund (IMF) and the World Bank, to liberalize the economy in exchange for financial assistance.
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Global Economic Environment: The end of the Cold War and the global trend towards economic liberalization underscored the need for India to open up its economy, attract foreign investment, and enhance trade relations.
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Political Will and Leadership: The government of Prime Minister P. V. Narasimha Rao and Finance Minister Manmohan Singh showed the political will to implement the needed reforms. They aimed to shift towards a more market-oriented economy by initiating policies of liberalization, privatization, and globalization.
The economic reforms introduced a series of measures, including de-licensing industries, reducing import tariffs, deregulating the economy, and encouraging foreign direct investment. As a result, India experienced significant economic growth, a rise in foreign investment, and integration into the global economy over the following decades.