The origin of financial crisis of Indian economy goes back to 1980’s. The Government expenditure exceeded its revenue. This forced the Government to borrow from public, banks and from international financial institutions. On the other hand, the Government had to spend its revenue to meet the problems like unemployment, poverty and population explosion.
The development programmes of the Government did not generate additional revenue from taxation. The income from public sector undertakings was insufficient. At times, the external borrowing was spent on meeting consumption needs. Sufficient attention was not given to reduce such expenditure and boost our exports to pay for the growing imports.
In the late 1980’s the Government expenditure started exceeding its revenue by huge margin. Even the borrowings were not enough to meet expenditure. Fiscal deficit rose to 8.5 percent of GDP.
Current account deficit in external balance rose to 2.5 percentage, rise in prices of essential goods, sharp increase in imports, sharp decline in foreign exchange reserves, erosion of international confidence etc., were other major problems.
India approached World Bank and International Monetary Fund (IMF) for loan. The country receives 7 billion as loan to manage the crisis.
These international agencies laid down certain conditions for loan. India was directed to liberalise and open up the economy. This was be achieved through removal of restrictions on the private sector, reducing the role of the Government in many areas and removal of restrictions in foreign trade.
India agreed to the conditions laid down by the World Bank and International Monetary Fund. The then prime minister Shri. P. V.Narasimha Rao and finance minister Dr.Man mohan Singh formulated a package of economic policy reforms. The new economic policy (NEP) was announced in July 1991.
It consisted wide range of economic reforms. The main thrust of the policy was to create a more competetive environment in the economy and removing the barriers to entry and growth of firms.