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The evolution of Indian economy from a public sector dominated socialist pattern to a liberalized open market economy was a slow process. The convergence peculiar circumstances such as the Gulf war, collapse of Soviet Union and unstable governments at the center and the economic crisis as seen in the balance of payment issue in the early 1990s made it imperative for India to respond to the changed scenario.
The origin of the economic crisis can be traced from the inefficient management of the Indian economy in the 1980's. In the late 1980's government expenditure began to exceed its revenue by such large margins that it became unsustainable. Inflation was soaring, imports grew in excess to the export to such a level that foreign exchange reserves declined to a level that it was not adequate to finance imports for more than two weeks. Even there was insufficient foreign exchange to pay the interest to international lenders.
To ward off this precarious situation of economy, India approached the World Bank and IMF and received $7 billion as loan to manage the crisis. In return, these institutions wanted that the Indian should open up the economy by removing restrictions of the several sectors and reduce the role of government in many areas and remove trade restrictions. India had no choice but to accept these conditions and announced the New Economic Policy. The Crux of the policy was to remove the barrier to the entry of private firms and to create more competitive environment for the economy. These reforms can be classified into two types.
1. The stabilization measures [short term]
2. The structural reform measures [Long term]
The government initiated a variety of policies which fall under three heads viz. Liberalization, Privatization and Globalization, "LPG Policy". The first two are policy strategies & the last one is the outcome of these strategies.