1. There was inefficient management of the Indian economy in the 1980s. The govt expenditure was more than the govt. revenue. Govt. was not able to generate sufficient revenue from internal sources such as taxation.
2. To finance the deficit the government borrowed heavily from banks, people of the country and international financial institutions.
3. Development policies required that even though the revenues were low, govt. still had to spend to solve the problems like unemployment, poverty and population explosion. Such programmes did not generate additional revenue.
4. Prices of many essential goods rose sharply.
5. The income from PSUs was also not high enough meeting additional expenditure. Many PSUs were suffering losses.
1. Imports grew at a very high rate without matching growth of exports.
2. Sufficient attention was not paid to boost exports to pay for the growing imports.
3. Scarce foreign exchange was spent on meeting consumption needs.
4. Foreign exchange reserves dropped to levels that were not sufficient for even a fortnight.
5. The government was not able to make repayments on its borrowings from abroad.
6. There was not sufficient foreign exchange to pay the interest on international loans.
Govt. approached IBRD (International Bank for Reconstruction & Development commonly called World Bank) and IMF (International Monetary Fund) for long term loans. While granting the loan, the World Bank and IMF insisted on major changes in development policies. In this way the idea of New Economic Policy (NEP) germinated. NEP included three main polices namely, Liberalisation, Privatisation and Globalisation (LPG).
Liberalisation means freeing the economy from govt. control. It put an end to all the rules and laws which were aimed at regulating the activities of private sector. Following are the major changes taking place in important areas... [continues]
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