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Background of the Crisis

The inefficient management of the Indian economy in the 1980s lead to the financial crisis. The government generates funds through taxation, running of public sectors etc in order to implement various policies and for the general administration. When the income is less than the expenditure the government borrows from banks to finance the deficit. It also borrows from international financial institutions. When we import goods, we pay in dollars, which is earned when we export some other goods.

The development policies required lots of funds even though the revenues were low. The government had to overspend in order to tackle problems like unemployment, poverty and population explosion. Taxation and other sources of internal revenues were low whereas the government had to spend on things like national defence and the social sector. There was a need to utilize the funds in a highly efficient manner. The growing expenditure could not be met by the incomes from public sector undertakings too. Our foreign exchange got from borrowing also got spent in meeting the demands of consumption needs. The exports weren't given sufficient attention so that they could pay for the growing expenses. The amount being spent was also not controlled.

In the late 1980s the government expenses rose and they were larger than the revenue by huge margins. The prices of essential commodities rose. Export rate was low while the import rates were exceedingly high. All this resulted in the insufficient funds in the foreign exchange reserves and we were not able to pay the interest on the amount borrowed from international organizations.

We then approached the International Bank for Reconstruction and Development (IBRD), also known as World Bank and the International Monetary Fund(IMF) and took a loan of 7billion US dollars to tide over the financial crisis. In order to avail this loan, India was expected to liberalise the economy by reducing the role of government in various sectors and by removing the restrictions placed on the private sector.

In order to tide over the crisis India agreed to the conditions and announced the New Economic Policy (NEP). NEP brought in a lot of economic reforms. The basic aim of these reforms was to provide more competition in the economy by removing the restrictions imposed on foreign imports. The policies of NEP can be classified into two categories namely:
  • Stabilization measures

  • Structural reform measures

Stabilisation measures were short term in nature and where introduced to control inflation and to overcome some of the weakness that had developed and disrupted the balance of the economy. In other words, they were introduced to maintain sufficient foreign reserves and to bring inflation under control.

Structural measures reform measures were long term in nature and were made with the aim of improving the efficiency of the economy and increase international competitiveness by removing the rigidity of the Indian economy. The government introduced various policies which can be categorized as:
  • Liberalisation
  • Privatisation
  •  Globalisation
The first two are strategies and the last one is their outcome.

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