India had to adopt set of economic reforms i.e. liberalisation, privatisation and globalisation because of the following factors:

1. Mounting fiscal deficit: In our planned economic development, anticipated expenditure was always in excess of anticipated receipts resulting into fiscal deficit. It increased to 8.5% of GDP in 1991 as against 5% in 1981-82. In order to meet this deficit, government had to make public borrowings involving interest burden of borrowing.

2. Adverse balance of payment : Deficit in balance of payment means when foreign payments are in excess of foreign receipts. In India, it mounted from Rs.2214 crores in 1980-81 to Rs.17367 crores in 1990-91. To meet this deficit, government had to depend upon external borrowings.

3. Gulf crisis: Iran-Iraq war in 1990-91, is known as gulf-crisis. It led to a sharp rise in petrol prices in the international market. Our exports to gulf countries fell sharply but there was a steep rise in import bills. It made the balance of payment position further grim. It compelled the government to introduce the new economic policy at this juncture.

4. Fall in foreign reserves: At one time, during 1990-91, foreign exchange reserves fell to a lower level of 2400 crores, which was just enough for the payments of three weeks imports. The crisis was so serious that Chandra Shekhar government had to mortgage gold reserves with other countries to pay off interest and foreign debts. It forced India to adopt a new set of measures to accumulate foreign exchange reserves.

5. Rise in prices:  After 1960-61, prices of all
commodities continued to rise. The situation became serious when the rate of inflation arose from 6.7% to 16.7%.

6. Poor performance of public sector undertakings: Government of India expanded public sector in a jhuge way during 1951-1991, but their return was negligible. So, it was the need of the hour to shift it to the private sector instead of public sector.

Answer:

Economic reforms initialed in India in the year 1991 wore crisis driven rather than being strategic. The following factors became the reason for economic reforms to be introduced in India (i) High Fiscal Deficit, Debt Trap and Low Foreign Exchange Reserves Government expenditure exceeded the revenue, from various sources such as taxation, earning from public sector enterprises etc due to high spending on social sector, infrastructure and defence. The government borrowed funds to finance the deficit from banks, people of the country and international financial institutions. Due to faulty policies, government was not able to make repayments on its external borrowings and starting taking fresh loans to repay the previous loans thus getting caught in a debt trap. Secondly, foreign exchange reserves borrowed from other countries and financial institutions spent on meeting consumption needs. As a result foreign exchange reserves declined to a level and that was not adequate to finance imports for more than two weeks. (iii) High Inflation Long term rise in general price level is called inflation. Prices of many essential goods rose sharply due to slow output growth and high demand, which resulted in double digit inflation (inflation at more than 10% level) in 1980-81 to 1990-91. During this critical situation no country or international lender was willing to lend to India. India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF) for loan. India was granted $7 billion as loan to manage the crisis on the condition that India would liberalize and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions. India agreed to the conditionalities of World Bank and IMF and thus announced the New Economic Policy (MEP) consisting of wide ranging economic reforms under three heads viz liberalization, privatization and globalization.