Question

State points in favour of economic reforms

Answer 1

Indian economic reforms of 1991 represent a radical shift from the dysfunctional development strategy of the previous four decades. The pre-reform strategy pursued importsubstituting industrialization, with the state playing the dominant role in the economy. Its foundations were laid prior to independence and attracted wide support across the political spectrum. As such, there was no significant political support for reforms until 1991, when a serious macroeconomic and balance of payments crisis forced a rethinking of the development strategy.

External borrowing was largely on concessional terms from multilateral lending institutions and from bilateral, government to government external aid until the eighties. As the eighties wore on, the government also resorted to borrowing from abroad on commercial terms both from the capital market and non-resident Indians (NRIs). In 1983-84, out of $22.8 billion of public and publicly guaranteed external debt, roughly 17% was owed to private creditors. On the eve of the macroeconomic crisis in 1990-91, external debt had tripled to $69.3 billion, of which around 30% were owed to private creditors. Thus debt to private creditors grew five-fold in seven years. Since the gross fiscal deficit was too large to be financed entirely by drawing on savings (domestic and external) part of it was monetized.