In 1991, India met with an economic crisis relating to its external debt the government was not able to make repayments on its borrowings from abroad. The immediate pressing concerns facing the Indian economy in the beginning of the nineties included the following:

• Fiscal Indiscipline: Nearly all the important indicators like budgetary deficit, the revenue deficit, the monetized deficit and gross fiscal deficit were on the rise. The gross fiscal deficit of the Central Government had been more than 8 percent of GDP since 1985-86.
• Shortage of Foreign Exchange: The fall of the USSR resulted in a fall in exports. The Gulf War resulted in crude prices shooting up, thereby inflating the import bill. Being a closed economy, India did not have any significant foreign reserves forcing it to take foreign currency loans.
• Inflationary Pressure: Prices of essential commodities, cost of living increased and industrial costs were witnessing strong upward trends.
• Shortage of Finance: The public investment witnessed large expansion, averaging 10% of GDP in the 1980s. However, the expenditure was compensated by external commercial borrowing, which came at a huge cost.
• Unemployment: There was no proportionate rise in employment even as industrial growth had increased in the previous decade.
• Revenue expenditure: Worsening terms of borrowing trebled debt servicing costs-debt service payments to current account receipts during the decade rose from 10% in 1980-81 to 30% in 1990-91.

The problem areas lay with policies like the system of licensing, government control over key industries, restrictions on use of foreign technology and foreign investment and protectionist measures against competition. In this context, several key reforms were initiated, which included: Industrial Policy Changes:

• There was de-licensing of all industries except a few, to allow more competition, expansion of industry and industrial efficiency.
• Indian industry was given freedom to import technology from abroad.
• Foreign investors were allowed to enter select industries upto 51% of the total capital.
• Restrictions placed on large industries to prevent monopolisation were removed.

Trade and Foreign Exchange Policy Changes:

• There was a systematic reduction on import duties across various items.
• Import licensing was liberalised.
• Official control on foreign exchange was removed leading to no difference between official and market rates.

Fiscal Policy Changes:

• There was a reduction in excise duties on a number of items.
• Gradual reduction of direct tax rates was introduced to improve compliance of tax payment.
• The government was pushed to reduce avoidable expenditure to increase its ability to invest.
• The government also decided to sell a part of its capital to enterprises so as to mobilise resources for meeting its requirements On the whole, the ‘structural adjustment programme’ of the government heralded the ‘LPG’ era which has since continued to seek an improvement in efficiency of resources, increase industrial competitiveness, quality of products and an overall increase in living standards.