In June 1991 India was the most autarchic non-communist country in the world. Despite a small dose of liberalisation in the 1950s, imports were either subject to licensing or were simply banned. India’s reform programme began in the middle of a macroeconomic crisis that erupted in early 1991. The crisis was brought to a head by a steep fall in foreign exchange reserve to about $ 1 billion (equal to two week’s imports), a sharp downgrading of India’s credit rating and a cut of foreign private lending. Inflation was 12% and high, public and current account deficit was about 10% and 3% of GDP respectively, and a heavy burden of domestic and foreign debt. Oil prices increased following the Iraqi invasion of Kuwait. Current account deficit stood at not lesser than 40% of exports. These deficits were covered by heavy borrowing from the IMF and from commercial sources.
In this situation the new government assumed office in June 1991. It made a decision to organise sale of gold. The exchange rate of the rupee was adjusted, and massive devaluation of the rupee was carried against major currencies to improve the trade and payment situation. In this situation India needed major economic overhauling. Because of this economic crisis India had no choice but to go in for liberalisation, globalisation and privatisation.