Define the term ‘liberalization’. Explain the reasons for the Indian Government beginning the policy of liberalization in 1991.

Removing the barriers or restrictions set by the government is known as liberalisation. This liberalisation means removing the trade barriers and allowing the other foreign countries to import their product into the nation. The government imposes much fewer restrictions and fewer customs duty than before and is therefore said to be more liberal.

Reasons for liberalization in 1991

• Great famine- India was hit by the great famine in the mid-1980s and also there was prevailing massive poverty in the economy. To improve the economic condition, the government was forced to implement the liberalization policy.

• Inflation- With unemployment and poverty there was also a continuous rise in the general price level. This led to inflation in the economy. RBI was unable to control the inflation.

• Rise in fiscal deficit- Due to the boost in non- development expenditure fiscal deficit of the government had been increasing. Fiscal deficit means the difference between total expenditure and total receipts minus loans. To meet the fiscal deficit, the government has to raise loans and pay interest on it. Since there was a rise in fiscal deficit, there was the rise in public debt and interest.