- In the second half of the 1980s, there was enormous trade deficit.
- Imports were nearly double that of exports.
- India resorted to more short-term borrowings.
- Government indulged in fiscal profligacy (substantial borrowing).
- This led to weak macroeconomic fundamentals (high fiscal deficit, current account deficit, inflation, external debt).
- Foreign exchange reserves were critically low ($1 billion by June 1991).
- India’s international credit rating was sharply downgraded.
- It became extremely difficult to raise credit abroad.
- Government was forced to pledge gold as collateral to raise funds.
- The country was at the edge of default, necessitating economic reforms.