Since independence, India followed the mixed economy framework by combining the advantages of the market economic system with those of the planned economic system. But over the years, this policy resulted in the establishment of a variety of rules and laws which were aimed at controlling and regulating the economy and instead ended up hampering the process of growth and development. The economy was facing problems of declining foreign exchange, growing imports without matching rise in exports and high inflation. India changed its economic policies in 1991 due to a financial crisis and pressure from international organisations like the World Bank and IMF. 

These reforms concentrated on : 

(a) Introduction of “free of control” economy. 

(b) A shift from public to private sector. 

(c) Free entry to foreign private investment.

Thus, the basic pillars of new economic policy are Liberalization, Privatization and Globalization (LPG). The Economic Reforms are seen by some as an opportunity in terms of greater access to global markets, high technology and increased growth rates. The assumption was that the greater participation of the private sector would stabilize the Indian economy which was on the brink of collapse in 1990. Some arguments have been given in favour of New Economic Reforms which are as follows : 

(a) In spite of heavy investments by the public sector in 1990, our domestic production increased by 4% per capita income which showed an increase of just over 1%. It was assumed that the new economic reforms would foster greater rate of economic growth. 

(b) Reduction in fiscal deficit which had been continuously mounting has made new reforms inevitable. 

(c) The fall in tax rates, controlled supply, higher production, and other liberalization measures will bring prices under control which hampered the development process. 

(d) The balance of payment problem will be tackle with rising exports due to removal of trade and investment barriers.

(e) It is expected that the efficiency of industries will increase due to competition from foreign industries and it would also create a favourable atmosphere for the development of small scale industries.