The Nature and Likely Impact of the Impending Economic Crisis in India

 

The Nature and Likely Impact of the Impending Economic Crisis in India

SR Darapuri I.P.S.(Retd)

Introduction

India is presently regarded as one of the fastest-growing major economies in the world. Government statements, corporate reports, and international financial institutions frequently highlight India’s rising GDP growth, expanding digital economy, increasing infrastructure investment, and growing global influence. India is projected as an emerging economic superpower capable of replacing China as a global manufacturing and investment destination. Yet beneath this optimistic narrative lies a series of deep structural contradictions that indicate the emergence of a serious economic crisis.

The impending economic crisis in India is unlikely to resemble the sudden sovereign collapse witnessed in countries such as Sri Lanka or Argentina. India possesses substantial foreign exchange reserves, a diversified economy, and a relatively stable banking structure. However, the country faces a more complex and prolonged structural crisis characterized by unemployment, agrarian distress, weak purchasing power, rising inequality, informalization of labour, and increasing fiscal stress. The contradiction between high GDP growth and deteriorating socio-economic conditions for large sections of the population defines the essential nature of the present crisis.

The crisis is therefore not merely cyclical or temporary. It reflects deeper problems embedded in India’s model of development, which has increasingly favoured capital-intensive growth, corporate concentration, and financialization while neglecting employment generation, rural development, and social welfare. If these structural weaknesses are not addressed, India may enter a prolonged phase of economic instability accompanied by growing social tensions and political polarization.

Nature of the Emerging Economic Crisis

Growth Without Employment

One of the most striking features of the Indian economy today is the phenomenon of “jobless growth.” Although India continues to report relatively high GDP growth rates, employment generation has remained extremely weak. Economic expansion has failed to create sufficient secure and productive employment opportunities, especially for the rapidly growing youth population.

A large proportion of India’s labour force continues to work in the informal sector where wages are low, employment is insecure, and social protection is absent. Even educated youth increasingly face unemployment or underemployment. Millions are compelled to accept temporary, contractual, gig-based, or low-paying jobs unrelated to their qualifications. The rise of platform-based employment through app-driven services has further expanded precarious labour conditions.

This situation creates a dangerous contradiction. Economic growth without employment cannot sustain long-term social stability because rising aspirations among educated youth collide with shrinking opportunities. Youth unemployment therefore represents not merely an economic issue but also a potential source of political and social unrest.

Crisis of Demand and Purchasing Power

Another important dimension of the present crisis is weak domestic demand. Economic growth can remain sustainable only when the purchasing power of ordinary citizens expands. However, inflation, stagnant wages, rising unemployment, and increasing costs of living have severely weakened mass consumption demand in India.

The prices of food, fuel, housing, healthcare, transportation, and education have increased substantially in recent years. At the same time, wage growth for workers and salaried employees has not kept pace with inflation. Rural incomes in particular remain under severe pressure. As a result, a large section of the population struggles to maintain basic consumption levels.

This weak purchasing power creates a vicious economic cycle. When ordinary people cannot spend, industries face declining demand for their products. Businesses then reduce investment and employment generation, which further depresses purchasing power. Thus, insufficient demand becomes both a symptom and a cause of economic stagnation.

The concentration of wealth among a small corporate and upper-income elite aggravates this problem. Wealth accumulation at the top cannot compensate for declining mass consumption because broad-based economic growth requires the participation of millions of consumers, not merely a small affluent minority.

Agrarian Distress and Rural Crisis

The agrarian sector remains one of the weakest areas of the Indian economy. Despite employing a substantial portion of the population, agriculture contributes a declining share to national income. Indian farmers continue to suffer from low profitability, rising indebtedness, fragmented landholdings, climate vulnerability, and fluctuating market prices.

Input costs such as seeds, fertilizers, electricity, diesel, and irrigation have increased significantly. At the same time, many farmers fail to receive remunerative prices for their produce. Climate change has further intensified agricultural uncertainty through irregular monsoons, floods, droughts, and heatwaves.

Rural distress has serious implications for the broader economy because a large section of India’s population still depends directly or indirectly upon agriculture. Weak rural incomes reduce consumption demand across the economy and contribute to migration toward urban areas already suffering from unemployment and infrastructural pressure.

Farmer protests witnessed in recent years demonstrated the depth of agrarian dissatisfaction. The rural crisis therefore remains not only an economic issue but also a major political challenge.

External Vulnerabilities and Global Economic Pressures

India’s economy is also vulnerable to external shocks arising from global economic instability. One of the most significant vulnerabilities is India’s dependence on imported crude oil. Rising global oil prices directly increase inflation, transportation costs, industrial expenses, and fiscal pressure.

Geopolitical conflicts in West Asia or disruptions in global supply chains can therefore severely affect India’s economy. A rise in oil prices widens the trade deficit and puts pressure on the Indian rupee. Currency depreciation increases the cost of imports and external debt servicing, thereby intensifying inflationary pressures.

Global recessionary trends also affect India’s export sector, foreign investment inflows, and IT services industry. Since India is increasingly integrated into the global capitalist economy, international financial instability can rapidly transmit domestic economic stress.

Fiscal Stress and Public Debt

Both the central and state governments are experiencing growing fiscal pressure. Public expenditure requirements have increased due to infrastructure projects, welfare schemes, subsidies, debt servicing obligations, and defence spending. At the same time, economic slowdown and unemployment constrain tax revenue growth.

The fiscal burden became especially severe after the COVID-19 pandemic, which required emergency welfare spending while simultaneously reducing economic activity. Many state governments today face serious debt pressures and shrinking fiscal flexibility.

The challenge is intensified by extensive tax concessions and incentives granted to large corporations in the hope of stimulating investment. Critics argue that while corporate profits have risen substantially, corresponding gains in employment and wages have remained limited.

If fiscal deficits continue to rise without corresponding productive growth, governments may eventually reduce welfare expenditure, privatize public assets, or increase indirect taxes, all of which disproportionately affect ordinary citizens.

Rising Inequality

Perhaps the most defining characteristic of India’s present economic trajectory is rapidly increasing inequality. Economic growth has disproportionately benefited large corporations, financial elites, and upper-income groups, while the majority of workers experience economic insecurity.

A small section of the population controls an increasingly large share of national wealth. Meanwhile, millions continue to struggle with unemployment, low wages, malnutrition, inadequate healthcare, and poor educational opportunities. Regional inequalities between prosperous urban centres and backward rural regions have also widened.

Extreme inequality weakens social cohesion and democratic stability. When economic growth benefits only a minority, public dissatisfaction intensifies and faith in democratic institutions may decline. Inequality also reduces economic efficiency because concentrated wealth limits broad-based consumption and productive participation.

Structural Causes of the Crisis

Weak Manufacturing Base

India has failed to develop labour-intensive industrialization on the scale achieved by countries such as China, South Korea, or Vietnam. Manufacturing has not generated sufficient employment for the growing labour force. Instead, the economy has become increasingly dependent on services, many of which require high skills inaccessible to large sections of the population.

The absence of a strong manufacturing base limits export capacity, employment generation, and technological development.

Informalization of Labour

A major structural weakness of the Indian economy is the dominance of informal labour. Most workers lack job security, social protection, pensions, healthcare benefits, and collective bargaining rights.

Informalization suppresses wages and reduces long-term economic stability because insecure workers cannot sustain strong consumption demand. Labour market flexibility may increase short-term corporate profitability, but excessive precariousness weakens the broader economy.

Policy Shocks and Economic Mismanagement

Several controversial policy decisions have also contributed to economic disruption. Demonetisation severely affected the informal sector, small businesses, and daily wage labourers. Similarly, the initial implementation of the Goods and Services Tax (GST) created difficulties for small and medium enterprises.

The economic effects of the COVID-19 lockdown further intensified unemployment, poverty, and migration distress. Although recovery has occurred in some sectors, the benefits have remained unevenly distributed.

Corporate Concentration and Financialization

Economic liberalization has increasingly concentrated wealth and market power in the hands of a few large corporate groups. Small businesses often struggle to access credit, compete with monopolistic firms, or survive economic shocks.

Financialization has also shifted economic priorities toward speculative capital flows and stock market expansion rather than productive employment-generating investment. This creates growth that appears impressive statistically but remains socially fragile.

Likely Impact of the Crisis

Rising Unemployment and Social Unrest

The most immediate consequence of the economic crisis is likely to be rising unemployment, especially among youth. Persistent unemployment among educated populations creates frustration, alienation, and social anxiety.

If aspirations continue to rise while opportunities decline, social tensions may intensify in both urban and rural areas.

Expansion of Precarious Employment

Even where employment grows, much of it may remain insecure, temporary, and low-paid. Gig work, contractual labour, and platform-based employment may increasingly replace stable jobs with social protection.

This could create a society characterized by chronic insecurity and declining middle-class stability.

Inflation and Declining Living Standards

Inflation in essential commodities such as food and fuel can significantly reduce real incomes. Poor and lower-middle-class households are especially vulnerable because they spend a large proportion of their income on basic necessities.

Declining living standards may further weaken consumption demand and deepen economic stagnation.

Political Polarization and Authoritarian Tendencies

Economic distress often contributes to political polarization. Governments facing economic dissatisfaction may rely increasingly on identity politics, communal polarization, nationalism, or centralized authority to maintain political support.

Economic insecurity can therefore weaken democratic institutions and increase social conflict.

Pressure on Federalism

Fiscal stress may intensify tensions between the Union government and the states regarding taxation, revenue sharing, borrowing powers, and welfare expenditure. Financially weaker states may face severe developmental constraints.

Conclusion

The impending economic crisis in India is fundamentally a crisis of unequal and exclusionary development. Despite impressive GDP growth figures and expanding corporate profits, the broader economy suffers from structural weaknesses including unemployment, agrarian distress, weak purchasing power, informalization of labour, and widening inequality.

India is unlikely to experience an immediate economic collapse because its economy retains significant strengths such as foreign exchange reserves, a large domestic market, technological capacity, and a diversified production structure. However, these strengths alone cannot ensure long-term stability if growth remains disconnected from employment, social welfare, and mass prosperity.

The future trajectory of the Indian economy will depend on whether policymakers adopt reforms aimed at employment generation, rural development, labour protection, public investment in health and education, and reduction of inequality. Without such structural changes, India risks entering a prolonged period of high-growth instability in which economic expansion coexists with deepening social and political crisis.

Thus, the central challenge before India is not merely achieving economic growth but ensuring that growth becomes equitable, democratic, and socially sustainable.

How Far Is the Modi Government Responsible for India’s Present Economic Crisis?

 

How Far Is the Modi Government Responsible for India’s Present Economic Crisis?

SR Darapuri I.P.S.(Retd)

Introduction

The Indian economy in recent years has faced a complex set of challenges including slowing growth, unemployment, inflation, declining consumption demand, agrarian distress, and rising inequality. Although India continues to be described as one of the fastest-growing major economies in the world, serious concerns remain regarding the quality, sustainability, and inclusiveness of this growth. The recent appeal by the government for austerity and economic restraint has further intensified public debate regarding the condition of the economy and the responsibility of the government in creating or aggravating the present crisis.

The question of whether the government of Narendra Modi is responsible for the present economic situation is politically contentious and intellectually complex. Economic crises are rarely caused by a single factor. Global developments such as the COVID-19 pandemic, geopolitical conflicts, disruptions in international trade, and rising crude oil prices have undoubtedly affected India. However, many economists and political analysts argue that several policy decisions taken by the Modi government since 2014 have significantly weakened the Indian economy and intensified structural vulnerabilities.

This essay critically examines the extent to which the Modi government is responsible for India’s present economic difficulties. It argues that while external global conditions contributed to economic stress, a series of domestic policy choices—including demonetisation, problematic implementation of the Goods and Services Tax (GST), rising inequality, weak employment generation, excessive dependence on indirect taxation, and centralised economic governance—have played a major role in deepening the crisis.

Global Factors and External Constraints

Any fair assessment of India’s economic condition must begin by acknowledging the global context. The world economy has experienced repeated disruptions during the last decade. The COVID-19 pandemic severely affected production, trade, employment, and supply chains across the globe. Almost all major economies suffered recessionary pressures and inflationary shocks after 2020.

The Russia–Ukraine conflict further destabilised global markets by increasing energy and food prices. Similarly, continuing tensions in West Asia have contributed to rising crude oil prices. Since India imports nearly 85 percent of its crude oil requirements, fluctuations in international energy markets directly affect inflation, transport costs, trade deficits, and fiscal stability.

In addition, advanced capitalist economies themselves have faced slowing growth, rising debt, and inflation. Therefore, some degree of economic stress in India cannot simply be attributed to the policies of the Modi government alone. External economic conditions have undeniably created pressures that any government would have found difficult to manage.

However, the central question remains whether the government’s own policies strengthened India’s resilience or instead made the economy more vulnerable to these external shocks.

Demonetisation and the Disruption of the Informal Economy

One of the most controversial economic decisions taken by the Modi government was demonetisation in November 2016. The government suddenly withdrew ₹500 and ₹1000 currency notes, which constituted around 86 percent of the total currency in circulation.

The official justification for demonetisation included:

• elimination of black money,
• destruction of counterfeit currency,
• reduction of corruption,
• and promotion of digital transactions.

However, the policy generated enormous economic disruption, especially in the informal sector, which forms the backbone of India’s economy. Millions of workers, small traders, daily wage labourers, farmers, and small businesses depended heavily on cash transactions. The sudden withdrawal of currency created severe liquidity shortages.

Small enterprises closed down, employment declined, agricultural markets suffered, and consumption demand weakened sharply. The policy particularly damaged sectors such as:

• construction,
• small manufacturing,
• retail trade,
• transport,
• and rural markets.

The long-term effectiveness of demonetisation also came under question when the Reserve Bank of India reported that almost all demonetised currency returned to the banking system. This weakened the government’s argument that large amounts of black money would be permanently eliminated.

Many economists considered demonetisation economically irrational because it imposed enormous social and economic costs without achieving its declared objectives. The policy is now widely viewed as a major contributor to the slowdown that began before the pandemic.

Problems in the Implementation of GST

The introduction of the Goods and Services Tax in 2017 was presented as a major reform intended to create a unified national market. In principle, GST aimed to simplify India’s indirect tax system and improve tax compliance.

However, the implementation of GST created serious difficulties, particularly for small and medium enterprises (SMEs). Multiple tax slabs, frequent rule changes, technological problems in filing returns, and compliance burdens generated confusion and uncertainty.

Small businesses, which lacked digital infrastructure and accounting capacity, found it especially difficult to comply with the new system. Delays in tax refunds also hurt exporters and smaller manufacturers.

Although GST collections improved over time, the transition period significantly disrupted business activity. Critics argue that GST strengthened centralisation by reducing the fiscal autonomy of states and increasing dependence on the central government for compensation and revenue distribution.

The combined impact of demonetisation and GST within a short period severely weakened India’s informal and small-scale sectors, which are among the largest sources of employment in the country.

The Crisis of Unemployment

One of the most serious economic concerns during the Modi period has been rising unemployment. Despite periods of high GDP growth, employment generation has remained inadequate. This has led many economists to describe India’s recent growth pattern as “jobless growth.”

Youth unemployment has become particularly alarming. Educated young people, including graduates and technical degree holders, increasingly face difficulty in finding stable employment. Rural underemployment and informal labour also continue to remain widespread.

The Modi government launched initiatives such as “Make in India” with the promise of expanding manufacturing and creating millions of jobs. However, manufacturing growth has not been sufficient to absorb India’s large labour force entering the job market each year.

Automation, capital-intensive industrial growth, and insufficient labour-intensive manufacturing have further limited employment opportunities. Critics argue that the government focused excessively on large infrastructure projects and corporate investment without ensuring broad-based employment generation.

Unemployment not only creates economic insecurity but also weakens social stability and consumption demand, thereby affecting overall economic growth.

Rising Inequality and Concentration of Wealth

Another major criticism of the Modi government concerns growing inequality. During the last decade, India has witnessed significant concentration of wealth among corporate groups and high-income sections of society.

Reports by organizations such as Oxfam International and the World Inequality Lab have highlighted increasing disparities in income and wealth distribution.

Several policy choices contributed to this perception:

• corporate tax reductions,
• privatization policies,
• dependence on indirect taxes,
• and reduced emphasis on welfare expansion.

At the same time, ordinary citizens faced:

• stagnant wages,
• inflation,
• rising education and healthcare costs,
• and employment insecurity.

Critics therefore argue that economic growth during the Modi era disproportionately benefited large corporations and wealthy groups while the poor and middle classes faced increasing economic pressure.

Growing inequality also weakens long-term economic growth because concentrated wealth reduces mass purchasing power and consumption demand.

Dependence on Indirect Taxation

The Modi government increasingly relied on indirect taxes such as GST and fuel excise duties to generate revenue. Unlike progressive taxation, indirect taxes affect all consumers regardless of income level.

This means that poorer households often bear a proportionately heavier burden because they spend a larger share of their income on essential consumption.

High taxes on petrol and diesel became a major issue, especially during periods when global crude oil prices were relatively low. Instead of passing the full benefit of lower international oil prices to consumers, the government increased excise duties.

Higher fuel prices contributed to:

• inflation,
• increased transport costs,
• rising agricultural expenses,
• and higher prices of essential commodities.

As a result, inflationary pressures affected the daily lives of ordinary citizens.

Weakening Consumption Demand

A significant structural weakness in the Indian economy today is declining consumption demand. Economic growth ultimately depends upon the purchasing power of the population. When ordinary citizens reduce spending because of unemployment, low wages, or inflation, businesses reduce investment and production.

Several indicators have shown:

• weakening rural demand,
• stagnant real wages,
• declining household savings,
• and rising household debt.

Economists have repeatedly warned that infrastructure spending alone cannot sustain long-term growth unless accompanied by broad-based increases in mass incomes and employment.

Critics argue that the government overemphasised:

• stock market performance,
• corporate incentives,
• and headline GDP figures,
  while insufficient attention was given to strengthening household purchasing power.

Centralisation and Economic Governance

Another criticism concerns increasing centralisation of economic decision-making under the Modi government. Important economic policies often appeared highly centralised within the Prime Minister’s Office.

Critics argue that this reduced institutional debate and weakened the autonomy of economic institutions. Questions were raised regarding:

• transparency of unemployment data,
• revisions in GDP calculations,
• and delays in releasing official surveys.

Some economists believe that excessive concentration of decision-making reduced flexibility and discouraged independent policy criticism within institutions.

The Government’s Defence

Supporters of the Modi government reject the claim that it is primarily responsible for the present economic crisis. They argue that India continues to remain one of the fastest-growing major economies in the world despite difficult global conditions.

They point to:

• expansion of highways and infrastructure,
• digital transformation through UPI,
• improvements in tax compliance,
• direct benefit transfer schemes,
• increased formalisation of the economy,
• and India’s rising global economic stature.

The government also argues that reforms such as GST and digitisation were necessary long-term structural changes whose benefits would emerge gradually.

Supporters further claim that global economic instability—not domestic policy failure—is the principal cause of current difficulties.

Conclusion

The present economic difficulties in India are the product of both global pressures and domestic policy decisions. External factors such as the pandemic, geopolitical conflicts, supply-chain disruptions, and rising oil prices undoubtedly created severe challenges.

However, it is equally evident that several decisions of the Modi government significantly intensified economic vulnerabilities. Demonetisation disrupted the informal economy, GST implementation burdened small businesses, unemployment remained persistently high, inequality increased, and excessive dependence on indirect taxation weakened household purchasing power.

While the government succeeded in expanding infrastructure, digital finance, and state capacity in certain areas, these achievements have not adequately addressed the deeper structural problems of employment, inequality, rural distress, and declining mass demand.

Therefore, the Modi government cannot be held solely responsible for the present economic crisis, but it bears substantial responsibility for aggravating existing weaknesses and for pursuing policies that often-prioritised fiscal discipline, corporate growth, and centralised control over inclusive and employment-oriented development.

The larger challenge before India today is not merely achieving economic growth, but ensuring that growth becomes socially just, employment-generating, democratic, and beneficial to the vast majority of its citizens.