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.
