Economy

India's economic journey has been a blend of impressive growth and significant challenges. To understand the recent economic downturn, it's important to analyze the structural, global, and domestic factors that are shaping the current scenario.

1: Economic Development in India

Over the past few decades, India has made significant strides in becoming one of the world's fastest-growing major economies. The liberalization of the 1990s opened the economy to international markets, which, coupled with advancements in technology and reforms, led to rapid growth in sectors like IT, pharmaceuticals, and services. Key reforms, such as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), were introduced to create a more unified and business-friendly environment​

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Between 2004 and 2010, India's GDP growth averaged around 8-9%, making it a top emerging economy. The rise in urbanization, increased foreign direct investment (FDI), and infrastructure projects supported this expansion. However, this period of high growth also masked deep structural issues that were to surface later.

2: Post-Pandemic Recovery and Challenges

India’s economy was hit hard by the COVID-19 pandemic. GDP growth contracted in 2020-2021, but the economy has since shown signs of recovery, with growth rates reaching 6.1% in early 2023. However, this recovery has been uneven and patchy​

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While the services sector, especially digital services, rebounded quickly, industries like manufacturing and construction struggled. Inflation, driven by global supply chain disruptions and rising commodity prices, began to erode household savings and purchasing power. Moreover, the informal sector, which employs a significant portion of the Indian workforce, saw severe disruptions, causing widespread job losses and income stagnation​

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3: Structural Issues in the Indian Economy

India faces several long-standing structural challenges that are contributing to the current economic downturn:

1. Declining Private Investment: Corporate investment as a percentage of GDP has declined over the years, from 17% in 2008 to around 10% by 2022. The lack of private sector confidence is tied to low consumer demand and credit availability issues​
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2. Rural Distress: Agriculture, which supports nearly half of the population, has faced crises due to low productivity, monsoon variability, and pricing issues. The farm sector's slow growth and lack of modernization remain critical barriers​
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3. High Inequality: Economic growth has not been equitable. The top 10% of India's population controls over 56% of its wealth, while the bottom 50% has seen its income share fall​
   Drishti IAS. This widening inequality limits the broader consumer base needed to drive domestic demand.
   
4. Weak Manufacturing Sector: India's manufacturing sector, which is vital for employment and exports, has underperformed for years. Policy reforms like demonetization and GST caused short-term disruptions, while the sector struggled to remain competitive globally​
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4: Today's Economic Downturn: Core Reasons

The current economic downturn in India is rooted in both global and domestic challenges:

1. Global Economic Slowdown: Sluggish global growth, exacerbated by geopolitical tensions like the Russia-Ukraine war, has hurt India’s export markets. Global inflation and supply chain disruptions have further driven up costs​
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2. Inflation and Reduced Consumer Spending: Inflation, particularly in food and fuel prices, has strained household budgets. As real incomes stagnate, consumer spending, which accounts for a large share of GDP, has weakened​
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3. Policy-Driven Disruptions: Major policy changes, such as the implementation of GST and demonetization, caused significant short-term disruptions. Although aimed at long-term benefits, these reforms hit small businesses and the informal sector, leading to job losses and reduced consumption​
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4. Debt and Savings Crisis: With high inflation, many households have dipped into savings or taken on debt to maintain consumption levels. This has led to a worrying drop in the savings rate and a rise in household indebtedness, further weakening economic resilience​
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