Indian economy in the present times

Published on 16 Mar 2025

• India is one of the fastest-growing economies in the world, with a population of over 1.3 billion and a GDP of over $2.7 trillion.

  

  Challenges of Indian economy

  • Unemployment: High Unemployment rates, particularly among the youth, have been a persistent challenge. According to the Periodic Labour Force Survey, the unemployment rate for 2021-22 was 4.1%

  • Example: Significant rise during the COVID-19 pandemic with unemployment reaching over 20% at certain points. 

  • Income inequality: It is caused by the concentration of wealth triggered by the LPG reforms.

  • Example: According to Oxfam, India’s top 1% of the population held over 21% of the national income

  • Agricultural distress: India’s predominant sector which employs more than one-third of the population faces issues of low productivity, farmer suicides due to debt trap

  • Example: According to NCRB data, one agricultural labourer died every 2 hrs in 2021.

  • Fiscal deficit: It is continually increasing due to high expenditure and low revenue generation

  • Example: Indian fiscal deficit for 2022-23 was at 6.4% of GDP (Budget document)

  • Infrastructure Gaps: Inadequate infrastructure and connectivity hinder economic growth.

  • Example:  Logistics cost in India is 14-18% as against the global average of 8% (Economic survey 2023) which reduces the ease of doing business

  • Trade deficit: Continually increasing import bill and reduced export coverage. India's trade deficit with China crossed 100 billion dollars in 2022

  • Example: The Russia – Ukraine war led to inflation and supply chain bottlenecks. 

  • Lack of skilled labour: Despite having a large population, there is a skill mismatch with the demands of the market.

  • Example: Only 5% of India’s workforce is formally skilled compared to 80% in Japan and 96% in South Korea (Report on National Policy of Skill Development and Entrepreneurship)

  • Corruption: Corruption and bureaucratic red-tapism delay and hinder ease of doing business. This further reduces the investment.

  • Example: India ranks 85 out of the 180 countries in Transparency International’s Corruption Perception Index 2023.

  • Digital divide:  Access to the internet and digital services remain unequal in rural areas having limited connectivity and digital literacy. There is also a gender gap with women facing a crunch in access.

  • Example: Only 31% of the rural population uses the internet compared to 67 % of the urban population (World Inequality Report 2022)

  • Environmental challenges: Pollution and environmental degradation have reduced the human resource capacity and hindered economic growth.

  • Example: The infrastructure damage caused by disasters such as floods and submergence of cities due to sea level rise

  Reforms undertaken for economic stability

  • Financial Sector Reform

  • Banking Reform: The merger of several public sector banks in India to create larger and more stable entities

  • Example: Merger of Punjab National Bank, Oriental Bank of Commerce, and United Bank of India in 2020.

  • Securities Market Reform: Introduction of the Securities and Exchange Board of India (SEBI) to regulate and develop India's securities market.

  • Non-Banking Financial Institutions: Regulatory reforms and guidelines for non-banking financial companies (NBFCs) to enhance their stability and oversight.

  • Example: Microfinance Institutions (Development and Regulation) Bill,2012

  • Fiscal Policy Reform

  • Tax Reform: Implementation of the Goods and Services Tax (GST) in 2017 to simplify the tax structure and promote a unified national market.

  • Example: Abolition of Dividend Distribution Tax

  • Expenditure Reform: Various programs to enhance the efficiency of government spending,   

  • Example: Direct Benefit Transfer (DBT) scheme for subsidy payments.

  • Debt Management: The Fiscal Responsibility and Budget Management (FRBM) Act set targets for reducing fiscal deficits and managing government debt.

  • Monetary Policy Reform

  • Inflation Targeting: The Reserve Bank of India (RBI) adopted an inflation targeting framework to maintain price stability.

  • Example: The tolerance range set for repo rate 4±2

  • Exchange Rate Policy: RBI's intervention in the foreign exchange market to manage the Indian Rupee's exchange rate.

  • Example: Creation of Nostro and Vostro accounts

  • Interest Rate Management: RBI's policies to adjust key interest rates, like the repo rate, to influence borrowing and lending rates.

  • Trade and Investment Reform

  • Trade Liberalization: Reduction of tariffs and simplification of customs procedures to promote international trade.

  • Example: 100% FDI route opened for most sectors

  • Investment Promotion: The "Make in India" campaign to attract foreign investment and promote manufacturing in India.

  • Example: ’Make in India, make for the world’ to attract investment in the manufacturing sector

  • Trade Facilitation: Initiatives like the "Single Window Interface for Facilitating Trade" (SWIFT) to streamline customs clearance processes.

  • Labour Market Reform

  • Employment Protection: Amendments to labour laws in some Indian states to make it easier for businesses to hire and fire employees.

  • Example: the simplification of labour laws to 4 labour codes.

  • Skill Development Programs: Programs like the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) provide skill training to youth.

  • Example: Skill India Mission and Start-up India are other forums

  • Labour Market Information Systems: Online platforms like the National Career Service (NCS) to connect job seekers with employers.

  • Energy Sector Reform

  • Energy Deregulation: Introduction of market-based reforms in the power sector to encourage competition.

  • Example: Renewable purchase obligation under the Electricity Act,2003

  • Renewable Energy Promotion: Various incentives and targets to promote the adoption of renewable energy sources.

  • Example: The National Green Hydrogen mission to promote the use of green hydrogen

  • Energy Efficiency Measures: Implementation of the Perform, Achieve, and Trade (PAT) scheme to improve energy efficiency in industries.

  Indian economy’s resilience amidst external shocks

  The resilience of the Indian economy amidst external shocks depends on several factors and strategies.

  • Diversification of trade partners: Expanding trade relationships with non-conventional partners, making the economy less vulnerable to disruptions in one region 

  • Example: Recent expansion of the export basket to Latin American countries and ASEAN from the narrow basket of USA and China.

  • Foreign Exchange Reserves (FER): Maintaining FER provides a cushion against currency fluctuations and helps stabilize the economy during stress.

  • Example: The presence of sufficient FER during the COVID-19 pandemic helped cover the import bill.

  • Robust domestic demand: Focussing on stimulating domestic consumption and investment can act as a buffer against external shocks by reducing resilience on export markets.

  • Example: The Economic Survey 2022-23 stated that India’s pent-up demand increased post the pandemic.

  • Effective fiscal policy: Implementing countercyclical fiscal policies, such as stimulus measures during downturns helps stabilize the economy.

  • Example: The increase in government expenditure during the pandemic time in India

  • Monetary policy flexibility: The central bank adjusts interest rates and liquidity measures in response to changing economic conditions.

  • Example: RBI adjusting the repo rate to the level of 4+-2 level and pulling it into the liquidity adjustment facility (LAF) corridor

  • Investment in infrastructure: It improves economic growth and also enhances the economy’s ability to withstand shocks by improving logistics and connectivity.

  • Example: The National infrastructure pipeline and the Gati Shakti platform to mobilize it. 

  • Energy security: Reducing dependence on energy imports through investments in renewable energy and domestic production reduces exposure to global oil price fluctuations

  • Example: Mega Solar parks, Green Hydrogen Mission, FAME scheme to meet renewable energy target of 500GW by 2030.

  • Social safety nets: They provide basic necessities such as employment and food security for vulnerable populations and help mitigate the impact of external shocks

  • Example: The MGNREGA provides employment and aims to reduce distress migration; the One Nation One Ration card aids the migrant community in accessing PDS.

  Apart from these other factors, the political stability of a country, its regulatory reforms, risk management techniques and global collaboration also aid in providing economic stability amidst tough times.

  Evolution of state from an entrepreneur to a facilitator of the Indian economy

  • Entrepreneurial role (Pre-Liberalization Era): Indian state prior to 1991 played a dominant role in engaging various industries.

  • Example: The establishment of Steel Authority of India Limited (SAIL) in the steel sector and Hindustan Aeronautics Limited (HAL) in the aeronautics industry.

  • Transition to facilitator (Post -liberalization Era): The government moved away from direct involvement in businesses and encouraged private sector participation and investment.

  • Example: Dismantling the license raj, ‘Make in India’ project to improve entrepreneurship

  • Current facilitative role: Focus on policy formulation, and regulatory frameworks and provide the essential infrastructure for the ease of doing business

  • Example: India’s improved rank in the Ease of Doing Business Index by the World Bank

  • Public-private Partnership: The government and private sector share the risks and benefits and provide efficient outputs.

  • Example: The National Highways development programs and the Delhi metro are successful examples of PPP projects.

  • Investment promotion: The Indian government strives to make the country a favourable investment destination to enhance economic growth.

  • Example: India raised the Foreign Direct Investment FDI caps in various sectors such as defence and insurance.

  • Social and environmental responsibility: Through its sustainability initiatives regulates and creates laws.

  Example: Clean Indian Mission (Swachh Bharat Abhiyan) to improve sanitation and cleanliness and contribute to social well-being

  
  

Tags:
Economy

Keywords:
Indian economy Unemployment inequality Economic reforms

Syllabus:
General Studies Paper 3