By Santosh Mehrotra & Jajati Parida, respectively Visiting Professor, Higher School of Economics, Moscow, and Professor of Economics, University of Hyderabad
India’s desire to become Viksit Bharat by 2047 can be fulfilled only if the economy grows at 8% annually for the next 21 years. But such optimism overlooks a structural crisis. The headline GDP numbers conceal a blurred reality (notes former Chief Economic Adviser Arvind Subramanian rightly). India’s actual economic growth during the last decade is closer to 4-4.5% on average than official estimates of 6%, because of measurement problems. If growth itself has been weaker, India’s structural crisis is far deeper than the official statistics indicate, as discussed in our book Indian Out of Work: Rethinking the Growth Story.
A structural crisis is steadily eroding the foundations of India’s growth story. Weak job creation, stagnant wages, sluggish private investment, and faltering domestic demand are no longer isolated problems. They reinforce on one another, in a feedback loop, to trap the economy in a low-growth equilibrium path.
This crisis is not new. India has faced a structural crisis before. The state-led development model eventually culminated in the 1991 balance-of-payments crisis, triggering sweeping economic reforms. Liberalisation transformed the economy, integrated India into global markets, and unleashed nearly two decades of rapid growth.
But today’s challenge is entirely different. It is neither a Gulf War driven-crisis of external balances, nor macroeconomic instability. It is a crisis of employment, incomes, and demand — the very engines (or cyclical flow) that sustain long-term economic growth, and helped Indian economy achieve above 7.8% GDP growth during 2004-14. The economy slowed during the last decade on every front (as all the engines of growth stopped firing effectively).
First, the India’s structural slowdown is, at its core, a crisis of private consumption demand. Household consumption accounts for nearly 60% of GDP, yet the purchasing power of ordinary Indians (poor, casual labour, and informally employed) has steadily weakened. As non-farm job growth is barely half of the jobs needed with more and more educated youth joining the labour force, real wages have remained largely stagnant over the past decade, while household savings have fallen to just 18% of GDP in 2023-24, the lowest level in decades.
Similarly, the net household financial savings plunged to a 47-year low of 5% of GDP in 2022-23 before recovering marginally to 5.3% in 2023-24, even as household debt climbed to around 41% of GDP. Families are increasingly relying on personal loans and gold-backed borrowing to sustain consumption rather than rising incomes. This erosion of household balance sheets has weakened demand for mass-consumption goods, prompting firms to postpone investment and hiring. The result is a vicious cycle: stagnant wages suppress consumption, weak consumption depresses private investment, and subdued investment further constrains employment and income growth. No economy can sustain rapid growth when the purchasing power of its households steadily erodes.
Secondly, private investment was one of the most important drivers of growth during 2002-2014. During this period, India’s gross fixed capital formation averaged between 34 and 38% of GDP, supported by a domestic savings rate that touched 37%. This investment boom not only financed rapid infrastructure expansion and industrial capacity creation, but created 7.5 million per annum non-farm jobs. Contrastingly, the investment rate post-2014 remained below 32% of GDP, despite favourable macroeconomic conditions.
Unlike the previous decade, the government enjoyed an unprecedented windfall from lower international crude oil prices, which averaged around $70 per barrel compared to over $100 during much of 2004-14. The corporate tax rate was also slashed from 30% to 22% (15% for new manufacturing firms) in 2019, costing the exchequer nearly `1.45 lakh crore annually. Yet private investment failed to respond. Instead of expanding productive capacity, firms used higher profits to de-leverage their balance sheets and improve profitability.
This is reflected in an employment crisis, where about 24 million became open unemployed along with 90 million NEET (neither in employment nor in education and training) population.
Third, while public investment could have been compensated for the weakened private investment, the growing fiscal constraints has severely hampered the government. But the fiscal constraints are increasingly the result of policy choices rather than fiscal inevitability. The 2019 reduction in corporate tax rate — from 30% to 22% (and 15% for new manufacturing firms) — was projected to stimulate private investment.
Instead, it led to annual revenue loss of Rs 1.45 lakh crore, with little evidence of a sustained investment revival. Combined with generous cash transfers/free rations, the fiscal space shrank, resulting in fewer public resources for education, healthcare, nutrition, skill development, and employment programmes — the very investments that stimulate aggregate demand.
Fourth, the export engine that powered India’s high-growth years has steadily lost momentum. Merchandise exports increased from $314 billion in 2013-14 to $437 billion in 2023-24, but this modest gain masks nearly a decade of stagnation, with exports remaining below their 2013-14 level for several years before recovering after the pandemic. India’s share in global merchandise exports continues to languish at below 2%, reflecting its weak integration into global manufacturing value chains.
More importantly, the crisis is not confined to one sector. It is systemic. Manufacturing has failed to become India’s employment engine, contributing 13-14% of gross value added but employing under 12% of the workforce, while becoming increasingly capital-intensive and generating largely jobless growth.
The pandemic further exposed this fragility, forcing millions of migrant workers back into agriculture whose workforce increased by an estimated 80 million as a result. Although services now account for nearly 55% of GDP, their growth is concentrated in skill-intensive activities that exclude the majority of India’s workforce, over 70% of whom possess less than secondary education or limited vocational skills. Low-paying informal services are an employment of last resort. This is a structural crisis of demand: inadequate productive employment suppresses household incomes, weak incomes constrain private consumption, subdued demand discourages investment, and low investment further limits job creation.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
