This is a two-part blog post. The first part (this one) looks at the structural imperfections, unemployment, slow moving investment in the Indian economy from various different angles. The second part proposes some simple yet effective solutions to overcome or mitigate these anomalies. Let’s dive in…
India stands at a curious crossroad. On one hand, it boasts the fastest-growing major economy, a thriving digital sector, a youthful population, and surging start-up culture. On the other, the same nation grapples with stubborn unemployment, uneven growth, agrarian distress, sluggish investment, and deep structural inequalities. What explains this paradox? Why does an economy with such promise continue to stumble when it should soar? The answers lie in a mix of historical legacies, policy missteps, and structural deficiencies that constrain India’s potential.
At the heart of India’s economic malaise lies a persistent inability to translate growth into widespread prosperity. Over the past three decades, reforms have opened markets, liberalized trade, and accelerated GDP numbers. Yet, the distribution of these gains remains narrow. A small urban elite continues to capture disproportionate benefits, while large sections of the population remain engaged in low-productivity activities. This twin challenge—of jobless growth and income inequality—remains the single most significant ailment of the Indian economy. Despite impressive numbers, the employment elasticity of growth has plummeted. The economy produces value but not enough livelihoods.
Manufacturing, once touted as India’s ladder to mass employment, has not lived up to expectation. Countries like China, Vietnam, and Bangladesh used industrialization as their path out of poverty; India, instead, leapt from agriculture to services, bypassing a robust manufacturing base. The result is a structural gap. Services like IT and finance contribute heavily to GDP (almost 55% of of FY 2023-24) but employs a lesser share of the labor force (32%), while agriculture employs nearly half the working population yet contributes less than one-fifth of national income. This imbalance creates social tension and stalls productivity growth. Farmers remain trapped in cycles of low returns, climate shocks, and policy uncertainty, while millions of youth enter the labor market without adequate industrial or vocational opportunities.
Another chronic issue is India’s complex regulatory environment. Despite improvements in the World Bank’s Ease of Doing Business rankings, starting and operating a business still demands navigating a labyrinth of compliance, licenses, and approvals. Small and medium enterprises, which should be engines of job creation, often spend more energy dealing with bureaucratic hurdles than innovating or expanding. The Goods and Services Tax (GST) was a landmark reform aimed at unifying the domestic market, yet its implementation exposed structural inefficiencies. While large corporations could adapt, smaller traders faced confusion, liquidity stress, and compliance fatigue. Similarly, demonetization in 2016, though framed as a move to curb black money, disrupted cash-dependent supply chains and informal employment for months, revealing the fragility of India’s informal sector.
Public investment and fiscal management also display contradictions. India has invested heavily in infrastructure, yet critical gaps remain—in logistics, power reliability, and rural connectivity. Private investment, once buoyant, has turned cautious in recent years due to inconsistent policy signals and weak consumption demand. Many firms face balance sheet stress; heavily indebted corporate sectors have reduced capital expenditure, leading to what economists describe as a “twin balance sheet problem”—ailing banks and overleveraged companies dragging down recovery prospects. Even though the insolvency and bankruptcy framework improved credit discipline, resolution delays and legal bottlenecks have kept investor confidence subdued.
The banking sector, meanwhile, illustrates both progress and peril. Public sector banks, which dominate lending, still wrestle with non-performing assets stemming from past ambitious infrastructure lending and political interference. Policy measures like recapitalization and merger of weak banks have mitigated the crisis to a degree but have not addressed deeper governance issues. The rise of fintech has partially filled this gap, yet digital lending still occupies a modest share, constrained by regulatory caution and limited digital literacy in semi-urban and rural India.
Inflationary pressures and fiscal populism pose another recurring challenge. India’s policymakers often walk a tightrope between promoting growth and controlling prices, particularly food inflation. A bad monsoon, an oil price spike, or a supply chain disruption quickly reverberates through the economy, eroding household savings and consumer sentiment. While monetary policy under the Reserve Bank of India has generally maintained discipline, fiscal policy often slips into populist spending—loan waivers, subsidies, and pre-election announcements that prioritize short-term political gains over long-term fiscal prudence. The consequence is a swelling fiscal deficit that limits space for productive public investment in infrastructure, education, and health.
Education and skill development represent another silent fault line. India’s demographic dividend—its large young population—can either become a driving force for development or an explosive liability, depending on whether the economy can equip these youth with employable skills. Unfortunately, the quality of education and vocational training remains uneven. Millions of graduates enter the job market each year, but many are not job-ready. Employers often cite a mismatch between the curriculum and the evolving demands of industry, particularly in manufacturing, data science, and renewable energy. Without systematic reform in education and skill ecosystems, demographic advantage could turn into demographic distress.
The agriculture sector continues to suffer from chronic inefficiency and fragmented policy. Most Indian farmers cultivate small plots, often less than two hectares, making it difficult to achieve economies of scale or invest in technology. Public procurement and subsidy regimes skew incentives toward certain crops, contributing to water depletion and soil degradation. Agricultural markets remain partially reformed, with political resistance blocking the creation of unified national markets. Rural indebtedness and climate vulnerability compound these problems, keeping millions trapped in subsistence. True rural rejuvenation requires long-term investment in irrigation, cold storage, agro-processing, and cooperative farming—areas that receive far less policy energy than immediate relief programs.
Another deep-seated issue is India’s urbanization pattern. Rapid but unplanned urban growth has created cities that are engines of consumption, not productivity. Crumbling infrastructure, congestion, pollution, and housing shortages hamper both quality of life and business efficiency. Instead of becoming centers of economic dynamism like Shanghai or Seoul, many Indian cities struggle to accommodate basic services for their residents. A forward-looking urban policy—one that integrates mobility, sustainability, and economic clustering—remains overdue.
Inequality deserves particular emphasis when discussing what ails the economy. The top one percent of earners in India capture a disproportionate share of national income, while the bottom half share shrinking slices of the pie. Such polarization distorts both social stability and economic efficiency. When few hold the majority of wealth, consumption stagnates, as the rich save more and the poor cannot spend enough to sustain demand. This imbalance discourages enterprises from expanding production, fueling a vicious cycle of low demand, low investment, and low job creation. Social mobility becomes harder, eroding faith in institutions and reform.
Environmental degradation and poor resource governance now present non-negotiable economic constraints. Air pollution, deforestation, groundwater depletion, and climate shocks impose mounting costs on public health, productivity, and agriculture. India’s energy transition is underway, with renewable capacity expanding rapidly, but fossil fuel dependence and uneven policy execution remain obstacles. Climate adaptation must become central to economic strategy—not peripheral—if India hopes to sustain long-term growth.
Yet amid these challenges, India’s potential remains undeniable. The economy’s diversity, vast domestic market, technological prowess, and democratic dynamism provide a robust foundation for renewal. But recognizing that growth alone cannot cure structural disease is crucial. Building a more resilient and inclusive economy will require several shifts—toward labor-intensive manufacturing, environmentally conscious development, streamlined regulation, better education, and accountable governance. Each of these reforms is politically difficult but economically indispensable.
The true ailment of the Indian economy, then, is not lack of capability or ambition but an enduring mismatch between aspiration and execution. India knows what must be done—it has studied its problems for decades—but it struggles to sustain the political and institutional will to see reforms through. The health of an economy is not measured solely by quarterly GDP numbers; it is reflected in whether citizens feel their lives improving. Until economic growth reliably translates into decent work, secure livelihoods, and cleaner environments, India’s reform story will remain incomplete. The task is not to find new slogans but to finish the unfinished work of building an equitable, job-rich, and sustainable economy for the 21st century.