Each year around the budget time I write on the state of India’s economy and suggest solutions to resolve the problems facing the country. Normally I condense the material in one blog. This year is different. This work is a joint effort by Yogita and I.  We felt that the information which should be explained to our students and all those who follow our website and buy our book, “Economics Made Easy” could not be managed in one blog. Hence, we propose to do it in 3-4 blogs. In the first blog in the series, we have briefly covered the relevant global situation, the present state of our economy and the major reasons responsible for India’s economic ruin. The references have been given in this blog for our students to read.

Global Situation

The following major economic issues needing to be kept in mind are:

·       Rise in Interest Rates. Inflation for developed markets is on track to reach 4.7% at the end of this year—not an insignificant number—and in a typical economic cycle, this would be a clear signal for central banks to raise rates and pump the brakes on growth. The impact on India would be as follows:

o   Dollar will get stronger and the value of Rupee will fall.

o   The availability and cost of foreign funds will rise.

o   FPI inflows into Indian equity and bond markets will reduce.

o   RBI will be forced to raise interest rates soon during the financial year.

·       High Oil Prices. Oil prices are expected to rise in 2022. For India the likely impact will be:

o   Further inevitable rise in petrol and diesel prices by the government will affect disposable incomes of the population and create inflation because of the cascading effect.

o   It will adversely impact the Current Account Deficit (CAD).

·       Crisis in Ukraine. The crisis in Ukraine could raise the price of oil even more. This could adversely India’s weak economy even further.

Major Contributors to India’s GDP

·        Domestic consumption: Approximately 55 to 60% contribution.

·        Private investment: Approximately 30 to 35% contribution.

·        Public expenditure: Approximately 12 to 15% contribution.

·        Exports: Since India has a Current Account Deficit, that is imports are more than exports the impact is approximately – (1.5 to 2.5) %.

Sector-wise Contribution to GDP

·       Services: Population engaged: 32%   GDP: 54.27%

·       Industrial:  Population engaged: 25% GDP: 29.34%

·       Agriculture: Population engaged: 43%   of GDP: 16.38%

Indian Economy 2019-22: Major Issues

Rise in Poverty

The NSO’s numbers show that the average Indian was poorer in 2020-21, and will be poorer in 2021-22 too, as compared to 2019-20.  Also, he/ she spent and will spend less in the two years than he/ she spent in 2019-20.  The per capita income and per capita consumption expenditure at constant prices in the three years are:

                                 Per capita             Per capita

                                 income                  expenditure

2019-20:                 Rs 1,08,645           Rs 62,056

2020-21:                  Rs 99,694               Rs 55,783

2021-22:                  Rs 1,07,801           Rs 59,043

Rise in Unemployment

According to the CMIE, the urban unemployment rate is 8.51% and the rural unemployment rate is 6.74%.  Unemployment remains the biggest challenge faced by the country. While the creation of additional jobs has stalled, the flow of additions to the stock of working age population continues.

The inability to facilitate employment generation and to expedite the creation of a labour-intensive manufacturing sector to absorb the millions of low and semi-skilled workers is taking a toll.

The quality of jobs is also at stake. The percentage of salaried people has dropped from 21.2 per cent in 2019-2020 to 19 per cent in 2021, which means that 9.5 million people have become jobless or part of the informal sector.

A rise in unemployment is bad, but a fall in the labour participation rate is worse. The former reflects a shortage of jobs compared to the number of people looking for jobs. The latter reflects a fall in the number of people looking for jobs. When we juxtapose this against falling jobs, we see a glimpse of the hopelessness of people who should be looking for jobs.

Wealth Inequality

Cumulative wealth of 142 people in the country has increased from Rs 23 lakh crore to Rs 53 lakh crore in the last two years.

The total receipt of the government in 2021-22 was only Rs 40 lakh crore. Chidambram has expressed his fear that “very soon the increase in the wealth of these individuals would be greater than the total receipts of the Government of India”. The government has no plans to raise the taxes of the 142 people for the benefit of the approximately 140 crore Indians.

Poor Domestic Demand

Rise in poverty and unemployment have caused a reduction in domestic demand, which is the chief engine driving growth in India. The government’s policy of ignoring this problem does not eliminate it. The government has been ignoring this major issue since 2019-20.

Importance and State of MSMEs

§  Employment: It is the second largest employment generating sector after agriculture. It provides employment to around 120 million persons in India.

§  Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.

§  Exports: It contributes around 45% of the overall exports from India.

§  Inclusive growth: MSMEs promote inclusive growth by providing employment opportunities in rural areas especially to people belonging to weaker sections of the society.

o   For example: Khadi and Village industries require low per capita investment and employ a large number of women in rural areas.

§  Financial inclusion:  Small industries and retail businesses in tier-II and tier-III cities create opportunities for people to use banking services and products.

§  Promote Innovation: MSMEs provide opportunity for budding entrepreneurs to build creative products boosting business competition and fuel growth.

Thus, MSME sector is the backbone of the national economic structure and acts as a bulwark for Indian economy, providing resilience to ward off global economic shocks and adversities. It has been providing 80% of the jobs in India.

A study, done by Small Industries Development Bank of India (SIDBI) reveals that 67% of the respondent MSMEs were temporarily closed for up to a period of three months and more than 50% of the respondent units witnessed a decline of more than 25% in their revenues during the FY 2020-21.


During the pandemic the unorganised middle class was caught without adequate (or even any) health insurance. After excluding insurance coverage for the organised sector (both government and private), and those covered by Ayushman Bharat and state-level health security schemes, a whopping 26 crore people had no health insurance when the pandemic started. They found hospitalisation costs staggering. 

While we are still reeling under the biggest health crisis of the century, the expenditure under health continues to be low and misleading as items such as water, sanitation, nutrition, and air pollution (no doubt important determinants of public health) are now clubbed with conventional health expenditure. This makes it harder to track specific expenditure on strengthening health infrastructure and healthcare services. Provision of basic public goods must be a key area of focus. 

Public spending on healthcare in India continues to languish, falling well below levels in other countries which are at similar levels of income. Yet, over the years, there has been a tendency to favour an insurance-based model, moving away from significantly expanding the public provision of healthcare facilities. This crisis is exposing the inadequacies and limits of that model.

In the Union Budget of 2020-21, central government spending on health was pegged at Rs 67,484 crore, or 2.1 per cent of its total budgetary outlay. 


The deep income and digital divide have resulted in virtually no formal schooling for millions of children.

A hundred television channels can never be a substitute for good quality classroom experience.

The economic shock of the pandemic has not just squeezed incomes of families and led to a reverse exodus to rural India, it has also led to the closure of several low-cost private schools.

 India has seen one of the longest school closures in the world.  

This is adding up to a grave learning crisis. A study carried out in January 2021 in five states by a research group from Azim Premji University found not only clear evidence of learning loss, but an alarming regression in children’s foundational abilities — to read, to understand what they are reading or do simple sums. If not arrested, the slide in learning, at this scale, has grim consequences for the young, and is likely to push them out of education entirely and stunt their future income opportunities significantly.

The Centre slashed the education budget by 6 per cent, with school education taking the biggest cut. Educationists fear that the learning loss caused by the pandemic might be inter-generational, with grave consequences for the economy and society.

During 2020-21, it became painfully evident that most students had to rely on remote learning, but many faced the double jeopardy of not possessing their own computing devices and smartphones at home, and their schools remaining in the dark without such facilities. In remote areas, particularly in the Northeast, many had to travel closer to mobile phone towers to access the internet on shared phones to get their lessons. The latest data confirms that a mere 22% of schools across the country on average had internet access, while government institutions fared much worse at 11%.


The average farmer was more a wage labourer than a seller of produce. Out of the country’s estimated 93.09 million agricultural households, over 70 per cent possess less than one hectare land. 

Supposedly designed to “modernise” the agricultural sector, the farm laws ultimately would have actually left millions of people without desperately needed government support, and at the mercy of the private sector and international corporations in an industry that is plagued with inequalities.

While the government was forced to reverse course, farmers in India still face significant challenges including a crisis of poverty and mounting debt driving many to suicide.

At present, there are no government regulations regarding how much or how little a farmer can earn.

Current subsidies help farmers stay afloat, but it is still often impossible to turn a profit given the high cost of production against the low prices for which crops are sold.

Farmers are now asking that the government implement regulations that prevent crops from being sold below real input costs and guarantee a reasonable profit for farms.

The illusion of PM KISAN is unravelling in the villages — the monthly dole of Rs 500, limited to the landowning classes, does not even cover the rise in gas cylinder prices, two-wheeler fuel costs, the hike in tractor diesel prices, or healthcare and education costs that have shot up multiple times.

After six years of rhetoric, the slogan of doubling farmers’ incomes has expectedly and conveniently been forgotten.

Social Security

As much as 91% of India’s workforce of 475 million is in the informal sector, and therefore lacks social insurance.

The latest government effort on the social security front was India’s Social Security Code 2020 (SS Code), which merged eight existing laws.

The much-needed hike in the social security pension for the elderly poor, widows and differently abled persons has not been provided.

The credit guarantee scheme can only be availed of by MSMEs which have been servicing their debt. Those that have been unable to do so – and this could be a very large number – do not qualify for the credit guarantee. Therefore, this measure will not be of any use to them.

Rs. 30,944 crores disbursed as part of cash transfers to women Jan Dhan account holders in 2020-2021 was discontinued last year.

Major Policy Decisions Since 2016 Responsible for Economic Ruin

Demonetization. Demonetization caused a loss of approximately 4-5 lac crores in 2016 and the carry forward impact of the loss is difficult to assess.It rendered approximately three crore people jobless while delivering a body blow to the unorganized sector, which houses a substantial portion of the MSMEs in India.

Poor Implementation of GST. The architectural framework of the GST favours the formal sector and adversely affected the informal sector. I could not find any expert opinion on the estimated loss of wealth and jobs it caused but it has been considerable.

Reduction in Corporate Tax. In Sep 2019 corporate tax was reduced from 30 percent to 22 percent which caused a loss of Rs 1.45 lac crore to the exchequer. This was done at a time when demand was slipping and practically all sensible economists were advising actions to focus on job creation and putting money in the hands of the poor. The false propaganda regarding this decision was that it will attract private investment and thus increase jobs. Since the capacity utilization of industry was below 70 percent the big corporates used the savings to reduce debt, improve profits and maybe buy electoral bonds of BJP. Private investment did not increase or jobs got created either in 2019-20 or subsequently. Since the profits of big corporates have increased considerably the cumulative loss of this policy can be assessed as over Rs 5 lac crore till the end of financial year 2021-22.

Sudden Lockdown. The ill planned and sudden lockdown in Mar 20 caused immense loss to the economy, jobs and created the tragic migrant crisis. There is no expert opinion on the quantum of loss it caused. The fall in GDP to Rs 135.13 lakh crore from 2019-20 to 145.69 lakh crore (approximately Rs 10 lac crores) was primarily caused by the lockdown.

In the next part I shall analyze as to what the government is trying to do for the economy and why the economic condition is likely to remain bad at the end of the year 2022-23 as well. Please wait for the next part—.


·       India GDP sector-wise 2021 –

·       Micro, Small and Medium Enterprises (MSME) (

·       Most capitalist Budget, inequality rising in India more rapidly than elsewhere: Chidambaram – ThePrint

·       Across the Aisle by P Chidambaram: The real and the surreal – The Financial Express

·       Govt’s ‘Aatmanirbharta’ push not a promising long-term growth strategy: Arvind Subramanian – BusinessToday

·       Budget 2022 | Swaminathan Aiyar: It is a risk-taking Budget, not populist: Swaminathan Aiyar – The Economic Times (

·       raghuram rajan: India’s economy has some bright spots, a number of very dark stains: Raghuram Rajan, Auto News, ET Auto (

·       India’s economy: 7 things to know | World Economic Forum (

·       World Economic Forum: Youth Disillusionment Among Top Risks For India (

·       World Economic Forum Lists Biggest Global Risks of 2022 | Nasdaq

·       2022 Global Economy: Normalizing, Not Normal | Morgan Stanley

·       Union Budget FY 2022-2023| National Portal of India

·       Union Budget 2022: Key highlights for the MSME sector (

·       Watch: Pronab Sen Says Budget to Widen K-Shaped Recovery, Polarise India v Bharat; Doubts 2 Lakh Cr CAPEX (

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