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Top Five Challenges of Indian Economy

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 Indian Economy

"Top Five Challenges of Indian Economy"

Indian economy is the world's sixth largest economy in terms of nominal GDP and third largest in terms of purchasing power parity (PPP)

Published : Tuesday, 16 May, 2017 10:00 AM

Top Five Challenges of Indian Economy

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Read Current Affairs Topic: Top Five Challenges of Indian Economy

Indian economy is the world’s sixth largest economy in terms of nominal GDP and third largest in terms of purchasing power parity (PPP). Though it is among the fastest growing economies in the world but high growth of GDP itself is not a goal but a measure to reach the goal of development. The difference between growth and development is that growth is a quantitative term while development is a qualitative term. Development ensures the improvement in the quality of life of the people but growth is just the increase in income and latter is necessary but not the sufficient condition to usher development. If the economic growth is polluting the air we breathe, creating unemployment and failed to increase life expectancy, then it is an unjust and ruthless growth without a humane aspect.  

India and even China are now among the largest economies of the world in terms of GDP after the several decades of economic growth but still both are yet to be classified as developed countries. In order to achieve that, the most significant challenges before the Indian economy are as under-

Income Inequalities

According to a report by Johannesburg based company New World Health, India is the second-most unequal country globally, with millionaires controlling 54% of its wealth. With a total individual wealth of $5,600 billion, it’s among the 10 richest countries in the world – and yet the average Indian is relatively poor.

Another report by Credit Suisse claims that in India, the richest 1% own 53% of the country’s wealth, the richest 5% own 68.6%, while the top 10% have 76.3%. The poorest half of the country have merely 4.1% share in the national income. In the year 2000, richest 1% of the country owned 36.8% of the country’s wealth while share of top 10% was at 65.9%. Thus, the increased economic growth in the last two decades had also increased the income inequalities. 

The World Economic Forum’s (WEF) Global Risk Report 2016 found that severe income inequalities will be the most significant risk in coming decade as it fuels health and social problems, such as mental illness and violent crime. The root cause of naxal problem in the red corridor of India can be traced back to income inequalities. So ensuring equitable distribution of income along with the high rate of economic growth is the foremost challenge for the government.

Occupational Shift

Since the independence, the government is endeavouring to bring economic equality through redistribution of wealth with the measures like progressive taxation, welfare schemes etc. However, such piecemeal measures were beating around the bush and ignored the main reason. 

The solution for income inequalities can be found in the comparative analysis of the share of different sectors of the economy in the national GDP and occupational structure of the society. In 1950-51, the share of primary (agriculture and allied) sector, secondary (industry) and tertiary (services) sector in the GDP was 56%, 15% and 29% respectively and the share of total workforce employed by these sectors was approximately 75%, 10% and 15% respectively. Now the share of agriculture in the GDP has reduced to less than 15% and that of services has increased to around 54% but the workforce in agriculture still accounts for around 50%. It means that 50% workforce employed in agriculture have share in only 15% of the national income.

Over the years, the occupational structure of India have become very stern and successive governments since the independence have failed in the challenge of transforming the occupational structure.

Economic Freedom

Skill Development

As already stated, in contrast to the developed world, occupational structure in Indian economy didn’t changed in accordance with the growth of different sectors because of which majority of the work force was still engaged in agriculture which was crippled with low productivity. There are only two ways to increase the income of agriculture labour – either by increasing the agriculture productivity or by transferring the surplus labour from agriculture to industrial and service sector. Though government is working on improving the agricultural productivity but as a matter of fact, it can never match the productivity of industrial and service sector. So only second option of transferring the surplus labour from primary to secondary and tertiary sector seems viable. This will also increase the wages of labour in agriculture sector because of reduction in labour supply

Therefore, it is expedient for the non-agriculture sector to generate enough jobs to absorb the surplus labour from the agriculture. For that matter, programmes like ‘Make In India’, ‘Start Up India and Stand Up India’ are expected to create sufficient jobs in secondary and tertiary sector. However, most of the future jobs will require skills while the majority of agriculture is unskilled. In order to make the Indian work force eligible for all the future jobs, development of skill in them is of utmost importance. Skill development is also necessary to exploit the demographic dividend which will start accruing due to aging population in the developed world. Imparting skills in the millions of workforce will not be an easy challenge for the government.  

Infrastructure Bottlenecks

Apart from the conducive policy measures, adequate infrastructure is the most important prerequisite to encourage double digit growth in the secondary and tertiary sector. Major challenges in the way of infrastructure growth are—complexities at policy making level, problems in land acquisition, absence of single window clearance of projects and inadequate funding. Government must encourage Pubic Private Partnership model to boost infrastructure growth and make provision for adequate funding of projects. Infrastructure growth will not only generate employment but also attract foreign investment.

The Infrastructure mainly includes energy, transportation and communication. For smooth functioning of a firm, the first and foremost requirement is the regular supply of power at affordable prices. Though electricity price is not very high in India in comparison to the developed world but regular supply is still a challenge. 

After energy, the fast and affordable transportation is second most prerequisite of the economy. Though there is commendable improvement in this sector in the last few years, but freight in India is still moving at snail’s pace. The average truck speed in India is about 20kph which means that road cargo in India covers 250-300kms in a day while in the US and Europe, cargo trucks cover 700-800kms in a day. The poor highway infrastructure and administrative inefficiencies at state borders are often blamed for the difficulty in transporting freight quickly between factories and ports through roads. Other reasons are - long queues at toll collection points, harassment by police and local governments and underpaid drivers who deliberately move slowly to save on diesel to generate additional income.

The Information and Communication Technology (ICT) has become an important part of every organization. It is not conceivable for any organization to work without ICT services. The growth of mobile technology in India is praiseworthy but internet speed is still a concern. Among the 14 countries in the Asia-Pacific region in the report, India came in dead last with an average connection speed of 1.7 MBPS in the year 2014.  

If the government is unable to improve its policy measures and infrastructure considerably, all the development happening in India will be despite the government and not because the government.


Next Phase of Reforms

After the first generation economic reforms of 1991, the unprecedented economic growth was witnessed in India but it failed to make desired dent on the poverty and unemployment. Despite securing its place among the top five economies of the world of the basis of PPP, India is still not included among the developed countries because of the presence of abject poverty across the country. In May 2014, the World Bank revised its methodology for measuring poverty (with revised poverty line of US$1.9) and found that 872.3 million people in the world are living below poverty line (BLP) out of which 179.6 million are in India. World Bank also found that 58% of the people in India are living on less than UD$3.1 per day. India is home to 17.5% of the world population and 20.7% of the world poor.


The reforms failed to generate the employment and alleviate the poverty, not because there was a fault in the reforms but because they were not followed by the next phase of reforms. Whatever minor reforms thereafter taken by the government mostly maintained the status quo. The need for next phase of reforms were consistently postponed due to the lack of political will. Such reforms include labour reforms, power reforms, etc. Despite the loss making State Electricity Boards (SEBs) situation of power sector had improved over the years but the labour laws prevalent in the country are now archaic in nature and doesn’t cater to the needs of current market dynamics. The inflexible nature of labour laws in India is repelling the foreign investors and they find China a better destination because if world class infrastructure and flexible labour laws even after being a communist nation. Because of the vehement protest by the opposition parties and labour unions, the labour reforms are the toughest challenge to implement in India. 

The aforesaid challenges needed to be addressed to make the Indian growth story a humane and inclusive one. However, these are not the only challenges and there are many others like environment protection, curbing corruption, cutting down red tapism, finance sector reforms, tax reforms etc. which are required to put the country on a new growth trajectory on one hand and improve the quality of life on other.

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