Let’s explore the fascinating journey of the Indian economy—how it transformed into a vibrant force after liberalisation, why it hit some rough patches starting around 2014, and what domestic and external factors have shaped its difficulties. This will not be a dry lecture with jargon thrown at you; think of it as a chat over chai about how India’s economic story unfolded.
Part 1: The Post-Liberalisation Boom—How India Got Vibrant
Picture India in the early 1990s. The economy was like a tightly wound spring, ready to burst but held back by decades of restrictive policies. The country was in a financial mess—foreign reserves were so low we could barely pay for a few weeks of imports. Then came 1991, a turning point. Under Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh, India flung open its doors to the world with liberalisation. It was like letting fresh air into a stuffy room.
Before this, India’s economy was shackled by the “License Raj”—a maze of permits and red tape that stifled businesses. Want to start a factory? Good luck navigating the bureaucracy. Liberalisation slashed tariffs, welcomed foreign investment, and told Indian companies, “Go compete!” The private sector, which had been sitting on the sidelines, suddenly shone. Companies like Tata, Reliance, and Infosys didn’t just step up—they sprinted.
The numbers tell the story. From 1991 to 2014, India’s GDP growth averaged around 6-7% annually, a tremendous leap from the sluggish 3-4% of the pre-reform years, often mocked as the “Hindu rate of growth.” Foreign direct investment (FDI) jumped from a measly $100 million in 1990 to over $30 billion by the mid-2000s. Industries like IT and telecom exploded. Bangalore became a global tech hub, and mobile phones went from luxury to necessity.
What made this vibrancy possible? For one, India’s young, English-speaking workforce was a goldmine. When the world needed software coders or call centre staff, Indian talent was ready. Exports soared—IT services alone rake in over $150 billion annually today. Meanwhile, deregulation unleashed entrepreneurship. Small businesses popped up, and big firms expanded globally. Think of Maruti Suzuki—once a government-backed carmaker, it teamed up with Japan’s Suzuki and became a household name.
The middle class ballooned too, from about 50 million in 1991 to over 300 million by the 2010s. They started spending—on cars, homes, vacations—fuelling domestic demand. It wasn’t perfect, though. Inequality grew, and rural India often lagged. Still, the post-liberalisation years turned India from a sleepy giant into an economic player the world couldn’t ignore.
Part 2: The Struggles from 2014 Onwards—What Happened?
Fast forward to 2014. India was riding high, often clocking growth rates above 7%. The Modi government came in with big promises—jobs, infrastructure, and a $5 trillion economy by 2025. But then, things wobbled. Growth slowed, dipping to 4-5% in some years, and the economy faced headwinds it couldn’t dodge. So, what went wrong?
First, let’s talk about two bold moves: demonetisation and the Goods and Services Tax (GST). In November 2016, the government scrapped 86% of India’s currency overnight, aiming to curb black money. It was a shock-and-awe tactic, but it backfired. Small businesses, which run on cash, ground to a halt. Imagine a vegetable vendor or a local kirana shop—suddenly, no one had money to buy, and they had no money to restock. GDP growth tanked from 8.2% in 2016 to 6.8% the next year.
Then came GST in 2017, a massive tax reform meant to unify India’s messy tax system. Great idea, but the rollout? Messy. Businesses, especially small ones, struggled with compliance—multiple tax slabs, confusing paperwork. A friend who runs a textile shop told me he spent more time figuring out GST than selling kurtas. Growth took another hit, dipping below 6%.
Jobs became a sore spot, too. India’s youth bulge—millions entering the workforce yearly—needed work, but job creation stalled. Manufacturing, which was supposed to boom under “Make in India,” didn’t take off as hoped. Investment slowed, and private companies hesitated to expand. By 2019, unemployment hit a 45-year high at 6.1%, per official data—though many argue the real number was worse.
Then, the global pandemic in 2020 kicked India while it was down. Lockdowns shuttered factories, and migrant workers trekked back to villages. GDP shrank by 7.3% in 2020-21—the worst contraction since independence. Recovery has been uneven since, with growth rebounding to 8% in 2021-22 but slowing again to 6-7% as global demand weakened.
So, from 2014, it wasn’t one colossal disaster but a series of stumbles—some self-inflicted, some external—that dulled India’s economic shine.
Part 3: Domestic and External Factors Shaping the Economy
India’s economy isn’t an island—it’s swayed by what happens at home and abroad, from politics to monsoons. Let’s break it down.
Domestic Factors
Policy Decisions: Government moves like demonetisation and GST showed how much policy can jolt the economy—for better or worse. On the flip side, reforms like easing FDI rules in sectors like defence and insurance kept some optimism alive. The push for digital payments post-demonetisation also birthed a fintech boom—think UPI and Paytm. But uncertainty around tax policies has been a thorn in the side. Even after GST, frequent tweaks to rates and rules—like retrospective tax disputes—left businesses jittery. Investors, Indian and foreign, hate surprises. When a company like Vodafone gets slapped with a $2 billion tax bill years after a deal, it sends a message: India’s tax regime can be unpredictable. That hesitation has kept some big investments on hold.
Social Dynamics: India’s diversity is its strength but also a challenge. Rural distress—about 60% of Indians depend on agriculture—drags growth when monsoons fail or farm prices crash. Meanwhile, urban India races ahead, widening the gap. Education and skills matter too. While IT thrives, millions lack training for modern jobs, leaving unemployment high.
Political Stability and Communalisation: Modi’s strong mandate since 2014 brought continuity, but it’s not been all smooth sailing. The communalisation of politics—rising tensions between religious communities, often stoked by polarising rhetoric or policies like the Citizenship Amendment Act (CAA)—has rattled the social fabric. Protests erupted, like those in 2019-20 over CAA, disrupting cities and spooking investors. Foreign headlines screamed about instability, and some multinationals paused plans, wondering if India was still a safe bet. Indian firms, too, held back—why sink money into a factory if riots might shut it down? State-level politics add complexity—some states like Gujarat attract investment, while others lag. Corruption, though reduced, still gums up the works.
Infrastructure and Investment: Roads, ports, and power got a big push—highway construction doubled since 2014. But private investment? It’s been timid. Banks, choked with bad loans from the early 2010s (think Vijay Mallya’s Kingfisher mess), tightened lending, starving businesses of cash. Add tax uncertainty and communal tensions, and you’ve got a recipe for reluctance—both Indian tycoons and foreign CEOs think twice before betting big.
External Factors
Global Economy: India’s tied to the world’s pulse. The 2008 financial crisis barely grazed us—growth stayed above 6%—because we weren’t too exposed. But post-2014, slowing global demand hit exports. China’s slowdown hurt too; they’re a big buyer of Indian goods. Oil prices are another wildcard—India imports 80% of its crude, so when prices spike (like in 2022 after Russia’s Ukraine war), the trade deficit balloons.
Geopolitics: Trade wars, like Trump’s tariffs, and tensions with China disrupted supply chains. India’s border spat with China in 2020 pushed a “self-reliance” drive, but banning Chinese apps and goods raised costs for Indian firms reliant on cheap imports.
FDI and Remittances: Foreign investment has been a lifeline—$80 billion flowed in during 2020-21 alone, despite Covid. Indian workers abroad send back $80-100 billion yearly, cushioning the economy. But when global recessions hit, both can dry up. And when domestic unrest flares, FDI gets warier—communal clashes don’t exactly scream “invest here.”
Climate and Nature: Monsoons dictate rural India’s fate. A bad year—like 2015’s drought—slashes farm output, hikes food prices, and fuels inflation. Climate change makes this worse, with erratic rains now routine.
Wrapping Up the Chai Chat
India’s economy is a rollercoaster—thrilling highs post-1991, shaky dips from 2014, and a mix of homegrown and global forces steering the ride. Liberalisation unleashed a vibrant, dynamic India, proving it could punch above its weight. But the struggles since 2014—compounded by tax uncertainty and communal tensions—remind us that bold ideas need smooth execution, and no economy’s immune to the world’s chaos or its own fault lines.
Today, in March 2025, India’s at a crossroads. Growth’s picking up—maybe 6.5% this year—but challenges like jobs, inequality, and climate loom large. Investors, Indian and foreign, want clarity on taxes and peace on the streets. Domestic grit and global luck will decide if India hits that $5 trillion dream. For now, it’s a story of resilience—imperfect, messy, but always moving forward. What do you think—where’s this ride headed next?
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