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Policy mistakes in India: A vicious circle of poverty

Early in November, several alarming news surfaced. According to the CMIE, 5.46 million Indians lost their jobs in October. Our youth unemployment rate increased from 15.66% in 2016-17 to 28.26% in 2020-21.

Policy Mistakes In India: A Vicious Circle Of Poverty
Photo by Shubham Verma

India which was once the land of riches is now counted as a poor state characterized by inequality and poverty with an affluent elite. According to the World Inequality Report 2022, 57% of the national income is held by the top 10% including 22% of national income held by the top 1%. The bottom 50% of the population holds just 13% in 2021. 

Some troubling reports came to notice in early November. As per the CMIE data, in October around 5.46  million Indians lost their jobs. Our youth unemployment rate of 15.66 percent in 2016-17 rose to 28.26 percent in 2020-21. Approximately 33 percent of all employable youth were estimated to be unemployed by August 2021. Annually, 20 million Indians enter the job market with only a few job openings. All this occurred when the informal sector which is a natural backup for India was devastated by demobilization, GST, and the lockdown. 

Whilst the government is jubilant with the recovery level of GDP of the Indian Economy, which at 8.4% has reached its pre-pandemic levels, a look at some of the statistics it has released in the past few months showcases some warning scenarios. Though GDP has bounced back, the financial and social state of India remains far from rosy. The socio-economic well-being of India was upset by the fall in fortunes of lakhs of Indians during the pandemic. This coupled with existing government practices around minimum wages and poverty alleviation policies aggravated the problem. 

India could have built a strong economy with a competitive ready-made garment industry similar to Bangladesh. This could have been achieved by providing incentives to the informal sector and MSMEs to acquire size while pursuing trade deals with Europe, Canada, and the US. India’s textile export was approximately flat between 2015 and 2019. 

The unit labor cost of producing a shirt in India is $0.5 as compared to $0.2 in Bangladesh. This is a consequence of an unproductive workforce, poor logistics, and policy inaction. Petrol prices are soaring high with high taxes. The expected rise in sales of electric vehicles in India is just 8% of total car sales in 2030 as compared to 40% of total car sales in China. All these point out a clear case of a lack of policy incentives.

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Policy Mistakes In India: A Vicious Circle Of Poverty
Photo by Mohammad Samir

An average Indian kitchen budget has been hit hard by rising retail inflation. With almost 300 million LPG consumers and increasing LPG  prices, the aftermath of personal and fiscal finances has been significant. This has been due to policy missteps – the state’s push for the adoption of LPG cookstoves instead of electric cookstoves. An increase in the use of electric cookstoves would have reduced import demand as well as protected the ordinary consumers from inflation.   

There have been significant price hikes for edible oil. This is partly caused by dependence on palm oil.  If policymakers would have urged to increase the average yield of oilseeds farms in India and lowered duties on imports or held campaigns to shift edible oil demand to locally produced edible oil then this could have broken the connection with international prices. On top of that, ordinary vegetables and daily essentials are now pricier. 

All of these factors taken together have made Indian poorer. To cope up with this large number of Indian households have taken loans. The poorest are given the worst conditions to borrow loans. They are charged at a 25 to 50 percent annual percentage rate and then chased by recovery agents. This has led many families to sell or flog off their family’s gold.

All this has caused a vicious circle of poverty with rising inequality. The middle class is narrowing from 99 million in 2020 to 66 million in 2021. Across different sectors, large corporates are dominating the value chain. The Indian Economy scenario requires a demand-side policy to raise revenue for MSMEs and benefit the common man. Policymakers need to find ways to finance MSMEs, offer a simplified taxation system, conduct antitrust laws, and enhance competition.


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Written By

Sneha Bhattacharjee is currently enrolled as a postgraduate student at Rabindra Bharati University and specializes in Economics. She is keenly interested in learning and exploring real-world scenarios. With her critical thinking and writing skills, she wants to solve real-world complexes by writing articles and blogs. Apart from academics and work, Sneha enjoys painting but can also be found hiking in the hilly countryside.

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