In the last two years, the Indian economy has been experiencing four particularly chilling financial realities: the rapid evaporation of FDI from the Indian stock market, the fast depreciation of the rupee not only against the dollar but also against most major global currencies, the quick drying up of liquidity in the banking system despite the RBI’s continuous and active support, and a burgeoning national and domestic debt spiral. Finally, there is the looming middle-income trap, accompanied by a strangely uniform narrative from economic think tanks—from policy makers to the so-called economists of Dalal Street and their global financial institutional counterparts—expressing surprise and disappointment over these distorted financial developments in the Indian economy despite its supposedly strong macroeconomic conditions and claims of having the fastest-growing GDP in the world. Most expectedly, in the present tense geopolitical environment involving the Iran war, they continue to repeat the same opinions and expressions of surprise.
The moot question, therefore, is: what is macroeconomics, and what is the actual state of India’s current macroeconomic situation?
After the globalization of the world economy in the 1990s, a new core term began to dominate financial discourse—GDP. It became the standard metric for evaluating the economic achievements of nations, from measuring economic growth to setting parameters for the extent of money printing by central banks. The GDP system follows a fixed method of assessing a nation’s economy through the total production of domestic goods and services. If the numbers appear comforting, the macroeconomic health of the nation—the heart and soul of its economy—is presumed to be sound.
However, this approach surprisingly and deliberately omits several other critical aspects of macroeconomics, such as employment generation, wealth distribution, the quality of the education system, infrastructure development, administrative efficiency, the effectiveness of direct taxation, judicial competence, and digital infrastructure.
Over the past 18 years, India has consistently received praise from Western economies for its impressive GDP growth rate, officially reported to hover between 7% and 8.2%. However, this performance has often been attributed to questionable base-year calculations and unreliable statistical methods used in computing GDP. When the base year is corrected, the growth rate appears to shrink significantly—from the claimed 8.2% to nearly 4%.
In several earlier articles, I have raised concerns about the near-malfunctioning of the direct tax system, particularly over the past decade. This has largely been due to chronic shortages of manpower and a deliberate policy inclination that appears to allow large taxpayers to escape the direct tax net, while imposing harsher indirect tax burdens through GST on ordinary citizens.
This phenomenon is not limited to India alone. It is also evident in the United States and several other economies aligned with it, except for Scandinavian nations and some European countries.
Human civilization runs on three essential pillars: science and technology, law, and the economy. The economy functions effectively only when the direct tax system operates efficiently and impartially. The robust and stable financial condition of Scandinavian nations stands as strong evidence of this principle.
India’s economic growth narrative and GDP story are largely driven by exports in sectors such as information technology, pharmaceuticals, agriculture, engineering goods, and garments—most of which are exported to the United States. These exports have benefited from highly liberal tariff policies, which have also contributed to pushing the US economy into a severe debt cycle.
Over the past decade, policymakers in the South Block and North Block have largely concealed these deeper macroeconomic concerns under the narrative of a strong GDP story. Independent financial analysts, buoyed by the gains of the stock market and influenced by the brokerage houses that employ them, have echoed the same narrative of a robust GDP and the claim that India is the fastest-growing economy in the world.
Adding to this narrative is the emergence of a new chapter in India’s domestic financial landscape—the semiconductor and electronics revolution, along with unprecedented growth in exports of mobile phones and other digital devices, even surpassing China’s records.
However, a recent statement by the President of the Indian Electronics Manufacturing Association has cast doubt on this optimism. He revealed that profit margins in electronic exports are rapidly shrinking to as low as 5–15% because nearly 85–90% of the basic materials are imported from China. Even these margins may disappear if the Chinese yuan continues to appreciate significantly against the rupee. A similar trajectory appears to be emerging in the semiconductor sector.
Now policymakers may begin to blame the ongoing war for India’s financial difficulties. However, a reality check suggests that India’s current economic challenges are largely independent of the war. They are the logical outcome of a weakened macroeconomic structure that has long been masked by an overemphasis on GDP as the sole indicator of economic health.
The laws of economics are not foolish. They operate in a logical and rational manner.
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