Crisis of the Indian economy and its root cause

The capitalist economy of our country is sinking into an all-round crisis. Production of goods and services, after slowing down in recent years, has now turned negative in several major industries.

Two-wheeler sales during April to August this year have been 14% less than in the same period of the previous year. Passenger car sales are down by 22%. TV sales are down by 10%. Sale of residential apartments in nine big cities has declined by 11%.

More and more households are postponing their plans to purchase air conditioners, refrigerators, washing machines and other durable goods on credit. Consumer durable loans extended in April-June 2019 are 75% less than a year ago.

As sales have declined, unsold stocks have accumulated. The capitalist companies are responding by cutting back on production and throwing workers out of jobs. Unemployment has reached its highest level in 45 years. Distress among peasants remains widespread and growing from bad to worse.

For the past several years, the rulers of our country have refused to admit that there was any problem with the economic system. In spite of repeated mass protests by workers and peasants, they kept singing the tune that “the fundamentals of our economy are very strong”. Even as recently as 15th August, 2019, the Prime Minister declared that our economy is doing extremely well. Now in September 2019, the official tune has changed because profit rates have declined and the capitalist class has sounded the alarm.

The corporate media has started talking about the crisis facing the economy. It has become front page news.

After extensive consultations with the representatives of various monopoly capitalist groups, the Finance Minister has started announcing various policy packages and tax rate changes, allegedly to address the crisis.

What is the real aim of these measures? Will they lift the economy out of crisis? To answer these questions, it is necessary to first address the question: What is the root cause of the economic crisis?

Root Cause

The root cause of the widespread decline in sales of consumption goods lies in the decline in purchasing power in the hands of workers and peasants, who make up more than 90% of the population.

Chart A

Average monthly wages of workers with regular jobs was Rs. 16,850 in 2017-18. Adjusting for inflation, this is less than what it was in 2011-12, when the previous such survey was conducted (see Chart A). This means workers in regular jobs have become poorer over the past 7 years. Casual workers are receiving slightly higher real wages compared to 2011-12, but still less than half compared to those in regular jobs.

One of the major factors that have depressed the wage rate is the increasing use of temporary and fixed-term contract workers for performing regular functions.

Average wage in the Indian auto industry was about 75% higher than the average wage in all Indian manufacturing industries in the year 2000. However, by the year 2015, auto industry wages were only about 10% more than the manufacturing industry average. The gap had been narrowed by massive resort to contract labour at the lowest possible wage rates.

Decline in the average real wage of workers has been accompanied by massive loss of jobs in recent years, in one sector after another. The Note Ban of November 2016, whose real aim was to expand the space for capitalist profits to be made from digital payments, led to a slump in production by medium and small-scale units. Lakhs of workers and small producers lost their means of livelihood. Peasants could not buy inputs needed for the next crop. The introduction of GST in 2017 led to more small producers and traders going out of business.

Tens of thousands of salaried workers in large IT and telecom companies were thrown out of their jobs in 2017 and 2018. And in 2019, Indian and foreign capitalist auto companies have thrown more than 3 lakh contract workers out of jobs. Expected job losses in auto component units are more than double that number. Unemployment among the youth has reached an alarming level (see Chart B).

Chart B
Chart C

When lakhs of workers lose their jobs, it affects the spending decisions of all workers. Those who are still employed hesitate to make new purchases, fearing that if they too lose their jobs they will be unable to pay the EMI.

Next to the working class, the second largest source of demand for consumption goods is from the families of peasants who till the land. Over the past several years, cost of cultivation has increased faster than the prices received by farmers. As a result, net incomes from agriculture have stagnated or declined (see Chart C).

The capitalist class has not only suppressed the wage rate and agricultural procurement prices, but also robbed the savings of the better paid workers. The Note Ban forced everyone to deposit all their savings with banks. The flood of deposits brought down the interest rate on bank fixed deposits well below the rate of inflation. Small savers were then lured into putting their savings into mutual funds. An official government campaign was launched under the banner “mutual funds sahi hai”. Tens of thousands of working people who put their savings in mutual funds lost money when the stock market crashed in 2018.

According to Business Standard, the combined net profit of a list of 118 major capitalist companies in the country increased by 26.9 percent in 2017-18. Capitalist monopoly houses have been growing richer year after year, while the toiling majority of people have been growing poorer and facing rising levels of insecurity of livelihood and insecurity of their savings.

Growing unemployment and insecurity of livelihood, along with stagnant or declining real wages and peasant incomes, and loot of people’s savings, are the main reasons why sales of consumer goods have declined. The working people do not have enough purchasing power because too much has been extracted out of them by the capitalist class and too many jobs have been destroyed.

Aggravating Factors

While the super-exploitation and robbery of the working people by the capitalist class is the root cause of the overproduction crisis, it has been further aggravated by two other factors – decline in investment and slowing down of export growth.

The amount of capital invested in productive assets, called “fixed capital formation”, has declined from 28% of GDP to 20% over the past 10 years. Investments grew to their highest level during the capitalist boom period of 2003-08. Following the worldwide crisis of 2008-09, Indian capitalist companies started defaulting on their bank loans. They cut back on their domestic investments. They exported more and more of their capital to invest abroad. They have also deployed an increasing share of their capital for totally unproductive purposes, such as financial speculation.

Export growth was acting as an important source of demand for Indian goods and services until the global crisis of 2008-09. After rising from 7% of total domestic production to 20% between 1991 and 2008, Indian exports have slowed down considerably since then. Indian export growth has been affected by the stagnation and decline in the economies of the biggest capitalist countries, and by the further decline in international trade caused by the US tariff war and sanctions.

Shortage of demand for consumption goods, capital goods as well as for Indian exports has led to an accumulation of unsold stocks of goods for sale. Piling up of unsold stocks has prompted capitalists to cut back on production. Production cutbacks have led to job losses, which have in turn led to further depression of purchasing power and further decline in the demand for consumer goods.

It is a vicious cycle, with its negative impact spreading to one sector after another until it envelops the entire economy.


The root cause of the crisis of the Indian economy lies in the fact that too much has been extracted by the capitalist class from the workers, peasants and other working people. Declining investment and slowing export growth are additional factors that are aggravating the crisis.

The so-called remedies proposed by the monopoly capitalists and implemented by the central government are aimed at enhancing the rate of capitalist profit, so as to attract higher levels of Indian and foreign capital investments and accelerate the growth of exports.

The central government is not even pretending to address the root cause of the crisis – namely, the decline in real wages of workers and net incomes of peasants. The truth is that the capitalist class, headed by the monopoly houses, has neither the interest nor the capacity to prevent workers and peasants from growing poorer. Their entire economic strategy is based on maintaining the wages of labour and procurement prices of agricultural commodities as low as possible. They want to attract the world’s biggest multinationals to invest in our country, by offering Indian labour power and the fruits of peasant toil at dirt cheap rates.

As long as the means of large-scale production remain under private ownership of monopoly capitalists, and all decisions are taken with the aim of maximizing their profits, the economic system is bound to keep falling repeatedly into crises of overproduction. It is bound to repeatedly get into a situation when production exceeds the capacity of the population to purchase what has been produced.

The only way to put an end to such crises, once and for all, is to reorient the economy to fulfil human needs instead of fulfilling capitalist greed.

The means of large-scale production and exchange must be brought under social ownership and control. They must be taken out of the hands of monopoly capitalist companies which are motivated by the maximization of private profits. The surplus generated by human labour can then be put back to raise the standard of living of the working people and their productive potential. All available hands can be productively employed, according to an overall social plan, to fulfil the rising material and cultural needs of the entire people.


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Oct 1-15 2019    Voice of the Party    Economy     2019   

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