What India’s current economic challenges reveal about austerity

What is austerity?

By definition, austerity refers to a set of policies aimed at restoring fiscal balance and economic competitiveness through cuts in public expenditure. Austerity measures commonly include budget cuts in welfare expenditure, often in health, education, housing, and other social expenditure. They can also include the following measures:

* Regressive taxation (lower-income individuals pay higher taxes).

* Reduction in capital gains tax (lower taxes on profits from investments).

* Increase in taxes on consumption (higher taxes on goods and services). 

* Deflation (often by restricting spending or credit to reduce inflation).

* Increase in interest rate (often by raising interest rates to contain inflation).

* Privatisation (Selling state-owned enterprises or transferring public services to private firms).  

* Flexible labour contracts, wage repression, and employment deregulation. 

One of the most important results of austerity policies, according to macroeconomic models, is a rise in unemployment through reduction in the overall demand in the economy. For example, reduction in public sector spending in infrastructure, health, and education can directly reduce employment by fewer recruitment of workers, layoffs, and wage freezes. 

Austerity during economic crises of 1930s and 1970s 

The history of austerity policies shows how governments have used such policies in times of economic crisis. In The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism (2022), Clara Mattei, a professor of economics, says that austerity as a policy mechanism emerged after WWI in response to inflation, public debts, and worker strikes aimed at preventing the collapse of capitalism. 

During the Great Depression of the 1930s, many governments responded with budget cuts, tax increases, and wage reductions. It was in this context that British economist John Maynard Keynes, the father of modern macroeconomics, wrote The General Theory of Employment, Interest, and Money (1936) as a response to global unemployment. 

According to Keynes’ paradox of thrift, also known as the paradox of savings, a rise in the saving rate of individuals or households, often due to unemployment, can cause a fall in the overall savings in an economy and eventually worsen a recession.   

The 1970s saw the rise of “stagflation”, a period defined by simultaneous slow growth, inflation, and unemployment. During this period, governments in the UK and the US emphasised neoliberal economic policies like fiscal discipline, privatization, deregulation, and labour-market flexibility. Both high interest rates and unemployment contributed to the weakening of labour unions. 

These developments shaped subsequent economic policy and gave rise to broader criticisms of austerity and neoliberal reform.

Criticism of austerity

In addition to Keynesians’ criticism of austerity, critics of austerity on the left argue that the history of these policies reflects a tendency to reduce workers’ bargaining rights, their wages, and benefits. In his book Austerity: The History of a Dangerous Idea (2013), Mark Blyth explains that austerity has not been able to reduce debt or lead to economic growth throughout its history. 

Yet, governments employ these measures repeatedly. For instance, in the aftermath of the global financial crisis of 2008 or the Great Recession, the predominant policy response in many countries was a shift towards fiscal austerity to restore market confidence, ensure public debt sustainability, and promote long-term economic stability. 

Studies have found that austerity policies during that period contributed to GDP contraction, rising inequality, adverse impact on public health, disproportionate consequences on gender, and reduction of social safety nets.

The case of the Greek financial crisis

The case of the Greek financial crisis is often cited as a notable example of how austerity works. After adopting the euro as its currency in 2001, Greece saw large deficits and rising public debt due to extensive borrowing to pay for public services and other social spending. In 2009, the new government disclosed that Greece’s fiscal deficit was far higher than anyone thought, hitting 15.6 percent of GDP in 2011. 

To keep the Greek government from defaulting, the “troika” – the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF) – offered a three-year bailout plan. The plan imposed tough austerity on the Greek government and its citizens, including an increase in taxes, reduction in pension and public sector wages, and structural reforms to restore growth and competitiveness.

The Greek government received loans of more than 100 billion euros from the EU and the IMF. However, the fiscal consolidation led to a shrinking of the Greek economy – its economic output declined drastically by 25 per cent, unemployment reached 27 per cent, wages and pensions fell, and the debt-to-GDP ratio increased from 130 per cent in 2009 to 180 per cent in 2014. Hence, the Greek experience remains central to debates over the effectiveness of austerity measures. 

Social costs of austerity

The recent Covid-19 pandemic also renewed debates about the long-term consequences of reduction in public spending on health and other social sectors. The health crisis exposed the vulnerabilities of public health systems across many countries, largely caused by decades of fiscal restraint. As governments increased public spending, austerity debates became important again. 

Feminist scholars have also offered critiques of austerity. They argue that fiscal austerity can reinforce traditional gender roles and moral codes. For instance, during the wage inflation of the 1970s, welfare and unemployment benefits were often seen as threats to the traditional male bread earner household model. Men who relied on unemployment benefits or food assistance programmes or working wives were seen as “feminised men”. 

Recent feminist critiques of austerity argue that cuts in public expenditure on healthcare, childcare, and eldercare shift responsibility onto women, increasing their burden of unpaid domestic and care work. Further, women are more likely to be in these sectors, who also face a greater threat of unemployment as a result of the reduction in public spending.    

The ongoing debates in India

In India, concerns about austerity have emerged in a different context. The current economic pressure has largely resulted from geopolitical tension in West Asia, which has contributed to higher energy prices, inflation, and a weakening rupee. India imports over 80 per cent of its crude oil requirements, which makes its economy vulnerable to external shocks like global inflation and a hike in fuel prices. 

Rather than introducing austerity measures at the policy level, the recent appeals by the government aim at encouraging behavioural change, such as reducing fuel consumption, limiting non-essential travel, and curbing gold purchases. 

However, India has also witnessed debates over public spending on health and education. Many analysts argue that expenditure in these sectors remains insufficient relative to developmental needs, despite increases in overall government spending. 

Limits of austerity

According to the State of Working India report 2026, 40 per cent of Indian graduates in the age group of 15-25 and 20 per cent in the age group of 25-29 are unemployed. These high unemployment rates reflect deeper structural challenges. From a Keynesian perspective, such conditions underscore the importance of public investment and employment-generating expenditure, particularly in sectors such as health, education, care work, and infrastructure. 

While behavioural changes like the use of public transportation in place of private vehicles may help, the need for more investment in infrastructure like public transportation cannot be overlooked. Behavioural changes can complement economic policy, but they cannot substitute for investments in infrastructure, healthcare, education, and employment generation that are necessary for long-term development.

Post read questions

Calls for restraint in private consumption often emerge during periods of external economic stress. In this context, examine the concept of austerity and discuss its relevance and limitations in the Indian economy.

Why have Keynesian economists historically opposed austerity during economic downturns? Discuss with reference to employment, aggregate demand, and economic recovery.

Austerity is often justified as a means of restoring fiscal stability, yet its social and economic consequences remain contested. Critically examine.

Behavioural change can complement economic policy, but it cannot substitute for public investment. Discuss in the context of transport, health, and energy security in India.

India’s dependence on imported crude oil makes it vulnerable to geopolitical disruptions. Discuss the economic implications of such external shocks and evaluate the policy options available to the government.

(Ritwika Patgiri is a doctoral candidate at the Faculty of Economics, South Asian University.)  

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