1. Low per capita income

Per capita income is defined as the ratio of national income over population. It gives the idea about the average earning of an Indian citizen in a year, even though this may not reflect the actual earning of each individual.

India's per capita income for the year 2012-2013 is estimated at Rs.39,168. This comes to about Rs.3,264 per month. If you compare India's per capita income with other countries of the world then it can be seen that India is well behind many of them. For example, the per capita income of USA is 15 times more that of India while China's per capita income is more than three times of India.

2. Heavy population pressure

India is world's second largest populated country after China. As per 2011 census, India's population stands at more than 121 crores. The main cause of fast rise in India's population is the sharp decline in death rate while the birth rate has not decreased as fast.

Death rate is defined as the number of people died per thousand of population while birth rate is defined as the number of people taking birth per thousand of population.

In 2010, the birth rate was 22.1 persons per one thousand population while the death rate was only 7.2 persons per one thousand population. Low death rate is not a problem. In fact it is a sign of development. Low death rate reflects better public health system. But high birth rate is a problem because it directly pushes the growth of population.

Heavy population pressure has become a major source of worry for India. It has put burden on the public exchequer to mobilize enough resources to provide public education, health care, infrastructure, etc.

3. Dependence on Agriculture

Majority of India's working population depend on agricultural activities to pursue their livelihood. In 2011 about 58% of India's working population was engaged in agriculture. In spite of this, the contribution of agriculture to India’s gross domestic product is a little over 17%.

A major concern of agriculture in India is that productivity in this sector is very less. There are many reasons for this:

  1. There is heavy population pressure on land to sustain huge number. Due to population pressure on land the per capita availability of land area is very low and not viable for extracting higher output.
  2. Since per capita land availability is less, a majority of people are forced to become agricultural labour working at low wages.
  3. Indian agriculture suffers from lack of better technology and irrigation facilities.
  4. Mostly people, who are not educated or not trained properly, are engaged in agriculture. So it adds to low productivity in agriculture.

4. Poverty and Inequality

India has world’s largest number of poor people. As per reports of government of India, in 2011-12 about 269.3 million people in India were poor. This was about 22% of India's population.

A person is termed poor if he or she is not able to consume the required amount of food to get a minimum calorie value of 2400 in rural area and 2100 in urban area. For this the person must earn the required amount of money as well to buy the food items.  The government has also estimated that the required amount of money. This is called poverty line.

Poverty goes with inequality in income and wealth distribution. Very few in India posses materials and wealth while majority have control over no or very little wealth in terms of land holding, house, fixed deposits, shares of companies, savings, etc.

Another issue linked to poverty is the problem of unemployment. One of the most important reasons of poverty in India is that there is lack of job opportunities for all the persons who are in the labour force of the country. Labour force comprises of the adult persons who are willing to work. If adequate number of jobs are not created every year, the problem of unemployment will grow. In India every year large number of people are added to the labour force due to increase in population, increase in number of educated people, lack of expansion of industrial and service sector at the required speed, etc.

5. Higher rate of capital formation or investment

At the time of independence, one of the major problem of Indian economy was deficiency in capital stock in the form of land and building, machinery and equipment, saving, etc. In order to continue the cycle of economic activities such as production and consumption, a certain ratio of production must go towards saving and investment.

However, the required ratio was never generated in the first four to five decades after independence. The simple reason being higher consumption of necessary items by the population of whom most happened to be poor and lower middle income class. Collective household saving was very less due to this.

Consumption of durable items was also very less. But in recent years things have charged. Economists have calculated that in order to support the growing population, India requires 14 percent of its GDP to be invested. The saving rate of India for the year 2011 stands at 31.7 percent. The ratio of gross capital formation was 36.6 percent. This is possible because people are now able to save in banks, consume durable goods and there has been large scale investment taking place on public utilities and infrastructure.

6. Planned Economy

India is a planned economy. Its development process has been continuing through five year plan since the first plan period during 1951-56.

Through planning the country sets its priorities first and provides the financial estimates to achieve the same. Accordingly efforts are made to mobilize resources from various sources at least cost. After every plan a review is made analyzing the achievements and short falls. Accordingly, things are rectified in the next plan.