In a small house in the Indian capital, a musician was doing the maths. During the good months, when his deft accompaniments to classical or popular vocalists are in demand, sarangi player Ghulam Ali can make as much as R50,000 (£500). The problem for Ali is that he's not sure there will be many good months in the near future.

"Those like us without a regular monthly income are the worst hit," he said, referring to the sudden downturn in the Indian economy that has analysts whispering about a possible full-blown crisis. "For a musician, it means fewer concerts even as everything has become more expensive – food, transport, electricity, cooking gas, even foreign travel. We artists like to eat and dress well, so for my family it means fewer outings, less money for the children's education, fewer acquisitions. No question now, for instance, of buying a computer for my kids."

Ali and his wife, Rozitaskeen, have two daughters and a son, aged 12, 10 and six, and they share a small house with Ali's three younger brothers, their families and his parents. The family is fairly typically middle class, but as a freelance musician Ali also belongs to the overwhelming majority of Indians (estimated at three-quarters of the working-age population) who do not have steady, full-time employment.

These people are the most vulnerable as India flirts with its biggest financial wobble for perhaps 20 years. Not since economic liberalisation unleashed private enterprise in the 1990s has there been such concern.

After the 2008 world economic crisis India recorded 9% GDP growth for at least two years but in recent weeks the rupee has tumbled, losing a sixth of its value against the dollar this month alone. Share prices have fallen, commodity prices are rising, investment is stalling, growth is slowing, and the government is staring at a huge balance of payments deficit. A sense of impending doom is building. Compounding the fears are signs that other emerging economies in Asia are also vulnerable, drawing inevitable questions as to whether this could turn into a repeat of the 1997 Asian financial crisis.

"It is a crisis," said economist Jayati Ghosh. "This is the big one. But it has been building up for a while due to many reasons: the growing current account deficit, the industrial slowdown, the lack of infrastructure development, the negative investment in the economy."

She sees the crisis as evidence that "the model of development which focuses only on GDP growth" has run its course. What is needed now is "wage and employment-led growth".

Other experts trace the problem to the failure of Manmohan Singh's government to push through structural reforms that could boost growth. The ruling Congress party's emphasis on huge government subsidy schemes, such as jobs for the rural poor, has added to an already high fiscal deficit.

"Just trying to accelerate growth from the present low level [annual GDP growth is now down to 5%] will help the economy," said economist Surjit Bhalla.

India imports much more than it exports, and so the current account deficit is at an unsustainable 4.8% of GDP. Until it is brought down, there can be very little hope of reviving investor confidence in the economy.

Gold has played an important role in skewing the trade deficit. A century ago, the economist John Maynard Keynes wrote that India's irrational love for gold was "ruinous to her economic development", and the obsession still runs deep. India's annual production of gold is barely 10 tonnes, so last year it imported 860 tonnes, which were made into jewellery or stored as coins and bars in family safes.

The government is now trying to stem the hunger for gold by increasing import duties. This has revived gold smuggling, a menace which in the 1960s led to the creation of the Mumbai underworld.

Jewellers are pushing for a more imaginative solution. It is estimated that households and Hindu temples are hoarding around 25,000 tonnes of gold bars and coins. Jewellers are lobbying government to implement a scheme that could unearth 10% of the treasure.

"It will meet the demand for jewellery for the next three years," said Vikas Chudasama, the secretary general of the All India Gems and Jewellery Association.

Economists and corporate bigwigs hope Singh's government comes up with other such solutions for resolving the economic crisis. The finance minister, Palaniappan Chidambaram, has tried to revive confidence by promising action, but major reforms have yet to be announced.

On the upside, this year's monsoon will lead to bumper agricultural production, and the cheaper rupee also comes with a thick silver lining. There will a surge in exports, especially in sectors such as information technology and pharmaceuticals, where India is a strong performer.

There is growing anxiety about the future, but India's middle class may not have lost faith yet in the possibility of economic regeneration. "I cannot see things improving soon," Ali said. "But I feel good days will come again."