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India Economy
 The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006). India is the second fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal.
The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earns their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly skilled workers in software and financial services, and software engineering.
India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate.
India faces a burgeoning population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to the green revolution and economic reforms.
India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis. Those reforms have included liberalized foreign investment and exchange regimes, significant reductions in tariffs and other trade barriers, reform and modernization of the financial sector, and significant adjustments in government monetary and fiscal policies.
The reform process has had some very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought. Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currency reserves ($85 billion in August 2003) and a moderate current account deficit of about 1% (2002-03). India's economic growth is constrained, however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real interest rates. India will have to address these constraints in formulating its economic policies and by pursuing the second generation reforms to maintain recent trends in economic growth.
Post-independence
Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation, state intervention in labour and financial markets, a large public sector, business regulation, and central planning. Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy.
They expected favourable outcomes from this strategy, because it involved both public and private sectors and was based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturerers.
India's low average growth rate from 1947-80 was derisively referred to as the Hindu rate of growth, because of the unfavourable comparison with growth rates in other Asian countries, especially the "East Asian Tigers". The economic reforms that caused a surge in economic growth after 1980 can be attributed to two stages of reform. The pro-business measures of 1980, initiated by Indira Gandhi and continued by Rajiv Gandhi, eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. The economic liberalisation of 1991, initiated by then Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a balance-of-payments crisis, did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.
Post 1991 reforms
India's trade has increased significantly since reforms began in 1991, largely as a result of staged tariff reductions and elimination of nontariff barriers. The outlook for further trade liberalization is mixed. India has agreed to eliminate quantitative restrictions on imports of about 1,420 consumer goods by April 2001 to meet its WTO commitments. On the other hand, the government has imposed "additional" import duties of 5% on most products plus a surcharge of 10% over the past 2 years. The U.S. is India's largest trading partner; bilateral trade in 1998-99 was about $10.9 billion. Principal U.S. exports to India are aircraft and parts, advanced machinery, fertilizers, ferrous waste and scrap metal, and computer hardware. Major U.S. imports from India include textiles and ready-made garments, agricultural and related products, gems and jewelry, leather products, and chemicals.
Significant liberalization of its investment regime since 1991 has made India an attractive place for foreign direct and portfolio investment. The U.S. is India's largest investment partner, with total inflow of U.S. direct investment estimated at $2 billion (market value) in 1999. U.S. investors also have provided an estimated 11% of the $18 billion of foreign portfolio investment that has entered India since 1992. Proposals for direct foreign investment are considered by the Foreign Investment Promotion Board and generally receive government approval. Automatic approvals are available for investments involving up to 100% foreign equity, depending on the kind of industry. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining.
India's external debt was up to $98 billion in March 1999, compared to $94 billion in March 1998. The country's debt service ratio has fallen to about 20%. Bilateral assistance has been about $1 billion annually in recent years, with the U.S. providing about $150 million in development assistance in Fiscal Year 1999. The World Bank had approved loans worth about $1.05 billion for India in 1999.
But in recent years India has gone from strength to strength. It has recorded a growth rate of above 5% even during the global recession. India has gradually developed a software sector that is leading the economy in growth. Indian firms handle outsourced work from US and Europe and provide high quality service at low costs thus keeping company expenditure low for organisations like GE, BA, etc. Indian firms like Infosys and Wipro implement products and give services comparable to the best in the world. This is why India has become an IT hotspot. Its foreign reserves are up to a record high and India has started repaying its loans at a higher pace as compared to earlier predictions. Indian GDP is 4th in terms of ppp and India is steadfast on the road to development.
India's economy grew at an unexpectedly robust 8.4 percent in the year through the third quarter, making it one of the fastest growing in the world, with analysts seeing stronger expansion in the coming quarters. Aided by the best monsoon in a decade, the farm sector emerged as the main growth engine for Asia's third-largest economy, rising 7.4 percent between the July-September quarters of 2002 and 2003.
Financial institutions
India has set up Special Economic Zones and software parks that offer tax benefits and better infrastructure to set up business. Pictured here is the Tidel Park in Chennai, one of the largest software parks in India.
India has set up Special Economic Zones and software parks that offer tax benefits and better infrastructure to set up business. Pictured here is the Tidel Park in Chennai, one of the largest software parks in India.
At the time of Independence, India inherited several institutions like the civil services, central bank, railways, etc., from her British rulers. Mumbai serves as the nation's commercial capital, with the Reserve Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) located here. The headquarters of many financial institutions are also located within the city.
The RBI, the country's central bank was established on 1 April 1935. It serves as the nation's monetary authority, regulator and supervisor of the financial system, manager of exchange control and as an issuer of currency. The RBI is governed by a central board, headed by a governor who is appointed by the Central government of India.
The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30 companies with April 1979 as the base year (100). These companies have the largest and most actively traded stocks and are representative of various sectors, on the Exchange. They account for around one-fifth of the market capitalisation of the BSE. The Sensex is generally regarded as the most popular and precise barometer of the Indian stock markets. Incorporated in 1992, the National Stock Exchange is one of the largest and most advanced stock markets in India. The NSE is the world's third largest stock exchange in terms of transactions. There are a total of 23 stock exchanges in India, but the BSE and NSE comprise 83% of the volumes. The Securities and Exchange Board of India (SEBI), established in 1992, regulates the stock markets and other securities markets of the country.
Industry
India's 5 leading companies, as per Forbes Global 2000 ranking for 2005.
India ranks fourteenth worldwide in factory output. Concerted efforts at industrialisation by the government, aiming at self-sufficiency in production and protection from foreign competition, for nearly four decades since independence, have encouraged a diverse (though small) industrial base. They together account for 27.6% of the GDP and employ 17% of the total workforce. Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods.
Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology.
Six Indian companies have been listed in the Fortune Global 500 list for the year 2006
Services
India ranks fifteenth worldwide in services' output. Still, this sector, providing employment to 23% of the work force, is the fastest growing sector, with a growth rate of 7.5% in 1991-2000 up from 4.5% in 1951-80. It has the largest share in the GDP, accounting for 53.8% in 2005 up from 15% in 1950.Business services (information technology, information technology enabled services, business process outsourcing) services are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialisation, availability of a large pool of low cost, but highly Skilled, educated and fluent English-speaking workers on the supply side and on the demand side, increased demand from foreign consumers interested in India's service exports or those looking to outsource their operations. India's IT industry, despite contributing significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th of the total services. Excellent infrastructure in the service sector and the lowest communication cost has helped India to be a dominant player in these sectors.
Banking and Finance
The Indian money market is classified into: the organised sector (comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks); and the unorganised sector (comprising individual or family owned indigenous bankers or money lenders and non-banking financial companies (NBFCs)). The unorganised sector and microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans.
Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980 and made it mandatory for banks to provide 40% (since reduced to 10%) of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfil their social and developmental goals. Since then, the number of bank branches have increased from 10,120 in 1969 to 98,910 in 2003 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total deposits increased 32.6 times between 1971 to 1991 compared to 7 times between 1951 to 1971.Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 32,270 or 48%, only 32,270 out of 5 lakh (500,000) villages are covered by a scheduled bank.
Since liberalisation, the government has approved significant banking reforms. While some of these relate to nationalised banks (like encouraging mergers, reducing government interference and increasing profitability and competitiveness), other reforms have opened up the banking and insurance sectors to private and foreign players.
Poverty
The recent ecenomic developments have mainly helped upper and middle class Indians. While the poverty in India has reduced significantly, 25% of Indians still live below the poverty line. Since the early 1950s, successive governments have implemented various schemes, under planning, to alleviate poverty, that have met with partial success. All those programmes have improved upon the strategies of the Food for work programme and National Rural Employment Programme of the 1980s, which attempted to use the unemployed to generate productive assets and build rural infrastructure. In August 2005, the Indian parliament passed the Rural Employment Guarantee Bill, the largest programme of this type, in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in 200 of India's 600 districts. The question of whether economic reforms have reduced poverty or not has fuelled debates without generating any clear cut answers and has also put political pressure on further economic reforms, especially those involving downsizing of labour and cutting down agricultural subsidies.
Corruption
Corruption has been one of the pervasive problems affecting India. It takes the form of bribes, evasion of tax and exchange controls, embezzlement, etc. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that had strangled private enterprise and was blamed for the corruption and inefficiencies. Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office.
The chief economic consequences of corruption are the loss to the exchequer, an unhealthy climate for investment and an increase in the cost of government-subsidised services. The TI India study estimates the monetary value of petty corruption in 11 basic services provided by the government, like education, healthcare, judiciary, police, etc., to be around Rs.21, 068 crores. India still ranks in the bottom quartile of developing nations in terms of the ease of doing business, and compared to China, the average time taken to secure the clearances for a startup or to invoke bankruptcy is much greater.
The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive action, computerisation of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances.
Occupations and Unemployment
Agricultural and allied sectors accounted for about 57% of the total workforce in 1999-2000, down from 60% in 1993-94. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 1999-2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7.32%, with rural areas doing marginally better (7.21%) than urban areas (7.65%).
Unemployment in India is characterised by chronic underemployment or disguised unemployment. Government schemes that target eradication of both poverty and unemployment, attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decreased role of the public sector after liberalisation has further underlined the need for focusing on better education and has also put political pressure on further reforms.
Regional imbalance
One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development.
The five-year plans have attempted to reduce regional disparities by encouraging industrial development in the interior regions, but industries still tend to concentrate around urban areas and port cities[68] After liberalization, the more advanced states are better placed to benefit from them, with infrastructure like well developed ports, urbanisation and an educated and skilled workforce which attract manufacturing and service sectors. The union and state governments of backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc., and focusing more on sectors like tourism, which although being geographically and historically determined, can become a source of growth and is faster to develop than other sectors.
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GDP (purchasing power parity):
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$3.611 trillion (2005 est.) |
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GDP (official exchange rate):
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$719.8
billion (2005 est.) |
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GDP - real growth rate:
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7.6% (2005 est.) |
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GDP - per capita (PPP):
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$3,300 (2005 est.) |
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GDP - composition by sector:
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agriculture:
18.6%
industry: 27.6%
services: 53.8% (2005 est.) |
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Labor force:
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496.4 million (2005 est.) |
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Labor force - by occupation:
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agriculture:
60%
industry: 17%
services: 23% (1999) |
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Unemployment rate:
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8.9% (2005 est.) |
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Population below poverty line:
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25%
(2002 est.) |
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Household income or consumption by
percentage share:
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lowest
10%: 3.5%
highest 10%: 33.5% (1997) |
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Distribution of family income - Gini
index:
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32.5
(2000) |
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Inflation rate (consumer prices):
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4.2% (2005 est.) |
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Investment (gross fixed):
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28.1% of GDP (2005 est.) |
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Budget:
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revenues:
$111.2 billion
expenditures: $135.8 billion; including capital expenditures of $15
billion (2005 est.) |
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Public debt:
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53.8% of GDP (federal and state debt combined) (2005 est.) |
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Agriculture - products:
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rice,
wheat, oilseed, cotton, jute, tea, sugarcane, potatoes; cattle, water
buffalo, sheep, goats, poultry; fish |
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Industries:
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textiles,
chemicals, food processing, steel, transportation equipment, cement,
mining, petroleum, machinery, software |
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Industrial production growth rate:
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7.9% (2005 est.) |
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Electricity - production:
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556.8 billion kWh (2003) |
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Electricity - consumption:
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519 billion kWh (2003) |
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Electricity - exports:
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187
million kWh (2003) |
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Electricity - imports:
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1.4
billion kWh (2003) |
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Oil - production:
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785,000 bbl/day (2005 est.) |
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Oil - consumption:
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2.32 million bbl/day (2003 est.) |
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Oil - exports:
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350,000 bbl/day |
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Oil - imports:
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2.09 million bbl/day |
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Oil - proved reserves:
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5.7 billion bbl (2005 est.) |
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Natural gas - production:
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27.1 billion cu m (2003 est.) |
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Natural gas - consumption:
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27.1 billion cu m (2003 est.) |
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Natural gas - exports:
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0 cu m (2001 est.) |
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Natural gas - imports:
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0 cu m (2001 est.) |
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Natural gas - proved reserves:
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853.5 billion cu m (2005) |
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Current account balance:
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-$12.95 billion (2005 est.) |
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Exports:
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$76.23 billion f.o.b. (2005 est.) |
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Exports - commodities:
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textile
goods, gems and jewelry, engineering goods, chemicals, leather
manufactures |
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Exports - partners:
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US
16.7%, UAE 8.5%, China 6.6%, Singapore 5.3%, UK 4.9%, Hong Kong 4.4%
(2005) |
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Imports:
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$113.1 billion f.o.b. (2005 est.) |
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Imports - commodities:
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crude
oil, machinery, gems, fertilizer, chemicals |
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Imports - partners:
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China
7.3%, US 5.6%, Switzerland 4.7% (2005) |
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Reserves of foreign exchange and gold:
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$136 billion (2005 est.) |
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Debt - external:
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$125.5 billion (2005 est.) |
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Economic aid - recipient:
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$2.9
billion (FY98/99) |
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Currency (code):
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Indian
rupee (INR) |
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Exchange rates:
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Indian
rupees per US dollar - 44.101 (2005), 45.317 (2004), 46.583 (2003), 48.61
(2002), 47.186 (2001) |
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Fiscal year:
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1
April - 31 March |
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