India Economy

March 29, 2010Indiaby EW World Economy Team

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India has the ninth largest economy in the world. India was the 19th largest exporter of merchandise and the sixth largest exporter of services in 2013, while it imported a total of $616.7 billion worth of merchandise and services the same year.

India's largest sector remains agriculture, contributing approximately 13.7 percent to the national gross domestic product (GDP) in 2012-13. Manufacturing holds an important, but steady, share of the economy's total production, while services have outgrown all other sectors.

By 2008, India had one of the world's faster-growing economies. Although growth slowed significantly during the global recession in 2008-09, it recovered by the end of 2009. The country has a significant fiscal deficit and a moderately high rate of inflation, between 8.9 and 12 percent, but low unemployment, around 3 percent.

The country is a member of the G-20 and is part of the BRICS.

Economic History

India is a very old culture, with a history that stretches back to a time before the rise of Rome in the west. The area enjoyed a successful agricultural, shipping, and intellectual based economy. Before 1700, India may have commanded as much as 22.6 percent of world income, despite its relative level of technological and militaristic power.

This made it a target for the West, and by the end of the 18th Century, the United Kingdom conquered most of India, beginning the colonial era. During the Colonial Era, roughly 1793-1947, the UK exploited the resources of India for its own benefit. Many believe that the resources required for industrial development in the West were taken from India, with little return to the indigenous population. Although the British occupation did see a great deal of infrastructure construction and urbanization, much of this was for the benefit of the colonists and less for the native population.

The post-independence-era Indian economy, from 1947 to 1991, was a mixed economy. Largely focused on self-sufficiency, the economy was inward looking, with a number of interventionist policies that failed to take advantage of the post-World War II economic expansion and growth in trade that many other nations enjoyed. The government nationalized much of the economy, and India's share of global trade fell from 1.3% in 1953 to 0.5% in 1983. Widespread bureaucratic inefficiency, corruption, weak government, and poor policy implementation characterized those years.

India experienced a fiscal crisis in 1991 that led to an overhaul of the Indian economy. The nation has adopted increasingly free-market principles and opened its economy to international trade. These reforms, coupled with strong investment in infrastructure, led to large growth in the overall economy of India, as well as an increase in per person incomes.

When India embarked on nuclear weapons tests in 1998, its credit rating took a significant hit, slowing some of the nation's growth. The rating has since gone back up to an investment level, as determined by S&P and Moody's in 2003.

Growth spiked between 2003 and 2007 with annual growth averaging nine percent. Per the onset of the global recession in 2008-09, growth moderated. Since 2012, Indian economic growth has been comparatively weak, slowing to about 4.4 percent. Other problems in the Indian economy have come to the forefront because of this situation, including a sagging rupee, slow industrial growth, and high amounts of debt.

Current Economic Situation

As of 2015, the World Bank ranked India 142nd out of 189 countries for ease of doing business. The abysmal results come from ongoing issues with poor administration and excessive government bureaucracy and corruption. For purposes of construction, India ranks tenth worst in the world.

The Indian state's presence in its economy is quite extensive. The government owns a number of enterprises and runs a number of inefficient subsidy programs that cause chronically high budget deficits. At the same time, the government lacks strong efficacy in policy-making and enforcement, and the legal system ranks among the worst in the world. This leads to widespread corruption and undermines innovation and growth in the private sector.

While the current administration has promised wide ranging political and structural reforms, details have been somewhat scarce. To date, analysts have not detected significant changes necessary to facilitate the kinds of change that the nation needs to invite greater investment, innovation, and private sector expansion.

Agriculture still makes up a large portion of the Indian economy, constituting 17 percent of GDP and employing 51 percent of the national workforce. Industry commands 26 percent of economic output and employs 22 percent of the workforce. Much of the rest of the economy is exported goods and services including petrochemicals, engineering, gems and jewelry, textiles, mining, services, and energy and power. The services sector, in particular, has drawn significant attention, as many industrialized nations have begun to offshore functions such as technical support to Indian workers who command a much lower hourly wage than domestic wage laws in many industrialized nations would allow.

Economic Forecast

Despite its many detractors, the OECD predicts a gradual uptick in Indian economic activity. This prediction comes from swiftly recovering business confidence boosted by the government's purported commitment to reducing red tape and eradicating corruption. The government has also begun to restart long-stalled infrastructure improvement projects.

India will need to address inflationary forces but avoid overly restraining domestic demand. However, political squabbling has led to setbacks in the passage of several reform measures, including one intended to facilitate easier land acquisition and another creating a national sales tax. The OECD believes this may lead to a small increase in deficit spending until these policies pass and the economy normalizes once more.

The Indian economy did decelerate a bit in the end of 2014, and growth appears to have moderated in the beginning of 2015. While the current administration's reform agenda should spur economic growth and increase business opportunities, the political deadlock may threaten the administration's effectiveness.

As a result, India's GDP anticipates increasing to 7.6 percent in 2015 and 7.9 percent in 2016. While most industrialized nations would consider this level of growth astounding, given the amount of catching up the Indian economy still needs to do, these results represent mixed news.