"If all economists were laid end to end, they would not reach a conclusion." ~ George Bernard Shaw

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Indian Economy

"While I am interested both in economics and in philosophy, the union of my interests in the two fields far exceeds their intersection."
~ Amartya Sen

Two decades ago, India initiated an economic reforms programme aimed at transforming a socialist economy to a market driven economy.

The annual growth rate of the economy had stagnated at around 3.5% from the 1950s to the 1980s and was sometimes disparagingly referred to as the "Hindu rate of growth". The fruits of the reforms programme reached their peak in FY ended March 2007, when India recorded its highest GDP growth rate of 9.6%.

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The GDP Growth in past 8 financial years has been:
  • 2006-07 9.6%
  • 2007-08 9.3%
  • 2008-09 6.7%
  • 2009-10 8.4%
  • 2010-11 8.4%
  • 2011-12 6.9%
  • 2012-13 4.5%
  • 2013-14 4.7%
  • According to the CIA World Fact Book, the top 10 economies are now the US, China, Japan, Germany, France, Brazil, UK, Italy, Russia and India. The Indian Economy is now the 10th largest economy in the world; the 3rd largest if measured by Purchasing Power Parity (PPP).

    Indian GDP crossed the $1.0 trillion mark in FY 2007-08 and it is expected to become a 2 trillion economy this year. Its PPP at the end of 2013 was $ 6.76 trillion (IMF estimates). India's economic growth was below 5% in the past two financial years, but has recovered from its relative slump; thanks in part to effective policies and a renewal of confidence, growth is expected once again to exceed 5% starting the current financial year. IMF prediction for FY 14 -15 GDP growth is 5.6%, based primarily on political stability and ongoing reforms initiated by the new government

    Per Capita Income - an inflection point reached
    India's per capita income is at the $1,500-mark today. This is average annual income of roughly Rs 90,000 for every Indian. The $1,000 per capita income is an important economic indicator. China reached this threshold in 2003, and has since unleashed a consumption boom. The figure of $1000 is considered an important inflection point when accompanied by a few other factors which are: an economy of the size of at least $500 billion, a healthy and sustainable growth rate in GDP and a large population. India meets all three criteria in this equation.

    Growth: Capable of being one of the fastest growing economies
    India grew at an average rate of 7% per annum for 10 years but this was followed by sub 5% growth in the last 2 years, a time when global growth itself had slowed down dramatically.

    The Services sector is the fastest growing sector in the economy and accounts for 57% of the GDP. Industry accounts for 26% and Agriculture 17%. The contribution of the services sector to the Indian economy has been manifold: a 57 per cent share in gross domestic product (GDP), growing by 10 per cent annually, contributing to about a quarter of total employment, accounting for a high share in foreign direct investment (FDI) inflows and over one-quarter of total exports.

    In the context of the present global economic slowdown, it is positive that the economy is primarily driven by domestic consumption. Economies that followed the export-oriented model suffered badly in the past couple of years. The rapidly growing middle class is also expected to lead to a large consumption boom contributing to economic growth.

    Contrary to popular perception, growth is also being witnessed in the rural areas (even though they still have a long way to go). In 2002, the rate of telephony penetration in rural areas was 1.2%; today, it has crossed 21%. The National Rural Employment Guarantee Scheme (NREGA) now covers 50 million households.

    Population: Second largest in the world
    The country has the second largest population in the world at around 1.2 billion. Roughly half the population is younger than 25. India has one of the youngest populations in the world with a median age of 23 against the global average of 33. Many view this potentially large work force as a "demographic dividend". Several nations have to face the prospect of small work forces supporting aging populations. On the other hand, providing jobs to the population is also a big challenge. About 200 million youngsters are expected to enter the Indian workforce in the next decade.

    Threats to the Indian Economy

  • Wholesale Price Inflation (WPI) is high and currently at around 8%. Inflationary pressures have abated slightly due to reduction on food prices and international commodity prices.

  • A large part of the population is below the poverty line - approx one third of the population. This disparity in incomes can become a major threat resulting in social unrest if not addressed.

  • 52% of the population is dependent on agriculture - a sector which is only growing at 3% per annum. 14% of the population is employed by industry and 34% by the services sector.

  • Unemployment is high at around 9.5%.

  • It is a difficult country to do business in, with "ease of doing business" ranking a low 134th among 189 countries.
  • Aiming for higher growth
    India recognises the need for a higher growth rate. Some of the steps the new Government would like to focus on are (i) a big push to infrastructure, (ii) easing ability to do business, (iii) legislation to introduce the Goods and Service Tax (iv) reforms to make land acquisition easier,(v) encouraging savings and (vi) gradually divesting in the Public Sector

    India vs China
    When discussing India, comparisons are often drawn to China. The two countries have followed completely different economic models. India is following a ground up model while China is pursuing a top-down approach that is a reflection of its command and control economy. India is a democracy, and China is not. India has relied more on its own entrepreneurs while China has relied on Foreign investment. While it cannot be denied that China has shown remarkable progress in economic growth, reduction of poverty, reducing infant mortality, some argue that India's model is the more sustainable one. A final thought - in the eventual analysis, can we attribute a price to democracy and freedom?

    Rajiv Butalia

    October 2014

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    Editor: Romola Butalia       (c) India Travelogue. All rights reserved.