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All about Indian Economy

Sameer Medhekar (Student) (4140 Points)

14 January 2009

Economy of India

The economy of India has a long history. After 1947, India followed a socialist-inspired approach marked by extensive public ownership, licensing and regulation, red tape, and protectionism. The consequence was a very slow growth rate in the first three decades. Economic liberalization since 1991 has moved India towards a market-based economy.

In the late 2000s, India's growth has reached 7.5%, which will double the average income in a decade. McKinsey states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year". India is the twelfth-largest economy in the world and the fourth largest by purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 128th in the world or 118th by PPP. States of India have large disparities in terms of investment-friendliness, per capita income, and income growth.

One estimate is that only 20% of job-seekers have any vocational training. Most people in India live on less than two purchasing power adjusted dollars a day. Half of children are underweight, nearly double that of Sub-Saharan Africa. In terms of occupation, two-thirds of the Indian workforce earn their livelihood directly or indirectly through agriculture in rural villages. As a proportion of GDP, towns and cities make over two thirds of the Indian economy.

India's trade has reached a relatively moderate share 24% of GDP in 2006, up from 6% in 1985. India's share of world trade has reached 1%. Major exports include petroleum products, textile goods, gems and jewelry, engineering goods, chemicals, leather manufactures. Major imports include crude oil, machinery, gems, fertilizer, chemicals.

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Sameer Medhekar (Student) (4140 Points)
Replied 14 January 2009

History

India's economic history can be broadly divided into three eras, beginning with the pre-colonial period lasting up to the 17th century. The advent of British colonisation started the colonial period in the 17th century, which ended with independence in 1947. The third period stretches from independence in 1947 until now.

Pre-colonial

The citizens of the Indus Valley civilisation, a permanent and predominantly urban settlement that flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and measures, made tools and weapons, and traded with other cities. Evidence of well planned streets, a drainage system and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems and the existence of a form of municipal government.

Silver coin minted during the reign of the Gupta king Kumara Gupta I (AD 414–55)

The 1872 census revealed that 99.3% of the population of the region constituting present-day India resided in villages,^[11] whose economies were largely isolated and self-sustaining, with agriculture the predominant occupation. This satisfied the food requirements of the village and provided raw materials for hand-based industries, such as textiles, food processing and crafts. Although many kingdoms and rulers issued coins,barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while its craftsmen received a part of the crops at harvest time for their services.^[12]

Religion, especially Hinduism, and the caste and the joint family systems, played an influential role in shaping economic activities.^[13] The caste system functioned much like medieval European guilds, ensuring the division of labour, providing for the training of apprentices and, in some cases, allowing manufacturers to achieve narrow specialization. For instance, in certain regions, producing each variety of cloth was the speciality of a particular sub-caste.

Estimates of the per capita income of India (1857–1900) as per 1948–49 prices.^[14]

Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon, opium andindigo were exported to Europe, the Middle East and South East Asia in return for gold and silver.^[15]

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. One estimate puts the revenue of Akbar's Mughal Empire in 1600 at £17.5 million, in contrast with the total revenue of Great Britain in 1800, which totalled £16 million.^[16] India, by the time of the arrival of the British, was a largely traditional agrarian economy with a dominant subsistence sector dependent on primitive technology. It existed alongside a competitively developed network of commerce, manufacturing and credit. After the fall of the Mughals, India was administered by Maratha Empire. The Maratha Empire's budget in 1740s, at its peak, was Rs. 100 million. After the loss at Panipat, the Maratha Empire disintegrated into confederate states of Gwalior, Baroda, Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior state had a budget of Rs. 30M. However, at this time, British East India company entered the Indian political theatre. Until 1857, when India was firmly under the British crown, the country remained in a state of political instability due to internecine wars and conflicts.^[17]

Colonial

An aerial view of Calcutta Port taken in 1945. Calcutta, which was the economic hub of British India, saw increased industrial activity during World War II.

Company rule in India brought a major change in the taxation environment from revenue taxes to property taxes resulting in mass impoverishment and destitution of the great majority of farmers, resulting in numerous famines.^[18] The economic policies of the British Raj effectively destroyed India's large handicrafts industry and caused a massive drain of India's resources.^[19][20] An estimate by Cambridge Universityhistorian Angus Maddison reveals that India's share of the world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8% in 1952.^[21] It also created an institutional environment that, on paper, guaranteed property rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures, capital markets, a well developed system of railways and telegraphs, a civil service that aimed to be free from political interference, and a common-law, adversarial legal system.^[22] India's colonisation by the British coincided with major changes in the world economy—industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world,^[23] with industrial development stalled, agriculture unable to feed a rapidly growing population, one of the world's lowest life expectancies, and low rates of literacy.

The impact of the British rule on India's economy is a controversial topic. While leaders of the Indian independence movement, and left-nationalist economic historians have blamed colonial rule for the dismal state of India's economy in its aftermath, right-wing historians have countered that India's economic performance was due to various sectors being in a state of growth and decline, resulting from changes brought about by colonialism and a world that was moving towards industrialization and economic integration.^[24]

Independence to 1991

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, industrialization, state intervention in labor and financial markets, a large public sector, business regulation, and central planning.^[25] Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.^[26] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.^[27]

Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic policy. They expected favorable 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.^[28] The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidizing manual, low-skill cottage industries was criticized by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers.^[29]

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".^[22]

The Rockefeller Foundation's research in high-yielding varieties of seeds, their introduction after 1965 and the increased use of fertilizers andirrigation are known collectively as the Green Revolution, which provided the increase in production needed to make India self-sufficient in food grains, thus improving agriculture in India. Famine in India, once accepted as inevitable, has not returned since the introduction of Green Revolution crops.

After 1991

In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. While this increased the rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans.^[30] India asked for a $1.8 billion bailout loan from IMF, which in return demanded reforms.^[31]

In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh initiated the economic liberalisation of 1991. The reforms 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.^[32] Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has 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.^[33] Since 1990 India has emerged as one of the fastest-growing economies in the developing world; during this period, the economy has grown constantly, but with a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security.

While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to investment level in 2007 by S&P and Moody's.^[34] In 2003, Goldman Sachs predicted that India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind US and China.^[35][36]

In the revised 2007 figures, based on increased and sustaining growth, more inflows into foreign direct investment, Goldman Sachs predicts that "from 2007 to 2020, India’s GDP per capita in US$ terms will quadruple", and that the Indian economy will surpass the United States (in US$) by 2043.^[37] Goldman Sachs has outlined 10 things that it needs to do in order to achieve its potential and grow 40 times by 2050. These are 1.improve governance 2.raise educational achievement 3.increase quality and quantity of universities 4.control inflation 5.introduce a credible fiscal policy 6.liberalize financial markets 7.increase trade with neighbours 8.increase agricultural productivity 9.improve infrastructure and 10.improve environmental quality.

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Sameer Medhekar (Student) (4140 Points)
Replied 14 January 2009

Sectors

Agriculture

Composition of India's total production (million tonnes) of foodgrains and commercial crops, in 2003–04.

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishingaccounted for 16.6% of the GDP in 2007, employed 60% of the total workforce^[39] and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since Green revolution in India. However, international comparisons reveal that the average yield in India is generally 30% to 50% of the highest average yield in the world.^[40]

Slow agricultural growth is a concern for policymakers as some two-thirds of India’s people depend on rural employment for a living. Current agricultural practices are neither economically nor environmentally sustainable and India's yields for many agricultural commodities are low. Poorly maintained irrigation systems and almost universal lack of good extension services are among the factors responsible. Farmers' access to markets is hampered by poor roads, rudimentary market infrastructure, and excessive regulation.

—World Bank: "India Country Overview 2008"^[41]

The low productivity in India is a result of the following factors:

§ According to "India: Priorities for Agriculture and Rural Development" by World Bank, India's large agricultural subsidies are hampering productivity-enhancing investment. Overregulation of agriculture has increased costs, price risks and uncertainty. Government interventions in labor, land, and credit markets are hurting the market. Infrastructure and services are inadequate.^[42]

§ Illiteracy, general socio-economic backwardness, slow progress in implementing land reforms and inadequate or inefficient finance and marketing services for farm produce.

Farming in Delhi.

§ The average size of land holdings is very small (less than 20,000 m²) and is subject to fragmentation, due to land ceiling acts and in some cases, family disputes. Such small holdings are often over-manned, resulting in disguised unemployment and low productivity of labour.

§ Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs and impracticality in the case of small land holdings.

§ World Bank says that the allocation of water is inefficient, unsustainable and inequitable. The irrigationinfrastructure is deteriorating.^[42] Irrigation facilities are inadequate, as revealed by the fact that only 52.6% of the land was irrigated in 2003–04,^[43] which result in farmers still being dependent on rainfall, specifically the Monsoon season. A good monsoon results in a robust growth for the economy as a whole, while a poor monsoon leads to a sluggish growth.^[44] Farm credit is regulated by NABARD, which is the statutory apex agent for rural development in the subcontinent.

India has many farm insurance companies that insure wheat, fruit, rice and rubber farmers in the event of natural disasters or catastrophic crop failure, under the supervision of the Ministry of Agriculture. One notable company that provides all of these insurance policies is agriculture insurance company of india and it alone insures almost 20 million farmers.

Industry

Industry accounts for 27.6% of the GDP and employ 17% of the total workforce.^[39] However, about one-third of the industrial labour force is engaged in simple household manufacturing only.^[45] In absolute terms, India is fourteenth in the world in factory output.^{[citation needed]}

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.^[46] 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.^[47]

A power loom used inEttayapuram

Textile manufacturing is the second largest source for employment after agriculture and accounts for 26% of manufacturing output.^[48] Tirupur has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear.^[49] Dharavi slum in Mumbai has gained fame for leather products.Tata Motors' Nano attempts to be the world's cheapest car.^[50]

India's restrictive labor regulations hamper the large-scale creation of formal industrial jobs.^[2][51][6]

India’s labor regulations - among the most restrictive and complex in the world - have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labor regulations can attract more labor- intensive investment and create jobs for India’s unemployed millions and those trapped in poor quality jobs. Given the country’s momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the work force over the next decade.

—World Bank: India Country Overview 2008^[41]

Services

India is fifteenth in services output. It provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 55% in 2007 up from 15% in 1950.^[39]

Business services (information technology, information technology enabled services, business process outsourcing) 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 specialization, and an availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers, on the supply side, matched on the demand side by an increased demand from foreign consumers interested in India's service exports, or those looking tooutsource 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 in 2001^[52] However the contribution of IT to GDP increased to 4.8 % in 2005-06 and is projected to increase to 7% of GDP in 2008^[53][54]

Most Indian shopping takes place in open markets and millions of independent grocery shops called kirana. Organized retail such supermarkets accounts for just 4% of the market as of 2008.^[55] Regulations prevent most foreign investment in retailing. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods to states, from states, and even within states.^[55]

Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo medical tourism.^[56]

Finance

More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold.^[57]

The Indian money market is classified into: the organised sector (comprising private, public and foreign owned commercial banks andcooperative 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.^[58]

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Since then, the number of bank branches has 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.^[59][60]

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.^[61][39]

Natural resources

India's total cultivable area is 1,269,219 km² (56.78% of total land area), which is decreasing due to constant pressure from an ever growing population and increased urbanisation.

India has a total water surface area of 314,400 km² and receives an average annual rainfall of 1,100 mm. Irrigation accounts for 92% of the water utilisation, and comprised 380 km² in 1974, and is expected to rise to 1,050 km² by 2025, with the balance accounted for by industrial and domestic consumers. India's inland water resources comprising rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly 6 million people in the fisheries sector. In 2008, India had the world's third largest fishing industry.^[62]

India's major mineral resources include Coal (3rd-largest reserves in the world), Iron ore, Manganese, Mica, Bauxite, Titanium ore, Chromite,Natural gas, Diamonds, Petroleum, Limestone and Thorium (world's largest along Kerala's shores). India's oil reserves, found in Bombay Highoff the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the country's demand.^[63][39]

Rising energy demand concomitant with economic growth has created a perpetual state of energy crunch in India. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Though India is rich in Thorium, but not in Uranium, which it might get access to in light of the nuclear deal with US. India is rich in certain energy resources which promise significant future potential - clean / renewable energy resources like solar, wind, biofuels (jatropha, sugarcane).

Sameer Medhekar (Student) (4140 Points)
Replied 14 January 2009

For more details please visit the following link https://en.wikipedia.org/wiki/Indian_economy

Prakash Popat (3134 Points)
Replied 21 January 2009

Nice sharing sameer.

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