An Overview of the Economy in India
India is Asia’s third largest economy in nominal GDP. It hasa GDP of over $1.6 trillion, growing even during this globalrecession at approximately 6% per annum.
II. India Economic Reforms
How did India reach this point?In 1991, faced with a balance of payment crisis, India beganthe process of liberalizing its economy. While India has hadmany successive governments since 1991, with different rulingparties, the overall direction of liberalization has remainedthe same. Some may call it slow, plodding, reform, whichstudiously ignores contentious issues such as labor lawreforms. However, the fact is that India is today transformedfrom a socialist economy, with growth rates of 3 to 3.5%, to amarket economy, with an average growth rate of over 6%.
Let’s put this into perspective:
The best testimony to India’s economic reforms is the factthat, depending on how you define poverty, they helped 100 to300 million people to escape poverty. The history of economicreforms in India has proved that there is a direct correlationbetween the progress of economic reforms and elimination ofpoverty… more economic reforms in India have alwaystranslated into less poverty.
III. What are the Key Drives of India’s Economy
There are four key drivers of India’s economy:
(i) Savings Rate
(ii) Service Sector
The second driver of India’s growth is its service sector which has:
The biggest growth engines of this sector continue to be:
Cheap labor, low rents, tax incentives made India a hub for ITservices and outsourcing.While some of these advantages arebeing eroded, India’s service sector, nevertheless, continues togrow, with a low-end services moving to cheaper destinationslike Malaysia, Bangladesh, and Philippines and high-end valueadded services moving to India.
(iii) Demographic Dividend
The third key driver of the India’s economy is itsdemographic dividend.
The fourth key driver of India’s economy is increasingurbanization.
IV. What are the Key Challenges to India’s Growth
There are four key challenges to India’s growth:
One of the biggest challenges that India faces is the lack ofinfrastructure. Almost every statistic on India’s infrastructurespeaks of its inadequacy.The Indian government plans to counter the problem withan investment of $1 trillion during 2012-2017, half of whichwill be in the private sector, with significant public/privatepartnerships. A significant portion of this investment isplanned to be made in the construction of a high-speed roadnetwork, dedicated rail-freight corridor, intra-city connectivitythrough metros, power projects and telecommunicationnetworks. The road and metro rail capacities in India areexpected to increase by 20 times during the next two decades.All major airports are being modernized to internationalstandards. Therefore, once India gets its act together oninfrastructure, India’s infrastructure sector, with its massivecapital outlays and multiplier effect on growth, could be thebiggest driver of India’s growth and the biggest opportunityfor foreign investors.
(ii) Massive Inefficient Public Sector
The second key challenge for India is the massive inefficientpublic sector, a vestige of its socialist past. The Indiangovernment has made some progress towards privatization ofthe public sector. Generally, it has preferred to dribble downequity in the public sector companies, rather than sellstrategic stakes in government companies. However, the paceof privatization in India continues to be disappointing.
The third key challenge for India is its agricultural sector.Agriculture which supports over 50% of India’s populationsaw a decline from 32% of the GDP to approximately 16% ofthe GDP during the last two decades, which has resulted inincreasing disparity between the rural population and theurban population. This is a challenge that the Indiangovernment needs to tackle head on with a quantum leap insupply chain management and agricultural technology. TheIndian government has increased its budgetary support foragriculture from $800 million in 2001 to $2.7 billion in 2011.For all its shortcomings, agriculture sector is India’s mostpromising sector. Today, 40% of the total agricultural producein India which leaves the farm gates does not reach theconsumers because of lack of roads, refrigeration facilities,storage facilities, cold storage facilities and other supply chainissues. Therefore, as India builds its infrastructure andstrengthens its supply chain, the agricultural sector wouldreceive a boost and could become a key driver of the Indianeconomy.(iv) Manufacturing Sector The fourth key challenge ofIndia’s economy is its manufacturing sector. India’smanufacturing sector also has not done as well as its servicesector and India’s share in the world manufacturing is stillrelatively modest. However, rising middle class and consumerdemand is boosting India’s manufacturing sector. The grosscapital formation in industry has grown at a compoundannual growth rate of 11.76% between 2005 and 2010.
However, India’s manufacturing sector also has greatpromise:
V. How can the U.S. and India Help Each Other?
U.S. is a rich developed economy that needs stable newmarkets to fuel its growth. India is an emerging economy thatneeds large capital investments, know-how in critical areassuch as supply chain management and a market for its servicesector.
The idea of the world’s two largest democracies, U.S. andIndia, working together in an economic partnership, so thateach becomes the growth engine of the other is “an idea whosetime has come” and as Victor Hugo said, “an invasion ofarmies can be resisted, but not an idea whose time has come.”