Economy of India

From Wikipedia, the free encyclopedia

Jump to: navigation, search

Economy of The Republic of India

Modern Indian notes

Rank 11th

Currency 1 Indian Rupee (INR) ( ) = 100 Paise

Fixed exchange USD = 46.9100 INR

rates (August 27, 2010)
[1]

Fiscal year Calendar year (1 April — 31 March)

Trade organizations WTO, SAFTA, G-20 and others

Statistics

$1.250 trillion (nominal: 11th; 2009)[2]

GDP

$3.526 trillion (PPP: 4th; 2009)[2]

GDP growth 7.4% (2009/2010)[3]
GDP per capita $1,031 (nominal: 139th; 2009)[2]
 $2,941 (PPP: 128th; 2009)[2]
GDP by sector agriculture (17%), industry (28.2%), services
(54.9%) (2009)
Inflation (CPI) 9.97% (July 2010)[4]

Food inflation (9.53%) (Aug 2010)[4]

Population 42% (456 million earn below $1.25 per day) (2010
below poverty line est.)[5]
Gini index 36.8 (List of countries)
Labour force 467 million (2nd; 2009)
Labour force agriculture (52%), industry (14%), services (34%)
by occupation (2009 est.)
Unemployment 10.7% (2010 est.)[6]
Main industries telecommunications, textiles, chemicals, food
processing, steel, transportation equipment,
cement, mining, petroleum, machinery,
information technology, pharmaceuticals
Ease of Doing 133rd[7]
Business Rank
External
Exports $176.5 billion (18th; 2009)
Export goods software, petroleum products, textile goods, gems
and jewelry, engineering goods, chemicals, leather
manufactures
Main export US 12.3%, UAE 9.4%, China 9.3% (2008)
partners
Imports $287.5 billion (15th; 2009)
Import goods crude oil, machinery, gems, fertilizer, chemicals
Main import China 11.1%, Saudi Arabia 7.5%, US 6.6%, UAE
partners 5.1%, Iran 4.2%, Singapore 4.2%, Germany 4.2%
(2008)
FDI stock Home: $161.3 billion (24th; 2009)
Abroad: $77.4 billion (24th; 2009)
Gross external debt $223.9 billion (31 December 2009 est.)
 Public finances
Public debt 58% of GDP (2009 est.)[8]
Revenues $129.8 billion (2009 est.)
Expenses $214.6 billion (2009 est.)
Economic aid $1.724 billion (2005)[9]
Foreign reserves $279.4 billion (6th; Jun 2010)
Main data source: CIA World Fact Book
All values, unless otherwise stated, are in US dollars
Throughout this article, the unqualified term "dollar" and the $ symbol refer to the US
dollar.

The economy of India is the eleventh largest economy in the world by nominal GDP[2] and the
fourth largest by purchasing power parity (PPP).[10] Following strong economic reforms from the
socialist inspired economy of a post-independence Indian nation, the country began to develop a
fast-paced economic growth, as free market principles were initiated in 1990 for international
competition and foreign investment. India is an emerging economic power with a very large pool
of human and natural resources, and a growing large pool of skilled professionals. Economists
predict that by 2020,[11] India will be among the leading economies of the world.

India was under social democratic-based policies from 1947 to 1991. The economy was
characterised by extensive regulation, protectionism, public ownership, pervasive corruption and
slow growth.[12][13][14][15] Since 1991, continuing economic liberalisation has moved the country
towards a market-based economy.[13][14] A revival of economic reforms and better economic
policy in 2000s accelerated India's economic growth rate. In recent years, Indian cities have
continued to liberalize business regulations.[7] By 2008, India had established itself as the world's
second-fastest growing major economy.[16][17][18] However, the year 2009 saw a significant
slowdown in India's GDP growth rate to 6.8%[19] as well as the return of a large projected fiscal
deficit of 6.8% of GDP which would be among the highest in the world.[20][21]

India's large service industry accounts for 55% of the country's Gross Domestic Product (GDP)
while the industrial and agricultural sector contribute 28% and 17% respectively.[22] Agriculture
is the predominant occupation in India, accounting for about 52% of employment. The service
sector makes up a further 34%, and industrial sector around 14%.[22] The labor force totals half a
billion workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea,
sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish.[23] Major industries
include telecommunications, textiles, chemicals, food processing, steel, transportation
equipment, cement, mining, petroleum, machinery, information technology enabled services and
pharmaceuticals.[23]

India's per capita income (nominal) is $1,030, ranked 139th in the world,[24] while its per capita
(PPP) of US$2,940 is ranked 128th.[25][26] Previously a closed economy, India's trade has grown
fast.[13] India currently accounts for 1.5% of World trade as of 2007 according to the WTO.
According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade
(counting exports and imports) was valued at $294 billion in 2006 and India's services trade
inclusive of export and import was $143 billion. Thus, India's global economic engagement in
2006 covering both merchandise and services trade was of the order of $437 billion, up by a
record 72% from a level of $253 billion in 2004. India's trade has reached a still relatively
moderate share 24% of GDP in 2006, up from 6% in 1985.[13]

Contents
[hide]

 1 History
o 1.1 Pre-colonial
o 1.2 Colonial
o 1.3 Independence to 1991
o 1.4 Since 1991
 2 Sectors
o 2.1 Industry and services
o 2.2 Agriculture
o 2.3 Banking and finance
o 2.4 Natural resources
 2.4.1 Petroleum and Natural gas
o 2.5 Pharmaceuticals
 3 External trade and investment
o 3.1 Global trade relations
o 3.2 Balance of payments
o 3.3 Foreign direct investment in India
 4 Currency
 5 Income and consumption
 6 Employment
 7 Economic trends
o 7.1 Issues
 7.1.1 Agriculture
 7.1.2 Corruption
 7.1.3 Government
 7.1.4 Education
 7.1.5 Infrastructure
 7.1.6 Labour laws
 7.1.7 Economic disparities
 8 See also
 9 Notes
 10 References
 11 External links

[edit] History
Main articles: Economic history of India and Timeline of the economy of India

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

The spice trade between India and Europe was one of the main drivers of the world economy[27]
and the main catalyst for the Age of Discovery.[28]

India's economic history can be broadly divided into three eras, beginning with the pre-colonial
period lasting up to the 18th century. The advent of British colonisation started the colonial
period in the early 19th century, which ended with independence in 1947. The third period
stretches from independence in 1947 until now.

[edit] Pre-colonial

The citizens of the Indus Valley civilisation, a permanent 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.[29]

The 1872 census revealed that 99.3% of the population of the region constituting present-day
India resided in villages,[30] 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.[31]

Religion, especially Hinduism, and the caste and the joint family systems, played an influential
role in shaping economic activities.[32] 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 specialty of a particular sub-caste.

Estimates of the per capita income of India (1857–1900) as per 1948–49 prices.[33]

Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon,
opium and indigo were exported to Europe, the Middle East and South East Asia in return for
gold and silver.[34]

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.[35] 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
decline of the Mughals, western, central and parts of south and north India were integrated and
administered by the Maratha Empire. The Maratha Empire's budget in 1740s, at its peak, was
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
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.[36]

[edit] 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 majority of farmers and led
to numerous famines.[37] The economic policies of the British Raj effectively bankrupted India's
large handicrafts industry and caused a massive drain of India's resources.[38][39] Indian
Nationalists employed the successful Swadeshi movement, as strategy to diminish British
economic superiority by boycotting British products and the reviving the market for domestic-
made products and production techniques. India had become a strong market for superior
finished European goods. This was because of vast gains made by the Industrial revolution in
Europe, the effects of which was deprived to Colonial India.

The Nationalists had hoped to revive the domestic industries that were badly effected by policies
implemented by British Raj which had made them uncompetitive to British made goods.

An estimate by Cambridge University historian 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".[40] 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. It also established a well
developed system of railways and telegraphs, a civil service that aimed to be free from political
interference, a common-law and an adversarial legal system.[41] 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,[42] with industrial development stalled, agriculture
unable to feed a rapidly growing population, India had one of the world's lowest life
expectancies, and low rates for literacy.

The impact of the British rule on India's economy is a controversial topic. 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 and that financial strength required for
Industrial development in Europe was derived from the wealth taken from Colonies in Asia and
Africa. At the same time right-wing historians have countered that India's low economic
performance was due to various sectors being in a state of growth and decline due to changes
brought in by colonialism and a world that was moving towards industrialization and economic
integration.[43]

[edit] Independence to 1991

Compare India (orange) with South Korea (yellow). Both started from about the same income
level in 1950. The graph shows GDP per capita of South Asian economies and South Korea as a
percent of the American GDP per capita.

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.[44] 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.[45] Capitalism and
Private sector did not exist before 1991. 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.[46]

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.[47][dead link] 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.[48][dead link] The 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".[41]

The Rockefeller Foundation's research in high-yielding varieties of seeds, their introduction after
1965 and the increased use of fertilizers and irrigation are known collectively as the Green
Revolution in India, 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 independence.

[edit] Since 1991

Main articles: Economic liberalization in India and Economic development in India

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.[49] India asked for a $1.8 billion bailout loan from IMF,
which in return demanded reforms.[50]
An industrial zone near Mumbai, India.

In response, Prime Minister Narasimha Rao along with his finance minister and current Prime
Minister of India Dr. Manmohan Singh initiated the economic liberalization 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.[51] 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.[52] Since 1990 India has a free-market economy and 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.[53] 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. India is often seen by most economists as a rising economic superpower
and is believed to play a major role in the global economy in the 21st century.[54][55] In 2009 India
purchased 200 Tons of Gold for $6.7 billion from IMF[56] as a total role reversal from 1991.

[edit] Sectors
[edit] Industry and services

See also: Information technology in India, Business process outsourcing in India, and Retailing
in India
The prestigious Tidel Park in Chennai. India has Asia's largest outsourcing industry[57] and is the
world's second most favorable outsourcing destination after the United States.[58]

India has one of the world's fastest growing automobile industries[59][60] Shown here is the Tata
Motors' Nano, the world's cheapest car.[61]

Industry accounts for 28% of the GDP and employ 14% of the total workforce.[22] However,
about one-third of the industrial labour force is engaged in simple household manufacturing only.
[62][dead link]
In absolute terms, India is 16th in the world in terms of nominal factory output.[63]

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.[64] 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.[65]

Textile manufacturing is the second largest source for employment after agriculture and accounts
for 26% of manufacturing output.[66] Ludhiana produces 90% of woolens in India and is also
Known as the Manchester of India. Tirupur has gained universal recognition as the leading
source of hosiery, knitted garments, casual wear and sportswear.[67] Dharavi slum in Mumbai has
gained fame for leather products. Tata Motors' Nano attempts to be the world's cheapest car.[61]

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.[22]

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 to outsource their
operations. The share of India's IT industry to the country's GDP increased from 4.8 % in 2005-
06 to 7% in 2008.[68][69] In 2009, seven Indian firms were listed among the top 15 technology
outsourcing companies in the world.[70] In March 2009, annual revenues from outsourcing
operations in India amounted to US$60 billion and this is expected to increase to US$225 billion
by 2020.[71]

Organized retail such supermarkets accounts for 24% of the market as of 2008.[72] 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.[72]

Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo
medical tourism.[73]

[edit] Agriculture

Farmers work inside a rice field in Andhra Pradesh. India is the second largest producer of rice in
the world after China[74] and Andhra Pradesh is the 2nd largest rice producing state in India with
West Bengal being the largest.[75]
Main articles: Agriculture in India, Forestry in India, Animal husbandry in India, and Fishing in
India

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging
and fishing accounted for 17% of the GDP in 2009, employed 52% of the total workforce[22] 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 the average yield in India is generally 30% to 50% of
the highest average yield in the world.[76]
Paddy fields at Kanyakumari district in Tamil Nadu

India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric
and black pepper.[77] It also has the world's largest cattle population: 193 million.[78] It is the
second largest producer of wheat, rice, sugar, cotton, silk, peanuts and inland fish.[79] It is the
third largest producer of tobacco.[79] India is the largest fruit producer, accounting for 10% of the
world fruit production. It is the leading producer of bananas, sapotas and mangoes.[79]

India is the second largest producer and the largest consumer of silk in the world, with the
majority of the 77 million kg (2005)[80] production taking place in Karnataka State, particularly in
Mysore and the North Bangalore regions of Muddenahalli, Kanivenarayanapura, and
Doddaballapura, the upcoming sites of a INR 700 million "Silk City".[81][82]

[edit] Banking and finance

Main article: Finance in India

See also: Banking in India and Insurance in India

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.[83]

Mumbai is the financial and commercial capital of India. Shown here is the World Trade Centre
of Mumbai

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.[84][85]

The public sector banks hold over 75% of total assets of the banking industry, with the private
and foreign banks holding 18.2% and 6.5% respectively.[86] 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.[22][87]

More than half of personal savings are invested in physical assets such as land, houses, cattle,
and gold.[88] Indian has the highest saving rate in the world at 36 percent.

[edit] Natural resources

Main article: Natural resources in India

See also: Energy policy of India

India has the world's fifth largest wind power industry, with an installed wind power capacity of
9,587 MW. Shown here is a wind farm in Muppandal, Tamil Nadu.

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.[89]

India's major mineral resources include coal, iron, manganese, mica, bauxite, titanium, chromite,
limestone and thorium. India meets most of its domestic energy demand through its 92 billion
tonnes of coal reserves (about 10% of world's coal reserves).[90]

India's huge thorium reserves — about 25% of world's reserves — is expected to fuel the
country's ambitious nuclear energy program in the long-run. India's dwindling uranium reserves
stagnated the growth of nuclear energy in the country for many years.[91] However, the Indo-US
nuclear deal has paved the way for India to import uranium from other countries.[92] India is also
believed to be rich in certain renewable sources of energy with significant future potential such
as solar, wind and biofuels (jatropha, sugarcane).
[edit] Petroleum and Natural gas

ONGC platform at Mumbai High in the Arabian Sea. As of 2010, India is the world's fifth largest
consumer of oil.[93]

India's oil reserves, found in Mumbai High, parts of Gujarat, Rajasthan and eastern Assam, meet
25% of the country's domestic oil demand.[22][94] India's total proven oil reserves stand at 11
billion barrels,[95] of which Mumbai High is believed to hold 6.1 billion barrels[96] and Mangala
Area in Rajasthan an additional 3.6 billion barrels.[97]

In 2009, India imported 2.56 million barrels of oil per day, making it one of largest buyers of
crude oil in the world.[98] The petroleum industry in India mostly consists of public sector
companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation
Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private
Indian companies in oil sector such as Reliance Industries Limited (RIL) which operates the
world's largest oil refining complex.[99]

[edit] Pharmaceuticals

India has a self reliant Pharmaceuticals industry. The majority of its medical consumables are
produced domestically. Pharmaceutical Industry in India is dotted with companies like Ranbaxy
Pharmaceutical, Dr. Reddy's Laboratories, Cipla which have created a niche for themselves at
world level. India including China, Brazil, Turkey, Mexico, Russia and South Korea are called
“pharmerging” countries. [100]

Today, India is an exporter to countries like the United States and Russia. In terms of the global
market, India currently holds a modest 1-2% share, but it has been growing at approximately
10% per year. India is unable to capture much of the value as most of the innovation taking place
is by non-Indian firms. They are developing products in their own R&D centres or outsourcing to
Indian engineering services firms and getting the stuff manufactured at either their own factories
or through contract manufacturing, as in pharmaceuticals.[101]

[edit] External trade and investment

Further information: Globalisation in India

[edit] Global trade relations

In March 2008, India's annual imports and exports stood at US$236 and US$155.5 billion
respectively.[102] Shown here is the cargo of a container ship being unloaded at the Jawaharlal
Nehru Port, Navi Mumbai.

India's economy is mostly dependent on its large internal market with external trade accounting
for just 20% of the country's GDP.[103] In 2008, India accounted for 1.45% of global merchandise
trade and 2.8% of global commercial services export.[104] Until the liberalization of 1991, India
was largely and intentionally isolated from the world markets, to protect its economy and to
achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative
restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity
participation, restrictions on technology transfer, export obligations and government approvals;
these approvals were needed for nearly 60% of new FDI in the industrial sector. The restrictions
ensured that FDI averaged only around US$200 million annually between 1985 and 1991; a large
percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of
non-resident Indians.[105] India's exports were stagnant for the first 15 years after independence,
due to the predominance of tea, jute and cotton manufactures, demand for which was generally
inelastic. Imports in the same period consisted predominantly of machinery, equipment and raw
materials, due to nascent industrialization.

Since liberalization, the value of India's international trade has become more broad-based and
has risen to 63,080,109 crores in 2003–04 from 1,250 crores in 1950–51. India's major trading
partners are China, the US, the UAE, the UK, Japan and the EU.[106] The exports during April
2007 were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06%
over the previous year.[107] In 2006-07, major export commodities included engineering goods,
petroleum products, chemicals and pharmaceuticals, gems and jewellery, textiles and garments,
agricultural products, iron ore and other minerals. Major import commodities included crude oil
and related products, machinery, electronic goods, gold and silver.[108]

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and
its successor, the WTO. While participating actively in its general council meetings, India has
been crucial in voicing the concerns of the developing world. For instance, India has continued
its opposition to the inclusion of such matters as labour and environment issues and other non-
tariff barriers into the WTO policies.[109]

[edit] Balance of payments

Cumulative Current Account Balance 1980-2008 based on the IMF data

Since independence, India's balance of payments on its current account has been negative. Since
liberalisation in the 1990s (precipitated by a balance of payment crisis), India's exports have been
consistently rising, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. India's
growing oil import bill is seen as the main driver behind the large current account deficit.[110] In
2007-08, India imported 120.1 million tonnes of crude oil, more than 3/4th of the domestic
demand, at a cost of $61.72 billion.[111]

Although India is still a net importer, since 1996–97 its overall balance of payments (i.e.,
including the capital account balance) has been positive, largely on account of increased foreign
direct investment and deposits from non-resident Indians; until this time, the overall balance was
only occasionally positive on account of external assistance and commercial borrowings. As a
result, India's foreign currency reserves stood at $285 billion in 2008.

Due to the global late-2000s recession, both Indian exports and imports declined by 29.2% and
39.2% respectively in June 2009.[112] The steep decline was because countries hit hardest by the
global recession, such as United States and members of the European Union, account for more
than 60% of Indian exports.[113] However, since the decline in imports was much sharper
compared to the decline in exports, India's trade deficit reduced to 252.5 billion rupee.[112]

India's reliance on external assistance and commercial borrowings has decreased since 1991–92,
and since 2002–03, it has gradually been repaying these debts. Declining interest rates and
reduced borrowings decreased India's debt service ratio to 4.5% in 2007.[114] In India, External
Commercial Borrowings (ECBs) are being permitted by the Government for providing an
additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates
these borrowings (ECBs) through ECB policy guidelines.[115]

[edit] Foreign direct investment in India

Share of top five investing countries in FDI inflows. (2000–2007)[116]

Inflows
Rank Country Inflows (%)
(Million USD)

1  Mauritius 85,178 44.24%[117]

 2  United States 18,040 9.37%

3  United Kingdom 15,363 7.98%

4  Netherlands 11,177 5.81%

5  Singapore 9,742 5.06%

6  Cyprus 5,742 3.06%

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for
foreign direct investments (FDI);[118] India has strengths in telecommunication, information
technology and other significant areas such as auto components, chemicals, apparels,
pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies
resulted in a significant hindrance. However, due to some positive economic reforms aimed at
deregulating the economy and stimulating foreign investment, India has positioned itself as one
of the front-runners of the rapidly growing Asia Pacific Region.[118] India has a large pool of
skilled managerial and technical expertise. The size of the middle-class population stands at 300
million and represents a growing consumer market.[119]

The inordinately high investment from Mauritius is due to routing of international funds through
the country given significant capital gains tax advantages; double taxation is avoided due to a tax
treaty between India and Mauritius, and Mauriitus is a capital gains tax haven, effectively
creating a zero-taxation FDI channel.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.
Industrial policy reforms have substantially reduced industrial licensing requirements, removed
restrictions on expansion and facilitated easy access to foreign technology and foreign direct
investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a
booming economy and liberalized FDI regime. In March 2005, the government amended the
rules to allow 100 per cent FDI in the construction business.[120] This automatic route has been
permitted in townships, housing, built-up infrastructure and construction development projects
including housing, commercial premises, hotels, resorts, hospitals, educational institutions,
recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors.
Fields which require relaxation in FDI restrictions include civil aviation, construction
development, industrial parks, petroleum and natural gas, commodity exchanges, credit-
information services and mining. But this still leaves an unfinished agenda of permitting greater
foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into
India reached a record $19.5 billion in fiscal year 2006-07 (April-March), according to the
government's Secretariat for Industrial Assistance. This was more than double the total of
US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24
billion[121] and for 2008-09, it is expected to be above $35 billion.[122] A critical factor in
determining India's continued economic growth and realizing the potential to be an economic
superpower is going to depend on how the government can create incentives for FDI flow across
a large number of sectors in India.[123]

[edit] Currency

The RBI headquarters in Mumbai

Main articles: Indian rupee and Reserve Bank of India

The Indian rupee is the only legal tender accepted in India. The exchange rate as on 23 March
2010 is 45.40 INR the USD,[124] 61.45 to a EUR, and 68.19 to a GBP. The Indian rupee is
accepted as legal tender in the neighboring Nepal and Bhutan, both of which peg their currency
to that of the Indian rupee. The rupee is divided into 100 paise. The highest-denomination
banknote is the 1,000 rupee note; the lowest-denomination coin in circulation is the 25 paise coin
(it earlier had 1, 2, 5, 10 and 20 paise coins which have been discontinued by the Reserve Bank
of India).[125]

The Rupee hit a record low during early 2009 on account of global recession. However, due to a
strong domestic market, India managed to bounce back sooner than the western countries. Since
September 2009 there has been a constant appreciation in Rupee versus most Tier 1 currencies.
On 11 January 2010 Rupee went as high as 45.50 to a United states dollar and on 10 January
2010 as high as Rupee 73.93 to a British Pound. A rising rupee also prompted Government of
India to buy 200 tonnes of Gold from IMF.

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.

[edit] Income and consumption

Main article: Income in India

Percentage of population living under the poverty line of $1 (PPP) a day, currently 356.35 rupees
a month in rural areas (around $7.4 a month).

As of 2005:

 85.7% of the population lives on less than $2.50 (PPP) a day, down from 92.5% in 1981.
This is much higher than the 80.5% in Sub-Saharan Africa.[126]
 75.6% of the population lives on less than $2 a day (PPP), which is around 20 rupees or
$0.5 a day in nominal terms. It was down from 86.6%, but is still even more than the
73.0% in Sub-Saharan Africa.[126][127][128][129][130]
 24.3% of the population earned less than $1 (PPP, around $0.25 in nominal terms) a day
in 2005, down from 42.1% in 1981.[126][131]
 41.6% of its population is living below the new international poverty line of $1.25 (PPP)
per day, down from 59.8% in 1981.[126] The World Bank further estimates that a third of
the global poor now reside in India.

Housing is modest. According to Times of India, "a majority of Indians have per capita space
equivalent to or less than a 10 feet x 10 feet room for their living, sleeping, cooking, washing and
toilet needs." and "one in every three urban Indians lives in homes too cramped to exceed even
the minimum requirements of a prison cell in the US."[132] The average is 103 sq ft (9.6 m2) per
person in rural areas and 117 sq ft (10.9 m2) per person in urban areas.[132]

Around half of Indian children are malnourished. The proportion of underweight children is
nearly double that of Sub-Saharan Africa.[133][134] However, India has not had famines since the
Green Revolution in the early 1970s. While poverty in India has reduced significantly, official
figures estimate that 27.5%[135] of Indians still lived below the national poverty line of $1 (PPP,
around 10 rupees in nominal terms) a day in 2004-2005.[136] A 2007 report by the state-run
National Commission for Enterprises in the Unorganised Sector (NCEUS) found that 65% of
Indians, or 750 million people, lived on less than 20 rupees per day[137] with most working in
"informal labour sector with no job or social security, living in abject poverty."[138]

Since the early 1950s, successive governments have implemented various schemes, under
planning, to alleviate poverty, that have met with partial success. All these programmes have
relied 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.[139] 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 all the
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 the downsizing of labour and cutting
agricultural subsidies.[140][141] Recent statistics in 2010 point out that the number of high income
households has crossed lower income households.[142]

[edit] Employment
See also: Indian labour law

Agricultural and allied sectors accounted for about 60% of the total workforce in 2003 same as 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 7.3%, with rural areas doing marginally
better (7.2%) than urban areas (7.7%). India's labor force is growing by 2.5% annually, but
employment only at 2.3% a year.[143]

Official unemployment exceeds 9%. Regulation and other obstacles have discouraged the
emergence of formal businesses and jobs. Almost 30% of workers are casual workers who work
only when they are able to get jobs and remain unpaid for the rest of the time.[143] Only 10% of
the workforce is in regular employment.[143] India's labor regulations are heavy even by
developing country standards and analysts have urged the government to abolish them.[13][144]

Unemployment in India is characterized by chronic or disguised unemployment. Government

schemes that target eradication of both poverty and unemployment (which in recent decades has
sent millions of poor and unskilled people into urban areas in search of livelihoods) 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 liberalization has further underlined the need for focusing on better education
and has also put political pressure on further reforms.[139][145]

Child labor is a complex problem that is basically rooted in poverty. The Indian government is
implementing the world's largest child labor elimination program, with primary education
targeted for ~250 million. Numerous non-governmental and voluntary organizations are also
involved. Special investigation cells have been set up in states to enforce existing laws banning
employment of children (under 14) in hazardous industries. The allocation of the Government of
India for the eradication of child labor was $10 million in 1995-96 and $16 million in 1996-97.
The allocation for 2007 is $21 million.[146]

In 2006, remittances from Indian migrants overseas made up $27 billion or about 3% of India's
GDP.[147]

[edit] Economic trends

India's 300 million strong middle-class population is growing at an annual rate of 5%.[148] Shown
here is a residential area in Mumbai.

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.[15] In spite of the high growth rate, the report stated that India would continue to remain
a low-income country for decades to come but could be a "motor for the world economy" if it
fulfills its growth potential.[15] 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
10. Improve Environmental Quality.[149]

[edit] Issues

[edit] Agriculture
An Indian farmer
Main article: Agriculture in India

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"[150]

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.[151]
 Illiteracy, slow progress in implementing land reforms and inadequate or inefficient
finance and marketing services for farm produce.
 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 irrigation infrastructure is deteriorating.[151] Irrigation facilities are inadequate, as
revealed by the fact that only 52.6% of the land was irrigated in 2003–04,[152] 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.[153] 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 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.

India's population is growing faster than its ability to produce rice and wheat.[154] The most
important structural reform for self-sufficiency is the ITC Limited plan to connect 20,000
villages to the Internet by 2013.[155] This will provide farmers with up to date crop prices for the
first time, which should minimise losses incurred from neighbouring producers selling early and
in turn facilitate investment in rural areas.

[edit] Corruption

Overview of the index of perception of corruption, 2007

Main article: Corruption in India

Corruption has been one of the pervasive problems affecting India. The economic reforms of
1991 reduced the red tape, bureaucracy and the Licence Raj that had strangled private enterprise
and was blamed by Chakravarthi Rajagopalachari 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.[156]

The Right to Information Act (2005) and equivalent acts in the Indian 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.[156] The 2009 report by Transparency International ranks India at 84th place
and states that significant improvements were made by India in reducing corruption.[157][158]

[edit] Government

Main article: Government of India

See also: Taxation in India  and Corruption in India
The number of people employed in non-agricultural occupations in the public and private
sectors. Totals are rounded. Private sector data relates to non-agriculture establishments with 10
or more employees.[139]

The current government has concluded that most spending fails to reach its intended recipients.
[159]
Lant Pritchett calls India's public sector "one of the world's top ten biggest problems — of
the order of AIDS and climate change".[159] The Economist's 2008 article about the Indian civil
service stated that the Indian central government employs around 3 million people, including
"vast armies of paper-shuffling peons".[159]

At local level, administration can be worse. It is not unheard of that a majority of a state's
assembly seats can be held by convicted criminals.[160] One study found that 25% of public sector
teachers and 40% of public sector medical workers could not be found at the workplace. India's
absence rates are one of the worst in the world.[161][162][163][164]

[edit] Education

Main article: Education in India

India has made huge progress in terms of increasing primary education attendance rate and
expanding literacy to approximately two thirds of the population.[165] The right to education at
elementary level has been made one of the fundamental rights under the Eighty-Sixth
Amendment of 2002.[166] However, the literacy rate of 65% is still lower than the worldwide
average and the country suffers from a high dropout rate.[167]

[edit] Infrastructure

See also: Transport in India, Indian Road Network, Ports in India, Electricity in India, States of
India by installed power capacity, Water supply and sanitation in India, and Communications in
India
Shown here is the Mumbai Pune expressway in Maharashtra.

India has built numerous new airports in recent years. Shown here is new Terminal 1D at Indira
Gandhi International Airport in Delhi

In the past, development of infrastructure was completely in the hands of the public sector and
was plagued by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale
investment.[168] India's low spending on power, construction, transportation, telecommunications
and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher
growth rates. This has prompted the government to partially open up infrastructure to the private
sector allowing foreign investment[139][169][170] which has helped in a sustained growth rate of close
to 9% for the past six quarters.[171]

Some 600 million Indians have no mains electricity at all.[172] While 80% of Indian villages have
at least an electricity line, just 44% of rural households have access to electricity.[173] According
to a sample of 97,882 households in 2002, l,,lelectricity was the main source of lighting for 53%
of rural households compared to 36% in 1993.[174] Some half of the electricity is stolen, compared
with 3% in China. The stolen electricity amounts to 1.5% of GDP.[173][175] Almost all of the
electricity in India is produced by the public sector. Power outages are common.[172] Many buy
their own power generators to ensure electricity supply. As of 2005 the electricity production
was at 661.6 billion kWh with oil production standing at 785,000 bbl/day. In 2007, electricity
demand exceeded supply by 15%.[172] Multi Commodity Exchange has tried to get a permit to
offer electricity future markets.[176]

India has the world's third largest road network in the world.[177] Container traffic is growing at
15% a year.[178] Some 60% of India’s container traffic is handled by the Jawaharlal Nehru Port
Trust in Navi Mumbai[citation needed]. Internet use is rare; there were only 7.57 million broadband
lines in India in November 2009, however it is still growing at slower rate and is expected to
boom after the launch of 3G and wimax services.[179]
Most urban cities have good water supply water 24 hours a day, while some smaller cities face
water shortages in summer season. A World Bank report says it is an institutional problem in
water agencies, or "how the agency is embedded in the relationships between politics and the
citizens who are the consumers."[180]

[edit] Labour laws

Main article: Indian labour laws

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.[150]

India's restrictive labor regulations hamper the large-scale creation of formal industrial jobs.[13]
[167][181]

India ranked 133th on the Ease of Doing Business Index 2010, behind countries such as China
(89th), Pakistan (85th), and Nigeria (125th). The Constitution provides protection of child labor,
slavery, equality of opportunities and forced labor etc. in form of fundamental rights, but the
implementation of provisions cited is a matter of concern.[182]

[edit] Economic disparities

Main articles: Economic disparities in India and Poverty in India

Lagging states need to bring more jobs to their people by creating an attractive investment
destination. Reforming cumbersome regulatory procedures, improving rural connectivity,
establishing law and order, creating a stable platform for natural resource investment that
balances business interests with social concerns, and providing rural finance are important.

– World Bank: India Country Overview 2008[150]

Slums next to high-rise commercial buildings in Kaloor, Kochi. Hundreds of people, mostly
comprising migrant labourers who come to the city seeking job prospects, reside in such shabby
areas.[183]

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.[184] Six low-income states - Bihar,
Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Uttar Pradesh - are home to more than one
third of India's population.[185]

Between 1999 and 2008, the annualized growth rates for Maharashtra (9%),[186] Gujarat (8.8%),
Haryana (8.7%), or Delhi (7.4%) were much higher than for Bihar (5.1%), Uttar Pradesh (4.4%),
or Madhya Pradesh (3.5%).[187] However, In 2009-10, Bihar witnessed a growth of about 12.6%,
and ended up becoming the 'next big economy in india' , followed by Gujarat with a growth of
11.3%.

Poverty rates in rural Orissa (43%) and rural Bihar (40%) are some of the worst in the world.[180]
On the other hand, rural Haryana (5.7%) and rural Punjab (2.4%) compare well with middle-
income countries.[180]

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[188] 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.[189][190]