Economy of India

Economy of The Republic of India

Modern Indian currency notes
Currency	1 Indian Rupee (INR) (₹) = 100 Paise
Fiscal year	1 April – 31 March
Trade organizations	WTO, SAFTA, G-20 and others
Statistics
GDP	$1.632 trillion (nominal: 9th; 2010) $4.057 trillion (PPP: 4th; 2010)
GDP growth	8.5% (2010–11)
GDP per capita	$1,371 (nominal: 138th; 2010) $3,608 (PPP: 129th; 2010)
GDP by sector	services (55.2%), industry (26.3%), agriculture (18.5%) (2010 est.)
Inflation (CPI)	9.72% (September 2011)
Population below poverty line	37% (2010)
Gini coefficient	36.8 (List of countries)
Labour force	478 million (2nd; 2010)
Labour force by occupation	agriculture (52%), industry (14%), services (34%) (2009 est.)
Unemployment	9.4% (2009–10)
Main industries	telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software, pharmaceuticals
External
Exports	$225.6 billion (2010 est.)
Export goods	petroleum products, precious stones, machinery, iron and steel, chemicals, vehicles, apparel
Main export partners	US 12.6%, UAE 12.2%, China 8.1%, Hong Kong 4.1% (2010)
Imports	$357.7 billion (2010 est.)
Import goods	crude oil, precious stones, machinery, fertilizer, iron and steel, chemicals
Main import partners	China 12.4%, UAE 6.5%, Saudi Arabia 5.8%, US 5.7%, Australia 4.5% (2010)
FDI stock	$35.6 billion (2009–10)
Gross external debt	$238 billion (31 December 2010 est.)
Public finances
Government debt	71.84% of GDP (2010 est.)
Revenues	$185.4 billion (2010 est.)
Expenses	$269.8 billion (2010 est.)
Economic aid	$2.107 billion (2008)
Credit rating	BBB- (Domestic) BBB- (Foreign) BBB+ (T&C Assessment) Outlook: Stable (Standard & Poor's)
Foreign reserves	$319 billion (July 2011)
All values, unless otherwise stated, are in US dollars.

"Dollar" and "$" refer throughout to the US dollar.

The Economy of India is the ninth largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). The country is a part of the G-20 major economies and the BRICS, in addition to being partners of the ASEAN. India has a per capita GDP (PPP) of $3,586 (IMF, 129th) as per 2010 figures, making it a low-middle income country. The independence-era Indian economy was inspired by the economy of the Soviet Union with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. However, in 1991, India adopted free market principles and liberalized its economy to international trade under the guidance of current Prime Minister Manmohan Singh, who then was the Finance Minister of India under the leadership of P.V.Narasimha Rao the then Prime Minister. Following these strong economic reforms, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people. India recorded the highest growth rates in the mid-2000s, and is one of the fastest-growing economies in the world. The growth was led primarily due to a huge increase in the size of the middle class consumer population, a large workforce comprising skilled and non-skilled workers, improvement in education standards and considerable foreign investments. India is the seventeenth largest exporter and eleventh largest importer in the world. Economic growth rates are projected at around 7.5%-8% for the financial year 2011-2012.

Overview

Social democratic policies governed India's economy from 1947 to 1991. The economy was characterised by extensive regulation, protectionism, public ownership, pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the country towards a market-based economy. A revival of economic reforms and better economic policy in first decade of the 21st century accelerated India's economic growth rate. In recent years, Indian cities have continued to liberalise business regulations. By 2008, India had established itself as the world's second-fastest growing major economy.

However, as a result of the financial crisis of 2007–2010, coupled with a poor monsoon, India's gross domestic product (GDP) growth rate significantly slowed to 6.7% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period. India’s current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2009–2010, according to the state Labour Bureau, was 9.4% nationwide, rising to 10.1% in rural areas, where two-thirds of the 1.2 billion population live. As of 2010, India's public debt stood at 71.84% of GDP which is highest among BRIC nations.

India's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural sectors contribute 28.6% and 14.6% respectively. 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%. However, statistics from a 2009–10 government survey, which used a smaller sample size than earlier surveys, suggested that the share of agriculture in employment had dropped to 45.5%.

Major industries include telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology-enabled services and pharmaceuticals. The labour force totals 500 million workers. Major agricultural products include rice, wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish. In 2009–2010, India's top five trading partners are United Arab Emirates, China, United States, Saudi Arabia and Germany.

Previously a closed economy, India's trade and business sector has grown fast. India currently accounts for 1.5% of world trade as of 2007 according to the World Trade Statistics of the WTO in 2006, which valued India's total merchandise trade (counting exports and imports) at $294 billion and India's services trade at $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 total trade in goods and services has reached a share of 43% of GDP in 2005–06, up from 16% in 1990–91. India's total merchandisee trade (counting exports and imports) stands at $ 606.7 billion and is currently the 9th largest in the world.

History

Main articles: Economic history of India and Timeline of the economy of India

Pre-colonial period (up to 1773)

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.

The spice trade between India and Europe was the main catalyst for the Age of Discovery.

Maritime trade was carried out extensively between South India and southeast and West Asia from early times until around the fourteenth century AD. Both the Malabar and Coromandel Coasts were the sites of important trading centres from as early as the first century BC, used for import and export as well as transit points between the Mediterranean region and southeast Asia. Over time, traders organised themselves into associations which received state patronage. However, state patronage for overseas trade came to an end by the thirteenth century AD, when it was largely taken over by the local Parsi, Jewish and Muslim communities, initially on the Malabar and subsequently on the Coromandel coast. Further north, the Saurashtra and Bengal coasts played an important role in maritime trade, and the Gangetic plains and the Indus valley housed several centres of river-borne commerce. Most overland trade was carried out via the Khyber Pass connecting the Punjab region with Afghanistan and onward to the Middle East and Central Asia. Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while their craftsmen received a part of the crops at harvest time for their services.

Silver punch mark coin of the Maurya Empire, with symbols of wheel and elephant. 3rd century BC.

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. The Mughal economy functioned on an elaborate system of coined currency, land revenue and trade. Gold, silver and copper coins were issued by the royal mints which functioned on the basis of free coinage. The political stability and uniform revenue policy resulting from a centralised administration under the Mughals, coupled with a well-developed internal trade network, ensured that India, before the arrival of the British, was to a large extent economically unified, despite having a traditional agrarian economy characterised by a predominance of subsistence agriculture dependent on primitive technology. After the decline of the Mughals, western, central and parts of south and north India were integrated and administered by the Maratha Empire. After the loss at the Third Battle of Panipat, the Maratha Empire disintegrated into several confederate states, and the resulting political instability and armed conflict severely affected economic life in several parts of the country, although this was compensated for to some extent by localised prosperity in the new provincial kingdoms. By the end of the eighteenth century, the British East India Company entered the Indian political theatre and established its dominance over other European powers. This marked a determinative shift in India's trade, and a less powerful impact on the rest of the economy.

Colonial period (1773–1947)

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.

There is no doubt that our grievances against the British Empire had a sound basis. As the painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3% at that time, to as low as 3.8% in 1952. Indeed, at the beginning of the 20th century, "the brightest jewel in the British Crown" was the poorest country in the world in terms of per capita income.

— Manmohan Singh

Company rule in India brought a major change in the taxation and agricultural policies, which tended to promote commercialisation of agriculture with a focus on trade, resulting in decreased production of food crops, mass impoverishment and destitution of farmers, and in the short term, led to numerous famines. The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, due to reduced demand and dipping employment. After the removal of international restrictions by the Charter of 1813, Indian trade expanded substantially and over the long term showed an upward trend. The result was a significant transfer of capital from India to England, which, due to the colonial policies of the British, led to a massive drain of revenue rather than any systematic effort at modernisation of the domestic economy.

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

India's colonisation by the British created an institutional environment that, on paper, guaranteed property rights among the colonisers, encouraged free trade, and created a single currency with fixed exchange rates, standardised weights and measures and 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. This 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, with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labour force, and extremely inadequate infrastructure.

The 1872 census revealed that 91.3% of the population of the region constituting present-day India resided in villages, and urbanisation generally remained sluggish until the 1920s, due to the lack of industrialisation and absence of adequate transportation. Subsequently, the policy of discriminating protection (where certain important industries were given financial protection by the state), coupled with the Second World War, saw the development and dispersal of industries, encouraging rural-urban migration, and in particular the large port cities of Bombay, Calcutta and Madras grew rapidly. Despite this, only one-sixth of India's population lived in cities by 1951.

The impact of the British rule on India's economy is a controversial topic. Leaders of the Indian independence movement and left-wing people who opposed India's independence movementeconomic historians have blamed colonial rule for the dismal state of India's economy in its aftermath and argued 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 industrialisation and economic integration.

Pre-liberalisation period (1947–1991)

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 percentage 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, and by those leaders' exposure to democratic socialism as well as the progress achieved by the economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a large public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid-1950s.

Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country's existence. They expected favorable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers. The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth by economists, because of the unfavourable comparison with growth rates in other Asian countries.

Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.

Post-liberalisation period (since 1991)

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

GDP of India has risen rapidly since 1991

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In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. He also raised the income tax levels at one point to a maximum of 97.5%, a record in the world for non-communist economies. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded reforms.

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, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 20th century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although the beneficiaries have largely been urban residents.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the 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.

Sectors

Industry and services

See also: Information technology in India, Business process outsourcing in India, and Retailing in India

India has one of the world's fastest growing automobile industries. Shown here is the Tata Nano, the world's cheapest car.

Industry accounts for 28% of the GDP and employ 14% of the total workforce. In absolute terms, India is 12th in the world in terms of nominal factory output. The Indian industrial sector underwent significant changes as a result of the economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to privatisation of certain public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods. Post-liberalisation, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.

Textile manufacturing is the second largest source of employment after agriculture and accounts for 20% of manufacturing output, providing employment to over 20 million people. As stated in late January, by the then Minister of Textiles, India, Shri Shankersinh Vaghela, the transformation of the textile industry from a degrading to rapidly developing industry, has become the biggest achievement of the central government. After freeing the industry in 2004–2005 from a number of limitations, primarily financial, the government gave the green light to the flow of massive investment – both domestic and foreign. During the period from 2004 to 2008, total investment amounted to 27 billion dollars. By 2012, still convinced of the government, this figure will reach 38 billion as expected; these investments in 2012 will create an additional sector of more than 17 million jobs. But demand for Indian textiles in world markets continues to fall. According to Union Minister for Commerce and Industries Kamal Nath, only during 2008–2009 fiscal year (which ends 31 March) textile and clothing industry will be forced to cut about 800 thousand new jobs – nearly half of the rate of two million, which will have to go all the export-oriented sectors of Indian economy to soften the impact of the global crisis. Ludhiana produces 90% of woollens in India and is known as the Manchester of India. Tirupur has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear.

India is 13th in services output. The services sector provides employment to 23% of the work force and is growing quickly, with a growth rate of 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. Information technology and business process outsourcing are among the fastest growing sectors, having a cumulative growth rate of revenue 33.6% between 1997–98 and 2002–03 and contributing to 25% of the country's total exports in 2007–08. The growth in the IT sector is attributed to increased specialisation, and an availability of a large pool of low cost, highly skilled, educated and fluent English-speaking workers, on the supply side, matched on the demand side by increased demand from foreign consumers interested in India's service exports, or those looking to outsource their operations. The share of the Indian IT industry in the country's GDP increased from 4.8 % in 2005–06 to 7% in 2008. In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world.

Mining forms an important segment of the Indian economy, with the country producing 79 different minerals (excluding fuel and atomic resources) in 2009–10, including iron ore, manganese, mica, bauxite, chromite, limestone, asbestos, fluorite, gypsum, ochre, phosphorite and silica sand. Organised retail supermarkets accounts for 24% of the market as of 2008. 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 from state to state, and even within states. Tourism in India is relatively undeveloped, but growing at double digits. Some hospitals woo medical tourism.

Agriculture

File:FarmersIndia.jpg

Farmers work outside a rice field in Andhra Pradesh. India is the second largest producer of rice in the world after China, and Andhra Pradesh is the second largest rice producing state in India with Uttar Pradesh being the largest.

Main articles: Agriculture in India, Forestry in India, Animal husbandry in India, and Fishing in India

See also: Natural resources in India

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 15.7% of the GDP in 2009–10, employed 52.1% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest economic sector and a significant piece of 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 the 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. Indian states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West Bengal and Maharashtra are key agricultural contributing states of India.

India receives an average annual rainfall of 1,208 millimetres (47.6 in) and a total annual precipitation of 4000 billion cubic metres, with the total utilisable water resources, including surface and groundwater, amounting to 1123 billion cubic metres. 546,820 square kilometres (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is irrigated. India's inland water resources including 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 six million people in the fisheries sector. In 2008, India had the world's third largest fishing industry.

India is the largest producer in the world of milk, jute and pulses, and also has the world's second largest cattle population with 175 million animals in 2008. It is the second largest producer of rice, wheat, sugarcane, cotton and groundnuts, as well as the second largest fruit and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable production respectively. India is also the second largest producer and the largest consumer of silk in the world, producing 77,000 million tons in 2005.

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, which includes individual or family owned indigenous bankers or money lenders and non-banking financial companies. 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.

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 8,260 in 1969 to 72,170 in 2007 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total bank deposits increased from ₹5,910 crore (US$710 million) in 1970–71 to ₹3,830,922 crore (US$460 billion) in 2008–09. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a scheduled bank.

India's gross domestic saving in 2006–07 as a percentage of GDP stood at a high 32.7%. More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold. 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. 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.

Energy and power

Main article: Energy policy of India

As of 2010, India imported about 70% of its crude oil requirements. Shown here is an ONGC platform at Mumbai High in the Arabian Sea, one of the few sites of domestic production.

India's oil reserves meet 25% of the country's domestic oil demand. As of 2009, India's total proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic metres. Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan. India is the fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters of 2010, which had an adverse effect on its current account deficit. 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 the oil sector such as Reliance Industries Limited (RIL) which operates the world's largest oil refining complex.

As of 2010, India had an installed power generation capacity of 164,835 megawatts (MW), of which thermal power contributed 64.6%, hydroelectricity 24.7%, other sources of renewable energy 7.7%, and nuclear power 2.9%. India meets most of its domestic energy demand through its 106 billion tonnes of coal reserves. India is also rich in certain renewable sources of energy with significant future potential such as solar, wind and biofuels (jatropha, sugarcane). India's huge thorium reserves – about 25% of world's reserves – are 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. However, the Indo-US nuclear deal has paved the way for India to import uranium from other countries.

External trade and investment

Further information: Globalisation in India and List of the largest trading partners of India

Global trade relations

A map showing the global distribution of Indian exports in 2006 as a percentage of the top market (USA – $20,902,500,000).

Until the liberalisation 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 $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. India's exports were stagnant for the first 15 years after independence, due to general neglect of trade policy by the government of that period. Imports in the same period, due to industrialisation being nascent, consisted predominantly of machinery, raw materials and consumer goods.

Since liberalisation, the value of India's international trade has increased sharply, with the contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 43% in 2005–06. India's major trading partners are the European Union, China, the United States and the United Arab Emirates. 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. In November 2010, exports increased 22.3% year-on-year to ₹85,063 crore (US$10 billion), while imports were up 7.5% at ₹125,133 crore (US$15 billion). Trade deficit for the same month dropped from ₹46,865 crore (US$5.6 billion) in 2009 to ₹40,070 crore (US$4.8 billion) in 2010.

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 to trade into the WTO policies.

Balance of payments

Cumulative Current Account Balance 1980–2008 based on IMF data

Since independence, India's balance of payments on its current account has been negative. Since economic liberalisation in the 1990s, precipitated by a balance of payment crisis, India's exports rose consistently, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. However, the global economic slump followed by a general deceleration in world trade saw the exports as a percentage of imports drop to 61.4% in 2008–09. India's growing oil import bill is seen as the main driver behind the large current account deficit, which rose to $118.7 billion, or 9.7% of GDP, in 2008–09. Between January and October 2010, India imported $82.1 billion worth of crude oil.

Due to the global late-2000s recession, both Indian exports and imports declined by 29.2% and 39.2% respectively in June 2009. 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. However, since the decline in imports was much sharper compared to the decline in exports, India's trade deficit reduced to ₹25,250 crore (US$3.0 billion). As of June 2011, exports and imports have both registered impressive growth with monthly exports reaching $25.9 billion for the month of May 2011 and monthly imports reaching $40.9 billion for the same month. This represents a year on year growth of 56.9% for exports and 54.1% for imports.

India's reliance on external assistance and concessional debt has decreased since liberalisation of the economy, and the debt service ratio decreased from 35.3% in 1990–91 to 4.4% in 2008–09. In India, External Commercial Borrowings (ECBs), or commercial loans from non-resident lenders, are being permitted by the Government for providing an additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates them through ECB policy guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act of 1999. India's foreign exchange reserves have steadily risen from $5.8 billion in March 1991 to $283.5 billion in December 2009.

Foreign direct investment

Share of top five investing countries in FDI inflows. (2000–2010)

Rank	Country	Inflows (million USD)	Inflows (%)
1	Mauritius	50,164	42.00
2	Singapore	11,275	9.00
3	USA	8,914	7.00
4	UK	6,158	5.00
5	Netherlands	4,968	4.00

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for FDI; 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 were a significant hindrance. However, due to 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. 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.

During 2000–10, the country attracted $178 billion as FDI. The inordinately high investment from Mauritius is due to routing of international funds through the country given significant tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel.

India's recently liberalised 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 liberalised FDI regime. In March 2005, the government amended the rules to allow 100% FDI in the construction sector, including built-up infrastructure and construction development projects comprising housing, commercial premises, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure. Despite a number of changes in the FDI policy to remove caps in most sectors, there still remains an unfinished agenda of permitting greater FDI in politically sensitive areas such as insurance and retailing. The total FDI equity inflow into India in 2008–09 stood at ₹122,919 crore (US$15 billion), a growth of 25% in rupee terms over the previous period..

Currency

The RBI's new headquarters in Mumbai

Main articles: Indian rupee and Reserve Bank of India

The Indian rupee is the only legal tender in India, and is also accepted as legal tender in the neighbouring 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 10 paise coin. However, with effect from 30 June 2011, 50 paise is the minimum coin accepted in the markets as all denominations below have ceased to be legal currency. India's monetary system is managed by the Reserve Bank of India (RBI), the country's central bank. Established on 1 April 1935 and nationalised in 1949, the RBI serves as the nation's monetary authority, regulator and supervisor of the monetary system, banker to the government, custodian of foreign exchange reserves, and as an issuer of currency. It is governed by a central board of directors, headed by a governor who is appointed by the Government of India.

The rupee was linked to the British pound from 1927–1946 and then the U.S. dollar till 1975 through a fixed exchange rate. It was devalued in September 1975 and the system of fixed par rate was replaced with a basket of four major international currencies – the British pound, the U.S. dollar, the Japanese yen and the Deutsche mark. Since 2003, the rupee has been steadily appreciating against the U.S. dollar. In 2009, a rising rupee prompted the Government of India to purchase 200 tons of gold for $6.7 billion from the IMF.

Income and consumption

Main article: Income in India

See also: Poverty in India

World map showing the Gini coefficient, a measure of income inequality. India has a Gini coefficient of 0.368.

India's gross national income per capita had experienced astonishing growth rates since 2002.India's Per Capita Income has tripled from $ 423 in 2002–03 to $ 1219 in 2010–11, averaging 14.4% growth over these eight years. It will further go up to $ 1440 during 2011–12 fiscal. Indian official estimates of the extent of poverty have been subject to debate, with concerns being raised about the methodology for the determination of the poverty line. As of 2005, according to World Bank statistics, 75.6% of the population lived on less than $2 a day (PPP), while 41.6% of the population was living below the new international poverty line of $1.25 (PPP) per day. However, data released in 2009 by the Government of India estimated that 37% of the population lived below the poverty line.

Housing is modest. According to The Times of India, a majority of Indians had a per capita space equivalent to or less than a 100 square feet (9.3 m²) room for their basic living needs, and one-third of urban Indians lived in "homes too cramped to exceed even the minimum requirements of a prison cell in the US." 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.

GNI per capita:

  India (1,170 $)

  Higher GNI per capita compared to India

  Lower GNI per capita compared to India

Around half of Indian children are malnourished. The proportion of underweight children is nearly double that of Sub-Saharan Africa. However, India has not had any major famines since Independence.

Since the early 1950s, successive governments have implemented various schemes to alleviate poverty, under central planning, 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. In August 2005, the Parliament of India, in response to the perceived failure of economic growth to generate employment for the rural poor, passed the Rural Employment Guarantee Bill into law, guaranteeing 100 days of minimum wage employment to every rural household in all the districts of India. The Parliament of India also refused to accept Union Government's argument that it had taken adequate measures to reduce incidence of poverty in India.The question of whether economic reforms have reduced poverty has fuelled debates without generating clear-cut answers and has also increased political pressure against further economic reforms, especially those involving the downsizing of labour and cutting agricultural subsidies. Recent statistics in 2010 point out that the number of high income households has crossed lower income households.

Employment

See also: Labour in India and Indian labour law

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.

Agricultural and allied sectors accounted for about 52.1% of the total workforce in 2009–10. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 7% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 2004–05, 8.3% of the population was unemployed, an increase of 2.2% over 1993 levels, with unemployment uniformly higher in urban areas and among women. Growth of labour stagnated at around 2% for the decade between 1994–2005, about the same as that for the preceding decade. Avenues for employment generation have been identified in the IT and travel and tourism sectors, which have been experiencing high annual growth rates of above 9%.

Unemployment in India is characterised by chronic (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 decline in organised employment due to the decreased role of the public sector after liberalisation has further underlined the need for focusing on better education and has also put political pressure on further reforms. India's labour regulations are heavy even by developing country standards and analysts have urged the government to abolish or modify them in order to make the environment more conducive for employment generation. The 11th five-year plan has also identified the need for a congenial environment to be created for employment generation, by reducing the number of permissions and other bureaucratic clearances required. Further, inequalities and inadequacies in the education system have been identified as an obstacle preventing the benefits of increased employment opportunities from reaching all sectors of society.

Child labour in India is a complex problem that is basically rooted in poverty, coupled with a failure of governmental policy, which has focused on subsidising higher rather than elementary education, as a result benefiting the privileged rather than the poorer sections of society. The Indian government is implementing the world's largest child labour elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organisations are also involved. Special investigation cells have been set up in states to enforce existing laws banning the employment of children under 14 in hazardous industries. The allocation of the Government of India for the eradication of child labour was $21 million in 2007. Public campaigns, provision of meals in school and other incentives have proven successful in increasing attendance rates in schools in some states.

In 2009–10, remittances from Indian migrants overseas stood at ₹250,000 crore (US$30 billion), the highest in the world, but their share in FDI remained low at around 1%. India ranked 133rd on the Ease of Doing Business Index 2010, behind countries such as China (89th), Pakistan (85th), and Nigeria (125th).

Economic trends and issues

Commercial office buildings in Gurgaon.

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. 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.

Agriculture

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"

India's population is growing faster than its ability to produce rice and wheat. The low productivity in India is a result of several factors. According to the World Bank, India's large agricultural subsidies are hampering productivity-enhancing investment. While overregulation of agriculture has increased costs, price risks and uncertainty, governmental intervention in labour, land, and credit markets are hurting the market. Infrastructure and services are inadequate. Further, the average size of land holdings is very small, with 70% of holdings being less than one hectare in size. The partial failure of land reforms in many states, exacerbated by poorly maintained or non-existent land records, has resulted in sharecropping with cultivators lacking ownership rights, and consequently low productivity of labour. Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs, illiteracy, slow progress in implementing land reforms, inadequate or inefficient finance and marketing services for farm produce and impracticality in the case of small land holdings. The allocation of water is inefficient, unsustainable and inequitable. The irrigation infrastructure is deteriorating. Irrigation facilities are inadequate, as revealed by the fact that only 39% of the total cultivable land was irrigated as of 2010, resulting in farmers still being dependent on rainfall, specifically the monsoon season, which is often inconsistent and unevenly distributed across the country.

Corruption

Overview of the index of perception of corruption, 2010

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 were largely blamed for the institutionalised corruption and inefficiency. Yet, a 2005 study by Transparency International (TI) 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.

The Right to Information Act (2005) which requires 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 and opened up avenues to redress grievances. The 2010 report by TI ranks India at 87th place and states that significant setbacks were made by India in reducing corruption.

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.

The current government has concluded that most spending fails to reach its intended recipients. A large, cumbersome and overworked bureaucracy also contributes to administrative inefficiency. India's absence rates are one of the worst in the world; one study found that 25% of public sector teachers and 40% of public sector medical workers could not be found at the workplace.

The Indian economy continues to face the problem of an underground economy with a 2006 estimate by the Swiss Banking Association suggesting that India topped the worldwide list for black money with almost $1,456 billion stashed in Swiss banks. This amounts to 13 times the country's total external debt.

Education

Main article: Education in India

India has made huge progress in terms of increasing primary education attendance rate and expanding literacy to approximately three-fourth of the population. India's literacy rate had grown from 52.2% in 1991 to 74.04% in 2011. The right to education at elementary level has been made one of the fundamental rights under the eighty-sixth Amendment of 2002, and legislation has been enacted to further the objective of providing free education to all children. However, the literacy rate of 74% is still lower than the worldwide average and the country suffers from a high dropout rate. Further, there exists a severe disparity in literacy rates and educational opportunities between males and females, urban and rural areas, and among different social groups.

Infrastructure

Shown here is the Chennai Port.

Shown here is the Mumbai-Pune expressway in Maharashtra.

See also: Transport in India, Indian Road Network, Ports in India, Electricity sector in India, States of India by installed power capacity, Water supply and sanitation in India, and Communications in India

In the past, development of infrastructure was completely in the hands of the public sector and was plagued by slow progress, poor quality and inefficiency. 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, and most public infrastructure, barring railways, is today constructed and maintained by private contractors, in exchange for tax and other concessions from the government.

Some 600 million Indians have no electricity at all. While 80% of Indian villages have at least an electricity line, just 44% of rural households have access to electricity. Some half of the electricity is stolen, compared with 3% in China. The stolen electricity amounts to 1.5% of GDP. Transmission and distribution losses amount to around 20%, as a result of an inefficient distribution system, handled mostly by cash-strapped state-run enterprises. Almost all of the electricity in India is produced by the public sector. Power outages are common, and many buy their own power generators to ensure electricity supply. As of 2006–07 the electricity production was at 652.2 billion kWh, with an installed capacity of 128400 MW. In 2007, electricity demand exceeded supply by 15%. However, reforms brought about by the Electricity Act of 2003 caused far-reaching policy changes, including mandating the separation of generation, transmission and distribution aspects of electricity, abolishing licencing requirements in generation and opening up the sector to private players, thereby paving the way for creating a competitive market-based electricity sector. Substantial improvements in water supply infrastructure, both in urban and rural areas, have taken place over the past decade, with the proportion of the population having access to safe drinking water rising from 66% in 1991 to 92% in 2001 in rural areas, and from 82% to 98% in urban areas. however, quality and availability of water supply remains a major problem even in urban India, with most cities getting water for only a few hours during the day.

India has the world's third largest road network, covering about 3.3 million kilometers and carrying 65% of freight and 80% of passenger traffic. Container traffic is growing at 15% a year. India has a national teledensity rate of 67.67% with 806.1 million telephone subscribers, two-thirds of them in urban areas, but Internet use is rare—there were only 10.29 million broadband lines in India in September 2010. However, this is growing and is expected to boom following the expansion of 3G and wimax services.

Economic disparities

Main articles: Economic disparities in India and Poverty in India

India continues to grow at a rapid pace, although the government recently reduced its annual GDP growth projection from 9% to 8% for the current fiscal year ending March 2012. The slowdown is marked by a sharp drop in investment growth resulting from political uncertainties, a tightening of macroeconomic policies aimed at addressing a high fiscal deficit and high inflation (going well beyond food and fuel prices), and from renewed concerns about the European and US economies. Although the Government was quite successful in cushioning the impact of the global financial crisis on India, it is now clear that a number of MDG targets will only be met under the Twelfth Five Year Plan (2012-17)..

— World Bank: India Country Overview 2011

Illegal Slums next to high-rise commercial buildings in Kochi. millions of people, mostly comprising rural residents who migrate to cities seeking jobs, live in squalid conditions like these.

A critical problem facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of poverty, availability of infrastructure and socio-economic development. Six low-income states – Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa and Uttar Pradesh – are home to more than one third of India's population. Severe disparities exist among states in terms of income, literacy rates, life expectancy and living conditions.

The five-year plans, especially in the pre-liberalisation era, attempted to reduce regional disparities by encouraging industrial development in the interior regions and distributing industries across states, but the results have not been very encouraging since these measures in fact increased inefficiency and hampered effective industrial growth. After liberalisation, the more advanced states have been better placed to benefit from them, with well-developed infrastructure and an educated and skilled workforce, which attract the manufacturing and service sectors. The governments of backward regions are trying to reduce disparities by offering tax holidays and cheap land, and focusing more on sectors like tourism which, although being geographically and historically determined, can become a source of growth and develops faster than other sectors.

See also

Events:

• Late-2000s recession
• Oil price increases since 2003

Lists:

• List of companies of India
• List of the largest trading partners of India
• Income in India
• Trade unions in India
• Economic history of India

References

Books

• Datt, Ruddar; Sundharam, K.P.M. (2009). Indian Economy. New Delhi: S. Chand Group. p. 976. ISBN 978-81-219-0298-4. {{cite book}}: Invalid |ref=harv (help)
• Drèze, John; Sen, Amartya (1996). India: Economic Development and Social Opportunity. Oxford University Press. p. 292. ISBN 978-0-19-564082-3. {{cite book}}: Invalid |ref=harv (help)
• Kumar, Dharma (2005). The Cambridge Economic History of India, Volume II : c. 1757 – 2003. New Delhi: Orient Longman. p. 1115. ISBN 978-81-250-2710-2. {{cite book}}: Invalid |ref=harv (help)
• Nehru, Jawaharlal (1946). The Discovery of India. Penguin Books. ISBN 0-14-303103-1.
• Panagariya, Arvind (2008). India: The Emerging Giant. Oxford University Press. p. 514. ISBN 978-0-19-531503-5. {{cite book}}: Invalid |ref=harv (help)
• Raychaudhuri, Tapan; Habib, Irfan (2004). The Cambridge Economic History of India, Volume I : c. 1200 – c. 1750. New Delhi: Orient Longman. p. 543. ISBN 978-81-250-2709-6. {{cite book}}: Invalid |ref=harv (help)
• Roy, Tirthankar (2006). The Economic History of India 1857–1947. Oxford University Press. p. 385. ISBN 978-0-19-568430-8. {{cite book}}: Invalid |ref=harv (help)

Papers and reports

• "Economic reforms in India: Task force report" (PDF). University of Chicago. p. 32.
• "Economic Survey 2009–10". Ministry of Finance, Government of India. p. 294.

Further reading

Books

• Alamgir, Jalal (2008). India's Open-Economy Policy. Routledge. ISBN 978-0-415-77684-4. {{cite book}}: Invalid |ref=harv (help)
• Bharadwaj, Krishna (1991). "Regional differentiation in India". In Sathyamurthy, T.V. (ed.). Industry & agriculture in India since independence. Oxford University Press. pp. 189–199. ISBN 0-19-564394-1. {{cite book}}: Invalid |ref=harv (help)

Articles

• "Milton Friedman on the Nehru/Mahalanobis Plan". Retrieved 16 July 2005.
• "Infrastructure in India: Requirements and favorable climate for foreign investment". Retrieved 14 August 2005.
• Bernardi, Luigi and Fraschini, Angela (2005). "Tax System And Tax Reforms In India". Working paper n. 51. {{cite journal}}: Cite journal requires |journal= (help)CS1 maint: multiple names: authors list (link)
• Centre for Media Studies (2005). "India Corruption Study 2005: To Improve Governance Volume – I: Key Highlights" (PDF). Transparency International India. Retrieved 21 June 2009. {{cite journal}}: Cite journal requires |journal= (help)
• Ghosh, Jayati. "Bank Nationalisation: The Record". Macroscan. Retrieved 5 August 2005.
• Gordon, Jim and Gupta, Poonam (2003). "Understanding India's Services Revolution" (PDF). 12 November 2003. Retrieved 21 June 2009. {{cite journal}}: Cite journal requires |journal= (help)CS1 maint: multiple names: authors list (link)
• Panagariya, Arvind (2004). "India in the 1980s and 1990s: A Triumph of Reforms". {{cite journal}}: Cite journal requires |journal= (help)
• Sachs, D. Jeffrey; Bajpai, Nirupam and Ramiah, Ananthi (2002). "Understanding Regional Economic Growth in India" (PDF). Working paper 88. Archived from the original (PDF) on 1 July 2007. {{cite journal}}: Cite journal requires |journal= (help)CS1 maint: multiple names: authors list (link)
• Srinivasan, T.N. (2002). "Economic Reforms and Global Integration" (PDF). 17 January 2002. Retrieved 21 June 2009. {{cite journal}}: Cite journal requires |journal= (help)
• Kurian, N.J. "Regional disparities in india". Retrieved 6 August 2005.

News

• "India says 21 of 29 states to launch new tax". Daily Times. 25 March 2005.
• "Economic structure". The Economist. 6 October 2003.
• "Regional stock exchanges – Bulldozed by the Big Two". Retrieved 10 August 2005.

External links

Government of India websites

• Ministry of Finance, Government of India
• Department of Commerce, Government of India
• Department of Industrial Policy & Promotion
• Office of the Economic Adviser
• India in Business- Official website for Investment and Trade in India
• Union Budget & Economic Survey
• Income Tax Department of India
• Central Board of Excise and Customs
• Reserve Bank of India's database on the Indian economy

Publications and statistics

• World Bank – India Country Overview
• Ernst & Young 2006 report on doing Business in India
• IMF, India
• CIA – The World Factbook – India