Economy of India

Overview

The Republic of India is emerging out to be a strong economy post 1991 reforms. Goldman Sachs predicts that India's economy would stand at no. 3 by 2050.

Though its GDP is low in dollar terms, India has the world's 12th-largest GNP. In terms of GDP on PPP basis, India is ranked 4th largest, at about $2.66 trillion. About 60% of the population depends directly on agriculture.

Industry and services sectors are growing in importance and account for 25% and 50% of GDP, respectively, while agriculture contributes about 25.6% of GDP. More than 25% of the population live below the poverty line, but a large and growing middle class of 300 million has disposable income for consumer goods.

India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis. Those reforms have included liberalized foreign investment and exchange regimes, significant reductions in tariffs and other trade barriers, reform and modernization of the financial sector, and significant adjustments in government monetary and fiscal policies.

The reform process has had some very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought. Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currency reserves ($85 billion in August 2003) and a moderate current account deficit of about 1% (2002-03). India's economic growth is constrained, however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real interest rates. India will have to address these constraints in formulating its economic policies and by pursuing the second generation reforms to maintain recent trends in economic growth.

Post 1991 reforms

India's trade has increased significantly since reforms began in 1991, largely as a result of staged tariff reductions and elimination of nontariff barriers. The outlook for further trade liberalization is mixed. India has agreed to eliminate quantitative restrictions on imports of about 1,420 consumer goods by April 2001 to meet its WTO commitments. On the other hand, the government has imposed "additional" import duties of 5% on most products plus a surcharge of 10% over the past 2 years. The U.S. is India's largest trading partner; bilateral trade in 1998-99 was about $10.9 billion. Principal U.S. exports to India are aircraft and parts, advanced machinery, fertilizers, ferrous waste and scrap metal, and computer hardware. Major U.S. imports from India include textiles and ready-made garments, agricultural and related products, gems and jewelry, leather products, and chemicals.

Significant liberalization of its investment regime since 1991 has made India an attractive place for foreign direct and portfolio investment. The U.S. is India's largest investment partner, with total inflow of U.S. direct investment estimated at $2 billion (market value) in 1999. U.S. investors also have provided an estimated 11% of the $18 billion of foreign portfolio investment that has entered India since 1992. Proposals for direct foreign investment are considered by the Foreign Investment Promotion Board and generally receive government approval. Automatic approvals are available for investments involving up to 100% foreign equity, depending on the kind of industry. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining.

India's external debt was up to $98 billion in March 1999, compared to $94 billion in March 1998. The country's debt service ratio has fallen to about 20%. Bilateral assistance has been about $1 billion annually in recent years, with the U.S. providing about $150 million in development assistance in Fiscal Year 1999. The World Bank had approved loans worth about $1.05 billion for India in 1999.

But in recent years India has gone from strength to strength. It has recorded a growth rate of above 5% even during the global recession. India has gradually developed a software sector that is leading the economy in growth. Indian firms handle outsourced work from US and Europe and provide high quality service at low costs thus keeping company expenditure low for organisations like GE, BA, etc. Indian firms like Infosys and Wipro implement products and give services comparable to the best in the world. This is why India has become an IT hotspot. Its foreign reserves are up to a record high and India has started repaying its loans at a higher pace as compared to earlier predictions. Indian GDP is 4th in terms of ppp and India is steadfast on the road to development.

India's economy grew at an unexpectedly robust 8.4 percent in the year through the third quarter, making it one of the fastest growing in the world, with analysts seeing stronger expansion in the coming quarters. Aided by the best monsoon in a decade, the farm sector emerged as the main growth engine for Asia's third-largest economy, rising 7.4 percent between the July-September quarters of 2002 and 2003.