The Economy of India is the seventh-largest in the world by nominal GDP and the third-largest by purchasing power parity(PPP).[28] The country is one of the G-20 major economies, a member of BRICS and a developing economy among the top 20 global traders according to the WTO.[29]
According to the Indian Finance Ministry the annual growth rate of the Indian economy is projected to have increased to 7.4% in 2014-15 as compared with 6.9% in the fiscal year 2013-14. In an annual report, the IMF forecast that the Indian Economy would grow by 7.5% percent in the 2015-16 fiscal year starting on April 1, 2015, up from 7.2% (2014–15).[30][31]
India was the 19th-largest merchandise and the 6th largest services exporter in the world in 2013; it imported a total of $616.7 billion worth of merchandise and services in 2013, as the 12th-largest merchandise and 7th largest services importer.[32] The agricultural sector is the largest employer in India's economy but contributes a declining share of its GDP (13.7% in 2012-13).[6] Its manufacturing industry has held a constant share of its economic contribution, while the fastest-growing part of the economy has been its services sector — which includes, among others, the construction, telecommunications, software and information technologies, infrastructure, tourism, education, health care, travel, trade, and banking industries.[7]
The post independence-era Indian economy (from 1947 to 1991) was a mixed economy with an inward-looking, centrally planned, interventionist policies and import-substituting economic model that failed to take advantage of the post-war expansion of trade and that nationalized many sectors of its economy.[33] India's share of global trade fell from 1.3% in 1953 to 0.5% in 1983.[34] This model contributed to widespread inefficiencies and corruption, and it was poorly implemented.[35]
After a fiscal crisis in 1991, India has increasingly adopted free-market principles and liberalised its economy to international trade. These reforms were started by former Finance minister Manmohan Singh under the guidance of Prime MinisterP.V.Narasimha Rao. They eliminated much of Licence Raj, a pre- and post-British era mechanism of strict government controls on setting up new industry. Following these economic reforms, and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by former Prime Minister Atal Bihari Vajpayee, the country's economic growth progressed at a rapid pace, with relatively large increases in per-capita incomes.[36] The south western state ofMaharashtra contributes the highest towards India's GDP among all states, while Bihar is among its poorest states in terms of GNI per capita. Mumbai, Maharashtra is known as the trade and financial capital of India.
Overview[edit]
The combination of protectionist, import-substitution, Fabian socialism, social democratic-inspired policies governed India for sometime after the end of British occupation. The economy was then characterised by extensive regulation, protectionism,public ownership of large monopolies, pervasive corruption and slow growth.[38][39] Since 1991, continuing economic liberalisation has moved the country towards a market-based economy.[38][39] By 2008, India had established itself as one of the world's faster-growing economies. Growth significantly slowed to 6.8% 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.[40] India's current account deficitsurged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2012–13, according to Government of India's Labour Bureau, was 4.7% nationwide, by UPS method;[12] and 3% by NSSO method.[13] India's consumer price inflation has ranged between 8.9 to 12% over the 2009-2013 period.[41]
History[edit]
Main articles: Economic history of India and Timeline of the economy of India
Pre-colonial period (up to 1793)[edit]
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.[42]
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.[44] Over time, traders organised themselves into associations which received state patronage. Raychaudhuri and Habib claim this 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.[45]
Other scholars suggest trading from India to West Asia and Eastern Europe was active between 14th and 18th century.[46][47][48] During this period, Indian traders had settled in Surakhani, a suburb of greaterBaku, Azerbaijan. These traders had built a Hindu temple, now preserved by the government of Azerbaijan. French Jesuit Villotte, who lived in Azerbaijan in late 1600s, wrote this Indian temple was revered by Hindus;[49] the temple has numerous carvings in Sanskrit or Punjabi, dated to be between 1500 and 1745 AD. The Atashgah temple built by the Baku-resident traders from India suggests commerce was active and prosperous for Indians by the 17th century.[50][51][52][53]
Further north, the Saurashtra and Bengal coasts played an important role in maritime trade, and theGangetic 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.[54]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.[55]
Sean Harkin estimates China and India may have accounted for 60 to 70 percent of world GDP in the 17th century.[56]
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.[57] 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.[58] 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.[59] 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.[60]
Colonial period (1793–1947)[edit]
From the beginning of 19th century British East India Company's gradual expansion and consolidation of power brought a major change in the taxation and agricultural policies, which tended to promote commercialization 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.[62] The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, due to reduced demand and dipping employment.[63] After the removal of international restrictions by the Charter of 1813, Indian trade expanded substantially and over the long term showed an upward trend.[64] 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.[65]
British territorial expansion in India throughout the 19th century created an institutional environment that, on paper, guaranteedproperty rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures and capital markets within the company held territories. It also established a system ofrailways and telegraphs, a civil service that aimed to be free from political interference, a common-law and an adversarial legal system.[68] 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,[69]with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labor force, and extremely inadequate infrastructure.[70]
The 1872 census revealed that 91.3% of the population of the region constituting present-day India resided in villages,[71] and urbanization 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.[72]
The impact of British occupation on India's economy is a controversial topic. Leaders of the Indian independence movement and economic historians have blamed colonial occupation 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.[73]
Pre-liberalisation period (1947–1992)[edit]
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 British social democracy as well as the planned economy of the Soviet Union.[70] Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a large government run public sector, business regulation, and central planning,[74] while trade and foreign investment policies were relatively liberal.[75] 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.[76]
| “ | Never talk to me about profit, Jeh, it is a dirty word. | ” |
—Nehru, India's Fabian Socialism inspired first prime minister to industrialist J.R.D. Tata, when Tata suggested state-owned companies should be profitable, [77]
| ||
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 independence. They expected favourable outcomes from their strategy, involving the rapid development of heavy industry by both public andprivate sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-stylecentral command system.[78][79] 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.[80] 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.[81][82]
| “ | (In the current Indian regulatory system, ) I cannot decide how much to borrow, what shares to issue, at what price, what wages and bonus to pay, and what dividend to give. I even need the government's permission for the salary I pay to a senior executive. | ” |
—J. R. D. Tata in 1969, [77]
| ||
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.[83] However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.[84]
Subsequently the Emergency and Garibi Hatao concept under which income tax levels at one point rose to a maximum of 97.5%, a record in the world for non-communist economies, started diluting the earlier efforts.
Post-liberalisation period (since 1991)[edit]
Main articles: Economic liberalisation in India and Economic development in India
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. 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 theGulf 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.[85] India asked for a $1.8 billion bailout loan from the International Monetary Fund(IMF), which in return demanded de-regulation.[86]
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.[87] 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.[88] By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation.[89] This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than rural residents.[90]
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.[91] India enjoyed high growth rates for a period from 2003 to 2007 with growth averaging 9% during this period.[92] Growth then moderated due to the global financial crisis starting in 2008. 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.[93][94]
Starting in 2012, India entered a period of more anaemic growth, with growth slowing down to 4.4%.[95] Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's decision to taper quantitative easing, foreign investors had been rapidly pulling out money from India though this has now reversed with the Stock market at near all-time high and the current account deficit narrowing substantially.
India is ranked 142nd out of 189 countries in the World Bank's 2015 ease of doing business index. In terms of dealing with construction permits and enforcing contracts, it is ranked among the 10 worst in the world, while it has a relatively favorable ranking when it comes to protecting minority investors or getting credit.[19]
Sectors[edit]
Historically, India has classified and tracked its economy and GDP as three sectors — agriculture, industry and services. Agriculture includes crops, horticulture, milk and animal husbandry, aquaculture, fishing, sericulture, aviculture, forestry and related activities. Industry includes various manufacturing sub-sectors. India's definition of services sector includes its construction, retail, software, IT, communications, hospitality, infrastructure operations, education, health care, banking and insurance, and many other economic activities.[97][98]
Agriculture[edit]
Main articles: Agriculture in India, Forestry in India, Animal husbandry in India, Fishing in India and Natural resources in India
India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 17% of the GDP and employed 51% of the total workforce in 2012. As the Indian economy has diversified and grown, agriculture's contribution to GDP has steadily declined from 1951 to 2011, yet it is still the largest employment source and a significant piece of the overall socio-economic development of India.[99] Crop yield per unit area of all crops has 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.[100] The states of Uttar Pradesh,Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West Bengal, Gujaratand Maharashtra are key contributors to Indian agriculture.
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.[101] 546,820 square kilometres (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is irrigated.[102] 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.[103]
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.[104] 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.[104] India is also the second largest producer and the largest consumer of silk in the world, producing 77,000 tons in 2005.[105]
India exports several agriculture products, such as Basmati rice, wheat, cereals, spices, fresh fruits, dry fruits, buffalo beef meat, cotton, tea, coffee and other cash crops particularly to the Middle East, Southeast and East Asian countries. It earns about 10 percent of its export earnings from this trade.[18]
Industry[edit]
Industry accounts for 26% of GDP and employs 22% of the total workforce.[106] According to the World Bank, India's industrial manufacturing GDP output in 2012 was 10th largest in the world on current US dollar basis ($239.5 billion),[107] and 9th largest on inflation adjusted constant 2005 US dollar basis ($197.1 billion).[108] The Indian industrial sector underwent significant changes as a result of the economic liberalisation in India economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to the privatisation of certain government owned public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.[109] 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.[110]
Petroleum products and chemicals[edit]
Petroleum products and chemicals are a major contributor to India's industrial GDP, and together they contribute over 34% of its export earnings. India hosts many oil refinery and petrochemical operations, including the world's largest refinery complex in Jamnagar that processes 1.24 million barrels of crude per day.[111] By volume, the Indian chemical industry was the third largest producer in Asia, and it alone contributed 5% of its GDP. India is one of the top 5 world producers of agrochemicals, polymers and plastics, dyes and various organic and inorganic chemicals.[112] Despite being a large producer and exporter of chemicals, India is a net importer of chemicals given its domestic demand for products.[113]
