Economy of India

The economy of India is the eleventh largest economy in the world by nominal GDPand the fourth largest by purchasing power parity (PPP). 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. According to the book 'Contours of the World Economy, 1-2030AD' by Angus Maddison, India was the largest economy from the year 1 AD until the colonial period whereupon it was taken over by other countries such as China and the U.K. Economists predict that by 2020, India will be among the leading economies of the world. According to the BRIC report, published by Goldman Sachs, India will be the second largest economy after China by 2043.

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.Since 1991, continuing economic liberalisation has moved the country toward 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 liberalize business regulations. By 2008, India had established itself as the world's second-fastest growing major economy. However, the year 2009 saw a significant slowdown in India's GDP growth rate to 6.8% 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.

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. 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%. The labour 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. Major industries include telecommunications, textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and pharmaceuticals.

India's per capita income (nominal) is $1,030, ranked 139th in the world, while its per capita (PPP) of US$2,940 is ranked 128th. Previously a closed economy, India's trade has grown fast. 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.

History

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

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

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

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.

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.

The 1872 census revealed that 91.3% of the population of the region constituting present-day India resided in villages, 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.

Religion, especially Hinduism, and the caste and the joint family systems, played an influential role in shaping economic activities. 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.

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.

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. India had approximately 32.33% of the GDP of the whole world at that time. 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. 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 30 million. 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.

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. The economic policies of the British Raj effectively bankrupted India's large handicrafts industry and caused a massive drain of India's resources. 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". 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. 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, 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.

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 labour and financial markets, a large public sector, business regulation, and central planning. 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. Capitalism and Private enterprise 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.

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. 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. 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".

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.

Since 1991

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

In the late 70s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes and small scale industries are created 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 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. India asked for a $1.8 billion bailout loan from IMF, which in return demanded reforms.

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. 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. 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. 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. In 2009 India purchased 200 Tons of Gold for $6.7 billion from IMF as a total role reversal from 1991.

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 Motors' Nano, the world's cheapest car.

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

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. 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.

Textile manufacturing is the second largest source for employment after agriculture and accounts for 26% of manufacturing output. 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. Dharavi slum in Mumbai has gained fame for leather products. Tata Motors' Nano attempts to be the world's cheapest car.

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.

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. In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world. 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.

Organized retail such 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 to states, from states, and even within states.

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

Agriculture

Farmers work inside a rice field in Andhra Pradesh. India is the second largest producer of rice in the world after China and Andhra Pradesh is the 2nd largest rice producing state in India with West Bengal being the largest.

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 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.

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. It also has the world's largest cattle population: 193 million. It is the second largest producer of wheat, rice, sugar, cotton, silk, peanuts and inland fish. It is the third largest producer of tobacco. India is the largest fruit producer, accounting for 10% of the world fruit production. It is the leading producer of bananas, sapotas and mangoes.

India is the second largest producer and the largest consumer of silk in the world, with the majority of the 77 million kg (2005) 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".

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.

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.

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.

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

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.

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).

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. However, the Indo-US nuclear deal has paved the way for India to import uranium from other countries. 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).

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.

India's oil reserves, found in Mumbai High, parts of Gujarat, Rajasthan and eastern Assam, meet 25% of the country's domestic oil demand. India's total proven oil reserves stand at 11 billion barrels (1.7×109 m3), of which Mumbai High is believed to hold 6.1 billion barrels (970×106 m3) and Mangala Area in Rajasthan an additional 3.6 billion barrels (570×106 m3).

In 2009, India imported 2,560,000 barrels (407,000 m3) of oil per day, making it one of largest buyers of crude oil in the world. 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.

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.

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.

External trade and investment

Further information: Globalisation in India

Global trade relations

In March 2008, India's annual imports and exports stood at US$236 and US$155.5 billion respectively. Shown here is the Chennai Port.

India's economy is mostly dependent on its large internal market with external trade accounting for just 20% of the country's GDP. In 2008, India accounted for 1.45% of global merchandise trade and 2.8% of global commercial services export. 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. 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. 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. 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. Its September 2010 exports were reported to have increased 23% year-on-year to US $18.02bn, while its imports were up 26.1% at $27.14bn. At US$13.06bn August's trade gap was the highest in 23 months but the economy is well on the road to cross $200 billion mark in exports for the financial year 2010-11. 

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.

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. 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.

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. 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 252.5 billion rupee.

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. 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.

Foreign direct investment in India

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

Rank Country Inflows

(Million USD) Inflows (%)

1 Mauritius 85,178 44.24%

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); 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. 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.

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. 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 and for 2008-09, it is expected to be above $35 billion. 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.

Currency

The RBI headquarters in Mumbai

Main articles: Indian rupee and Reserve Bank of India

The Indian rupee is the only legal tender in India. The exchange rate as on 23 March 2010 is 45.40 INR to the USD,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).

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.

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).

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

As of 2005:

86% 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.

76% 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.

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.

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. 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." 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.

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 famines since the Green Revolution in the early 1970s. While poverty in India has reduced significantly, official figures estimate that 27.5% of Indians still lived below the national poverty line of $1 (PPP, around 10 rupees in nominal terms) a day in 2004-2005. 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 with most working in "informal labour sector with no job or social security, living in abject poverty."

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. 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. Recent statistics in 2010 point out that the number of high income households has crossed lower income households.

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.

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. Only 10% of the workforce is in regular employment. India's labor regulations are heavy even by developing country standards and analysts have urged the government to abolish them.

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.

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.

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

Economic trends

India's 300 million strong middle-class population is growing at an annual rate of 5%. 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.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.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

Improve Governance

Raise Educational Achievement

Increase Quality and Quantity of Universities

Control Inflation

Introduce a Credible Fiscal Policy

Liberalize Financial Markets

Increase Trade with Neighbours

Increase Agricultural Productivity

Improve Infrastructure

Improve Environmental Quality.

Issues

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"

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.

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. Irrigation facilities are inadequate, as revealed by the fact that only 52.6% of the land was irrigated in 2003–04, 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. 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. The most important structural reform for self-sufficiency is the ITC Limited plan to connect 20,000 villages to the Internet by 2013. 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.

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 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.

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. The 2010 report by Transparency International ranks India at 87th place and states that significant setbacks were made by India in reducing corruption

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.

The current government has concluded that most spending fails to reach its intended recipients. Lant Pritchett calls India's public sector "one of the world's top ten biggest problems — of the order of AIDS and climate change". 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".

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. 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.

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. The right to education at elementary level has been made one of the fundamental rights under the Eighty-Sixth Amendment of 2002. However, the literacy rate of 65% is still lower than the worldwide average and the country suffers from a high dropout rate.

Infrastructure

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

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. 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 which has helped in a sustained growth rate of close to 9% for the past six quarters.

Some 600 million Indians have no means of 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. Almost all of the electricity in India is produced by the public sector. Power outages are common. 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/d (124,800 m3/d). In 2007, electricity demand exceeded supply by 15%. Multi Commodity Exchange has tried to get a permit to offer electricity future markets.

India has the world's third largest road network in the world. Container traffic is growing at 15% a year. 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.

Water supply is a major problem even in urban India, with most cities getting water for few hours during the day and in some cases, after several days. 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."

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.

India's restrictive labor regulations hamper the large-scale creation of formal industrial jobs.

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.

Economic disparities

Main articles: 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

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.

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

Between 1999 and 2008, the annualized growth rates for Maharashtra (9%),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%). However, In 2009-10, Bihar witnessed a growth of about 12.6%, and ended up becoming the 'fastest growing state' , 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. On the other hand, rural Haryana (5.7%) and rural Punjab (2.4%) compare well with middle-income countries.

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 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.

(source:wikipediA)