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Assessment of India's Economic Suitability for Investment

Paper Type: Free Assignment Study Level: University / Undergraduate
Wordcount: 3058 words Published: 12th Nov 2020

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India’s economy is the seventh-largest in the world, with a GDP of approximately USD 2.7 trillion, which accounts for approximately 3.18% of the world’s GDP (“GDP (current US$)” n.p.). The country has a diverse economy, with strong industries such as textiles, chemicals, steel, mining, machinery, pharmaceuticals and software (Zeder n.p.). Throughout this report, many economic and social indicators will be examined to determine whether India’s economy is suitable for investment by Canadian firms.


Gross Domestic Product (GDP) Growth

Figure 1: India’s GDP growth percentage annually from 1961 to 2018

Currently, India is the second-fastest-growing trillion-dollar economy in the world (“India loses place as world's fastest-growing economy” n.p.), however, it has experienced major economic slowdown over the last three years. In 2016, India’s GDP grew 8.17%, in 2017 its GDP grew 7.17% and in 2018 its GDP grew 6.98% (“GDP growth (annual %) – India” n.p.).

Figure 2: India’s GDP growth from January 2017 to July 2019

In 2019, during Q2 India’s GDP growth declined to 4.5%, which is the lowest India’s GDP has grown in any quarter since 2013 (Beniwal n.p.). Additionally, Moody’s Investors Service has forecasted that India’s GDP will only have grown 5.6% in 2019, 0.6% lower than their original forecasts of 6.2%, made earlier in the year (“Moody's cuts India's GDP […] for 2019” n.p.). However, Goldman Sachs believes that the economic slowdown is only cyclical, reporting that India’s GDP is expected to grow to 6.4% at the beginning of its 2020-21 financial year (Lee n.p.). Furthermore, the International Monetary Fund (IMF) projects that India’s GDP will grow 7% at the end of 2020 and will continue to grow thereafter (“Real GDP growth” n.p.).

Inflation Rate

Figure 3: India’s Inflation Rate from 1984 to 2018 and projected inflation rate from 2019 to 2024.

From 2012 to 2018, India’s Inflation rate has significantly decreased from 10% to 3.43%. In  2017 and 2018 the inflation rate has remained stable at approximately 3.5%, this trend is  expected to continue for 2019 overall and inflation is expected to increase slightly from 2020 to 2024, remaining stable at approximately 4% (“India: Inflation rate from 1984 to 2024 (compared to the previous year)” n.p.).

Figure 4: India’s inflation rate from November 2018 to October 2019

In 2019, the inflation rate increased each month, starting at 1.97% in January 2019 and rising to 4.62% in October 2019 (“India Inflation Rate” n.p.). The growth in inflation rate is alarming because India’s high inflation rate occurred simultaneously with its significant economic slowdown and this is the first time that inflation surpassed the Reserve Bank of India's (RBI) medium-term target of 4% since July 2018. In response to inflation and economic slowdown for India’s economy, the RBI released an announcement regarding interest rates and surprisingly kept interest rates unchanged (Nag n.p.), which has allowed India’s inflation to continue to increase. This has since caused innumerable issues including food inflation of 7.89% in October 2019. Some of the worst price increases include 26.1% for vegetables, 11.72% for pulses, 9.75% for fish and meat and 6.26% for eggs (Retail inflation breaches RBI target in October, […] 4.62% n.p.). Among non-food items, prices increased 4.58% for housing, 3.45% for miscellaneous items, 3.92% for pan, tobacco and other intoxicants, and 1.62% for clothing and footwear (“India Inflation Rate” n.p.). In 2019, due to rising prices, people of lower economic classes in India undoubtedly would have not been able to meet their basic needs, causing new people to live below the poverty line, thus increasing poverty rates.

Unemployment Rate

Figure 5: India’s unemployment rate from 1991 to 2019

Over the last three years, India’s trend for its unemployment rate has remained stable despite, inflation and economic slowdown due to the continuous demand for workers and a large percentage of unemployed people seeking jobs. The unemployment rate for India for 2017 was 2.557%, in 2018 it was 2.551% and in 2019 its unemployment rate is projected at 2.551%, according to the International Labour Organization’s (ILO) estimate (“Unemployment, […] (modeled ILO estimate) – India n.p.).

Figure 6: Differences in employment rate between men and women 2018 for OECD nations

One issue is the discrepancies between India’s employment rates between men and women. An OECD economic survey of India found the country has the largest difference between employment rates of women and men among OECD nations at 52 percentage points (Pandey n.p.).


Figure 7: A group of Indian families living in poverty

Throughout recent history, India has aimed to decrease the percentage of the population living below the national poverty line and has done so with great success. Between 2004 to 2011 poverty decline in India from 37.2% of the population to 21.9% (Poverty headcount ratio […] (% of population) – India n.p.). Data scientists at the World Data Lab, also anticipate India’s extreme poverty for 2019 will be less than 50 million people, compared to 268 million in 2011, the last year for which official data on Indian poverty are available (Kharas, Hamel, et al n.p.). Additionally, the United Nations 2019 Multidimensional Poverty Index (MPI) reported that India had the fastest reduction of its MPI in the world. In 2005/2006, 640 million people were in multidimensional poverty, which fell steeply to approximately 365.55 million people by 2016/2017, an impressive reduction of 271 million (McCarthy n.p.). Overall, India has done a phenomenal job decreasing poverty and based on previous trends, however, due to inflation and economic slowdown it is anticipate that poverty rates may surge in the short-term, but will decrease in the long-term. 

Human Development Index (HDI)

Figure 8: India’s Human Development Index (HDI) comparison to the world in 2017

In 2017, India’s HDI value was 0.640, ranking 130th out of 189 countries (“Table 1. Human Development Index and its components” n.p.). From 1990 to 2017 India’s HDI increased from 0.427 to 0.640, a growth of approximately 50%. India’s increase in HDI has come with tremendous benefits for its population, between 1990 and 2017, India’s life expectancy at birth also increased by almost 11 years. Additionally, in 2017, India’s school-age children stay in school for 4.7 years longer than in 1990. Moreover, between 1990 and 2017, India’s gross national income per capita increased by an astounding 266.6%. India’s patterns of increasing HDI has shown its strong dedication to improving the health of its people, their level of educational attainment and their standard of living. This has helped to ensure economic growth and prosperity for the future. Nonetheless, there are areas India can improve on, for example, 26.8% of India’s HDI value is lost on inequalities. This demonstrates the challenge  inequality poses for India as its economy grows (“India ranks 130 on 2018 Human Development Index” n.p.).

Debt-to-GDP Ratio

Figure 9: India’s debt-to-GDP ratio from 1991 to 2019 and projected debt-to-GDP ratio from 2020 to 2024.

From 2011 to 2019, India’s debt-to-GDP ratio has slightly increased, fluctuating between 66.8% and 69% (“General government gross debt” n.p.). According to the 2019 Interim-Union budget of India, India’s debt to-GDP ratio is second-worst among trillion-dollar emerging markets, at 68.4%, second only to Brazil. This has caused India’s economy to become vulnerable to foreign flows and global uncertainties. Additionally, India’s slight increase in debt has been one of the key contributors to its economic slowdown. (“Union Budget 2019: Debt-to-GDP ratio […] service debts n.p.). However, India’s debt-to-GDP ratio of approximately 69% for 2019 is not as bad as the same ratio for some of the largest countries in the world (in terms of GDP). For example, countries such as Japan has a debt-to-GDP ratio of 237.7%, Italy has a debt-to-GDP ratio of 133.2% and the United States has a debt-to-GDP ratio of 106.2% for 2019. Furthermore, India’s debt-to-GDP ratio is forecasted to decrease to 68.5% in 2020 and is projected to decrease yearly, reaching 65.6% by 2024 (“General government gross debt” n.p.). 


With a variety of economic and social indicators considered it has been determined that India’s economy is not currently suited for investment. It recommended to invest in India’s economy the beginning of its 2020-21 financial year, starting in April 2020 due to its projections for greater economic growth and development during this period. An investment in India’s economy during this time would present significant return on investment for Canadian Firms and provide them with an opportunity to further decrease poverty and work towards equal treatment of men and women in India’s economy. Firstly, in 2019 India is experiencing an economic slowdown and is approaching a trough in its business cycle, however according to Goldman Sachs its economy is expected to grow 6.4% at the beginning of its 2020-21 financial year (Lee n.p.). Secondly, India’s inflation surpassed the RBI’s medium-term target of 4% and the RBI unexpectedly kept their interest rate unchanged despite the increasing inflation in late 2019, however its inflation is projected to remain stable at 4% from 2020 to 2024 (“India: Inflation rate from 1984 to 2024 (compared to the previous year)” n.p.). Thirdly, the unemployment rate has remained stable for India over the last three years and it is predicted the unemployment rate will decrease slightly to approximately 2.4% because of projected economic growth in 2020 (“Unemployment, […] (modeled ILO estimate) – India n.p.). Fourthly, through research, it is predicted that poverty rate will increase slightly in 2019 and early 2020 because of economic slowdown, where the GDP only grew 4.5% in Q2 of 2019 (Beniwal n.p.). The poverty rate is also projected to grow in 2019 and early 2020 because of the increasing inflation rates which rose to 4.62% in October 2019 (“India Inflation Rate” n.p.), however, it is anticipated that the poverty rate will decrease in the long-term (Nag n.p.). Fifthly, India’s HDI is continuously improving year after year, however, in 2020 India is trying to improve its HDI further by providing more opportunities to girls and women to reduce inequalities. An investment in India’s economy would ensure a variety of social protection measures and equal treatment for the employment and education of both sexes, which will promote economic growth and ensure that the gains of economic development are shared widely throughout India (“India ranks 130 on 2018 Human Development Index” n.p.). Lastly, in 2019 India’s debt-to-GDP ratio is relatively high at approximately 69%, which is one of the main causes of economic slowdown, however, in 2020 its debt-to-GDP ratio is forecasted to decrease to 68.5% in 2020 and is projected to decrease yearly, reaching 65.6% by 2024. Subsequently, increasing its economic growth for 2020 and future years. (“General government gross debt” n.p.).


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