Introduction to Indian Economy

Choose a transition economy India, if possible. Research that country and its recent economic progress. Do you believe its economy will flourish or stagnate? Why? What can that country’s Govt. do to the economy flourish?

The term “transition economy” has often been used to describe the process of change in economies (such as in Eastern Europe) which are passing from a socialist economic system to a free market system based system on private property. However a second definition of “transition” which is more useful in the current context refers to the change from one type of market economy where patrimonial or patron client relationships are widespread to a rules-based system of market relationships. Transition towards political pluralism and a rules-based market system has been a key feature of the transition in countries such as Indonesia, the Philippines, Cambodia, and Russia.

Starting in the early 1950s India embarked on a “mixed” economic strategy that attempted to combine features of capitalism and socialism. At the time, India’s approach was praised by many of the world’s leading development economists and by other international donors. The strategy provided for a large public sector, import substitution, and a highly regulated private sector. The result was truly “mixed” for it produced both the slow growth of socialism and the inequalities of capitalism. While the newly industrialized countries of East Asia took another path, India’s political leadership held fast to the Nehru/Mahalanobis strategy well into the 1980s.

The current efforts of the Indian government, under the intellectual guidance of its able finance minister, to play catch-up by embarking on a series of market-oriented economic reforms. India still has a long way to go, but the limited reforms have already led to higher exports and greater industrial productivity. The barriers to continued reform are formidable, they depend on how quickly they produce results both in terms of efficiency and growth and a reduction in poverty. The reforms also depend upon political struggles over religious and ethnic identities that have little to do with the economic reforms.

INDIAN ECONOMY OVERVIEW

The Indian Economy is among the largest economies of the world ranking ninth position in terms of GDP and ranking fourth in terms of PPP. India is part of the BRICS and of the G-20 nations, moreover, to being participants of the ASEAN. In India, the per capita GDP was $3,408 in 2010, turning it a low-income group countries. The Indian economy in the pre independence era (before August, 1947) was following the economic policy of the Soviet Union having socialist practices, high import duties, large public sectors and less private participation typifying it, contributing to huge inefficiencies and rampant corruption. However, on the later part, India implemented principles of free market and liberalized its economic policies to global trade under the leadership of Manmohan Singh, the then Finance Minister of Indian under the guidance of the then Prime Minister P.V.Narashha Rao. After these strong measures of economic reforms, the economic growth of India accelerated at a quick pace achieving high growth rates and huge enhancementin the incomes of inhabitants.

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.

According to the official estimates, Indian economy is expected to grow at 7.6% (+/- 0.25%) in the fiscal year 2012-2013. However, leading financial organisations and economic think-tanks expect Indian economy to grow slower than official projections.

GROWTH PROSPECTS OF INDIAN ECONOMY

Economic development in India still depends on the various sectors that constitute the Indian economy – agriculture, services and manufacturing industries.

India is rated as one of the top economies in the world in terms of purchasing power parity(PPP) of the gross domestic product (GDP) by leading financial entities of the world, such as the International Monetary Fund, the World Bank, and the CIA

As far as agriculture is concerned, India is the second largest in volume of output. Certain related sectors of agriculture have played a major role in the development of the Indian economy by providing employment to a number of people in the forestry, fishing and logging industries.

In 2009, the agricultural sector contributed 17.5% to the entire GDP, and more than 50% of total labor force working in India is employed in the agricultural sector.

Production volume has gone up in Indian agriculture at a consistent rate since the 1950s. Much of this improvement can be attributed to the five-year plans that were established for the development of Indian agriculture. Developments in irrigation processes, as well as various modern technologies used have contributed to the overall advancement of agricultural processes.

Substantial amounts of research and development have been carried out in the agricultural space in India by organizations such as the Indian Agricultural Research Institute, the Indian Agricultural Research Statistics Institute and the Indian council of Agricultural Research.

In the industrial arena, India is 14th in terms of volume of factory output. Various developmental initiatives are also being carried out in the areas of gas, mining, electricity and quarrying. All these sectors contribute significantly to the GDP, and provide jobs to India’s citizens.

India is regarded as the 15th best economy in terms of production in the services sector. A sizeable amount of the Indian workforce is also employed by the service sector. In the ten-year period between 1990 and 2000, the rate of growth has been 7.5%, up from 4.5% during the 30-year period from 1951 to 1980.

Verticals, such as information technology (IT), software development, call centers, IT outsourcing, Business Process Outsourcing (BPO) and other IT-enabled services, have been the biggest contributors in the services sector of the Indian economy.

An increasing number of Indian companies have emerged as leading global players. The following Indian companies are part of the Forbes Global 2000 list for the year 2009:

Reliance Industries Limited (RIL)

State Bank of India (SBI)

Oil and Natural Gas Corporation (ONGC)

Steel Authority of India Limited (SAIL)

Reliance Communications

Larsen and Toubro Limited (L&T)

Bharat Petroleum Corporation Limited (BPCL)

Bharat Heavy Electricals Limited (BHEL)

HDFC Bank

Tata Consultancy Services (TCS)

India’s foreign investment policy allows 100% foreign ownership in most sectors, yet FDI inflows remain weak, averaging about 1% to 1.5% of GDP annually. These amounts could be significantly higher, but due to corruption, bureaucratic delays and regulatory uncertainty, foreign companies have held back. A prominent South Korean steel company has struggled to start a mining project for 5 years. Lack of regulatory clarity between the Federal government and the states was a significant factor in delaying the process. India’s exports should get a boost from the rupee’s weakening in the coming 12-24 months, though currency depreciation is not a solution to boosting long-term export potential. Meanwhile, EU banks are scaling back activity in India due to concerns closer to home, and this could open the door for other players to arrive.

Recent Indian economic developments

Some of the other important economic development India is as follows:

India has become a key contributor in global research and of growth in the Asia-Pacific (APAC) region, playing host to one-third of top 1,000 research and development (R&D) spenders in the world, according to a Zinnov study titled ‘Global R&D Benchmarking Study’

The Indian cloud market estimated at US$ 535 million in 2011 is expected to grow more than 70 per cent in 2012 and almost 50 per cent in the next three years, according to International Data Corporation (IDC)

The Government of India has approved 14 foreign direct investment (FDI) proposals worth Rs 1,584.11 crore (US$ 284.91 million), including that of Abhijeet Power Ltd to bring in FDI worth Rs 674 crore (US$ 121.22 million) and CLSA Singapore’s proposal to invest Rs 225 crore (US$ 40.47 million)

Foreign institutional investors (FIIs) have infused Rs 4,800 crore (US$ 863.31 million) into stock markets during August 1-10, 2012 – the highest ever on a year to date basis, according to the data available with the Securities and Exchange Board of India (SEBI)

The total merger and acquisitions (M&A) and private equity (PE) deal value in July 2012 stood at US$ 2 billion, from US$ 1.4 billion in the previous month due to an increase in outbound deals, as per Raja Lahiri, Partner, Transaction Advisory Services, Grant Thornton India. “PE/ VC deal space continued to see activity in the e-commerce/ Internet space and in renewable energy. Companies which have cash will drive M&A deal momentum going forward, since the time offers good deal opportunities in terms of valuation,” highlighted Lahiri

India is developing into an open-market economy, yet traces of its past autarkic policies remain. Economic liberalization, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country’s growth, which has averaged more than 7% per year since 1997.

India’s diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly more than half of the work force is in agriculture, but services are the major source of economic growth, accounting for more than half of India’s output, with only one-third of its labor force.

In 2010, the Indian economy rebounded robustly from the global financial crisis – in large part because of strong domestic demand – and growth exceeded 8% year-on-year in real term.

Sector’s Growth of the Indian Economy

Indian GDP Over the past Decade

India has become a key contributor in global research and of growth in the Asia-Pacific (APAC) region, playing host to one-third of top 1,000 research and development (R&D) spenders in the world, according to a Zinnov study titled ‘Global R&D Benchmarking Study’

The Indian cloud market estimated at US$ 535 million in 2011 is expected to grow more than 70 per cent in 2012 and almost 50 per cent in the next three years, according to International Data Corporation (IDC)

INDIA AS A FLOURISHING ECONOMY

Languishing for several decades in terms of growth perspective, India has now turned around and presently oscillating within a range of 8-9%, which is second highest performance after China in the global arena. Many renowned economists of the Globe are of the opinion that India would maintain a high rate of growth potential in future also in spite of its different problems. Their assessment are based on the facts that India would be capable of maintaining its workforce strengthening in the coming days as it has a positive rate of birth in terms of its population growth and as such this increasing number of workforce would result in more savings and more investment in the country. Besides, this would raise the level of productivity also simultaneously. Increased level of investment in turn would ensure infrastructure development in India as well and thereby enhance the production capability of economy in a significant manner.

A large contingent of workforce that India holds, enable it to take up the labour intensive jobs throughout the Globe than the other countries more easily and it would capture more outsourcing jobs in future from other developed countries.

STEPS TAKEN BY GOVERNMENT

A number of items were earlier reserved for production in the small-scale sector, defined in terms of units with investment in plant and machinery below Rs 35 lakhs. In many cases, this investment limit was too low for efficient production of the reserved items. The list of reserved items has been reviewed, and a number of items have been deleted, or in some cases redefined, to enable larger-scale investment to be made for the production of a large number of items.

In the area of trade policy, the Government accepted the principle of shifting from quantitative controls to tariff controls. Implementation, however, was left to be determined in the light of practical possibilities. Some tariff adjustments have indeed been made along these lines.

No major change was made in the degree of import liberalization in 1985 and 1986, but it was reaffirmed that the liberalization that had earlier taken place over the first half of the eighties would stay in place. The affirmation that import policy would not be reversed was an important signal in a situation where the balance of payments was beginning to show strain.

A list of industries was notifies where economies of scale are important, and for these industries minimum economic scales of plant were specified. Existing units below these sizes will be allowed to expand freely up to the minimum economic size, and new units will be licensed only for these of higher sizes.

The coverage of industrial licensing was reduced by delicensing twenty-five industries and eighty-two pharmaceutical products.

Where licensing remained in operation, procedures were simplified and industrial licensing was much more liberally operated. Furthermore, greater flexibility was provided to producers to expand capacity within existing licensed capacity. Provisions for allowing automatic expansion in licensed capacity, which existed earlier, were liberalized. For a number of products, licenses were “broadbanded” so as to cover similar products, thus allowing flexibility in varying the product mix.

Twenty-seven industries were added to the list of industries for which large houses are exempted from the special scrutiny normally required.

Finally, a number of measures were taken to improve the competitive position of exporters. The procedures for giving exporters access to imports at international prices were further improved in several ways and direct tax incentives for income from exports were strengthened. Some of these measures are applicable to all exporters, but others were aimed at particular export sectors. The customs duties on capital goods for certain industries deemed to have export potential (gems and jewelery, garments, leather, etc.) were reduced to 35 percent in an effort to bring the cost of production in these industries more in line with world prices

A major step was taken towards rationalization of the indirect tax system in 1986 by introducing a modified value-added tax, covering a wide range of commodities. The system provides for adjustment of the duties paid on inputs against the tax due on output. Although tax rates on outputs were simultaneously raised to avoid any net reduction in effective taxation in the initial stages, it was nevertheless an important reform. The total burden of excise taxation on a commodity is now more apparent since earlier-stage duties are adjusted against the tax. This paves the way for restructuring of indirect taxation in the future. The Government has indicated that restructuring of indirect taxes will be attempted industry by industry.

Steps have also been taken to rationalize the structure of customs duties. The range of variation of tariffs for capital goods has been reduces. Tariffs were raised on a number of items earlier allowed at 55 percent duty and lowered on others where the tariff was 101 percent, and all these items now face a uniform duty of 85 percent (inclusive of a 15 percent countervailing duty which offsets the 15 percent domestic excise duty on capital goods). In addition, the customs duty structure for components and raw materials has been both lowered, and rationalized, for selected sectors. It has also been indicated that such restructuring will continue to be made sector by sector.

CONCLUSION

From a recent review of a leading US financial firm, it has been stated that India would be able to keep its rate of annual GDP growth not below than 8% up to 2020 and within coming fifty years surpass the Economy of China. India would also gradually deregulate its labour market policy with the passage of time and bring about remarkable change in the field of education and training. Policy of more reform oriented programmes would be taken up and participation of multinational companies through merger and acquisitions would take place rapidly in the foreseeable future resulting in more economic activities. India is thus poised to take a definite turn in view of its micro as well as macroeconomic front.