Present Structure of the Indian Economy - Assignment Example

Present Structure of the Indian Economy Introduction to the Indian Economy A study of the structure of the economy and structural changes is necessary for understanding India’s economic development and guiding policies to sustain or improve economic growth. The Indian economy has barely been established over 60 years yet it is already among the leading economies of the world in many ways. It has one of the largest pharmaceutical, software, milk, and steel industries in the world. Over half of India’s labour has traditionally been in the agricultural industry. India’s information technology sector and other knowledge-based industries are the main driving forces for its rapid rate of economic growth, among the fastest in the world. If present trends continue, it could very well become the de facto IT/knowledge center of the global economy this century. Indeed, along with China the two economies are on course to becoming the next two global superpowers. What hampers India however are underlying structural weaknesses, especially the problem of widespread poverty whilst the situation of underdevelopment in its financial system is improving. The Present Structure and Direction of the Economy India has a highly productive, diversified and interconnected economy. The present structure of the Indian economy started taking shape from the economic reforms of the last decade. Thus the nineties brought about the major structural shift we see today. India’s current economic growth rate is 8.7% down from over 9% over the past few years (Economic Survey 2007-08). The “retardation this year was expected” (CSO). India’s strong private sector is believed to account for over 75% of its GDP. “Services are the major source of economic growth, accounting for more than half of India’s output with less than one third of its labor force” (CIA World Factbook). The GDP composition by sector is illustrated in the graph below. The shares of the primary and tertiary sectors are roughly reversed from the situation following India’s independence i.e. agriculture accounted for over half of the GDP in the middle of the last century. Agriculture is still India’s leading industry but it has a lower share of the GDP than before. And likewise the services sector accounted for about half of what it does today. So its growth is a feature of the present day new structure of the Indian economy. The industrial sector has only steadily increased overall. India’s population is one of its strongest of assets. Its middle class alone is over 300 million, which is larger than the US population. It provides her with one of the greatest skilled manpower in the world. The sheer size of its well-educated workforce, who are also well versed in the English language, have been a major contributing factor in the success of its software industry in particular. A World Bank study of the effects of India’s human capital endowment on the performance of fourteen of its major states showed that “the greater availability of skilled workers had a positive and significant impact on output in the service sectors” (Mattoo, 2008), which are more skill intensive. The same was not found for its manufacturing sectors. Input Based Scheme of Classification This is a classification of sectors based on natural resources, research & development, and labour & capital used in the production process as opposed to the primary, secondary & tertiary scheme used above. This helps “to reveal the importance of the resource intensive, technology intensive and labour and capital-intensive sectors in the production structure of the Indian economy” (Dasgupta, 2005). It also “shows the nature and the degree of interdependence of an economy” (ibid). Ricardo sectors (natural resource intensive) e.g. related to agricultural crops, agro based sectors, minerals, leather, petroleum, and cement. High-Technology sectors (high technology intensive requiring relatively greater research & development) e.g. electrical, electronic, mechanical, transport, and communication equipment, education, and medicine. Heckscher-Ohlin sectors (capital-labour intensive using relatively standardized production technologies) e.g. fertilizers, iron, non-ferrous metals, steel, banking, and transport services. The Dasgupta- Chakraborty (2005) study showed that the both H-T and H-O sectors are “strongly integrated with other sectors in terms of backward linkages but are weakly linked in terms of the forward linkages.” The situation is mixed for the Ricardo sectors. Importantly, the study reveals that the structure of the Indian economy “is neither a traditional nor a highly modernized one.” Capital-intensive industries should be playing a greater role as the engine of growth. Further, certain services like trade and transport as well as capital–intensive sectors are identified as key sectors of the Indian economy such that “investment in these sectors can speed up the industrialization process, a such sectors will stimulate greater economic activities in other sectors.” On the other hand, some key Ricardo sectors such as petroleum products and H-O sectors such as non-ferrous metals, industrial and electrical machinery “are seen to be dependent on import to some extent.” Another significant finding was that none of the H-T sectors were significantly dependent on export demand. India’s Financial System The Mumbai Stock Exchange (BSE) lists over 6,600 companies, less only than the New York Stock Exchange. The market value of India’s publicly traded shares stood at $650 billion as of 31 December 2008, ranked 17th in the world (CIA World Factbook). India also has a national stock exchange. India’s stock of money as of end of December 2007 was $250.9 billion (8th in the world), and of quasi-money was $647.3 billion (9th in the world). It also had $250 billion reserves in foreign exchange and gold. Recent years have witnessed “a soaring stock market, significant foreign portfolio inflows including the largest private equity inflows in Asia, and a rapidly developing derivatives market” (Allen, 2007). India has a number of bank types including commercial, co-operative, Post Office saving, and regional rural banks, apart from its central bank known as the Reserve Bank of India (RBI). The RBI regulates India’s financial and banking system, formulates monetary policy and prescribes exchange control norms as well as foreign exchange (Embassy of India). Recently however, there have been major changes in the banking system “with deregulation of interest rates and the emergence of strong domestic private players as well as foreign banks” (Allen, 2007). The commercial banking sector comprises of public sector, private and foreign banks. India’s financial system has a two-tier structure with All India financial institutions and state level institutions. India’s financial system is seen as effective in allocating capital to private companies for example, but overall it is also seen to be a hindrance to economic growth due to substantial underdevelopment (Farrell, 2005). However, the situation over the last few years is changing for the better. Microfinance in particular has helped tremendously in attracting venture capital. Current Problems & Recommendations Despite the aforementioned benefits of a large skilled manpower and an abundant supply of cheap labour, the large population is also one of India’s greatest burdens. India’s growth rate over the years has been impressive but its income per capita is still substantially lower than that of the US. In 2008 it was an estimated $2,800, which is 168th in the world. A related problem is that of growing income inequalities in India. As for poverty, there are millions of people still living in conditions without a proper and uninterrupted supply of water and electricity. Poverty may be on the decline but it is still a huge problem. So measures must be taken to control the population, alleviate poverty further and provide a more equitable distribution of income. In addition to poverty, India also has problems with pollution and other environmental concerns, natural resource constraints, especially fresh water, food shortages in some areas, political corruption, the provision of education, the existence of black markets, overburdened legal system etc. All these problems affect economic development and must therefore be tackled. With respect to trade and finance, it is noted that foreign access to many of India’s key sectors are restricted by high tariffs, with a notable exception of telecommunications. There is also little progress in the privatization of public industries. The Indian government should therefore continue the program of opening its economy and privatization based on the success of its telecommunications and information technology sectors, and reduce high tariffs. Where India has a comparative advantage as in labour-intensive sectors with high exports, it should be fully exploited. Exports have increased a lot in recent years but they still only account for about 10 percent of GDP. India has an immense potential but it needs to resolve its structural deficiencies so as to capitalize on its potential even better. Works Cited Allen, Franklin, Chakrabarti, Rajesh and De, Sankar. India’s Financial System. Oct. 27, 2007. 30 June 2009: http://finance.wharton.upenn.edu/~allenf/download/Vita/indias%20financial%20system.pdf. CIA World Factbook. https://www.cia.gov/library/publications/the-world-factbook/geos/IN.html. June 1, 2009. CSO. Economic Survey 2007-2008. Indian Export Import Portal. 30 June 2009: http://exim.indiamart.com/economic-survey. Dasgupta, Paramita and Chakraborty, Debesh. The Structure of the Indian Economy. Paper submitted for the Fifteenth International Input-Output Conference, Renmin University of Beiging, China, June 27-July 1, 2005. Embassy of India. Financial System. 30 June 2009: http://www.indianembassy.org/newsite//Doing_business_In_India/Financial_System_in_India.asp. Farrel, Diana and Lund, Susan. Reforming India’s financial system: Its underdevelopment is hindering the country’s economic growth. McKinsley Quarterly, Sept. 2005. Mattoo, Aaditya. Human Capital and the Changing Structure of the Indian Economy. World Bank Policy Research Working Paper No. 476. Social Science Research Network. March 1, 2008. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1149079. Read More