Indian Economic Growth - Essay Example

Indian Economic Growth

 India: Economic History If one were to trace India’s economic history, one would need to commence 5000 years ago with the flourishing economy of the Indus Valley Civilization (Maps of India, n.d ). History has documented that although people of the Indus Valley Civilization (2800 BC and 1800 BC) were primarily agrarian, there was trading with some of the countries in the Middle East. The Vedic age brought into existence urban centers in North India thus catapulting trade and commerce in the region. There is evidence to suggest that the ancient Indians traded products like the Dhaka Muslin, pepper, indigo, opium, textiles and handicrafts with the Roman Empire, the Middle East and South East Asia and Europe in exchange for gold and silver. With the entry of the Europeans in the 16th Century, there was a significant shift in the trading patterns of the country. The British Raj clearly controlled the course of the Indian economy in order to preserve the area as a market for British manufacturers. The focus of trade and commerce during the British rule was spices and cotton and as a result, heavy industries and industrialization were completely neglected. The 1947 war for an Independent India and the subsequent partition from Pakistan heavily dented the Indian economy (Cultural India, n.d). There was a need for rapid industrialization but this was oft uncared for as economic policies leaned heavily towards being socially oriented and centrally controlled. In 1950, the main focus areas were agriculture, fishing and forestry and this comprised 58.9% of India’s GDP. Jute and cotton textile manufacturing along with other industry contributed a mere 10.3% GDP the same year. These areas showed great decline during the 1960s and the 1970’s. The 1980’s saw an improvement in the rate of growth of India’s economy with governments realizing that it was important to loosen the tight control that the state had on the growth of the Indian economy. For instance, between the years 1980 to 1989, the annual growth rate of the economy stood at 5.5 percent with industry growing at an annual rate of 6.6 percent and agriculture at a rate of 3.6 percent. Investment rose from about 19 percent of GDP in the early 1970s to nearly 25 percent in the early 1980s (Maps of India, n.d). Political leaders finally realized that a heavily state controlled economy would not yield the desired results and hence a new policy that focused on liberalization, globalization and privatization was born. This, automatically generated results and India witnessed tremendous progress post-liberalization. India: Current Scenario If one is to use the PPP (Purchasing Power Parity) as an Index, India is the fifth largest economy globally and when measured in terms of the USD exchange rate, we rank Number 10 in the world, with a GDP of US $1.0 trillion (EconomyWatch, 2007). Our economy is diverse, vibrant, dynamic and presents a tremendous amount of growth opportunities with new sectors taking centre-stage catapulting India to global recognition. With a GDP growth rate of 9.2% at the end of the second quarter of 2006–2007 and 9.6% in 2006, India is the second fastest growing major economy in the world. Growth has been spurred by huge market reforms, huge FDI inflows, rising foreign exchange reserves, a phenomenal software and real estate boom and a prospering capital market (EconomyWatch, 2008). While India’s economy is still primarily driven by agriculture, (with 66% of the Indian population earning its livelihood from this sector), the country has witnessed a great deal of growth from the manufacturing industries, textiles and handicrafts and the service sector. In fact, the services sector has assumed an integral role in the Indian economy. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. With a large number of graduates, highly skilled professionals and above all a vast English speaking population, India has secured its place as an extremely popular outsourcing hub in the areas of technical support and customer services. Companies in the United States and United Kingdom, in particular have seen the value in the ‘affordability’ factor India provides and have thus off-shored assignments in the areas of IT technology, customer service, financial sector, pharmaceuticals and biotechnology, amongst others. Sectors that have evolved include aviation, nanotechnology, retailing, pharmaceuticals, manufacturing, telecommunications and tourism. India’s Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10% (EconomyWatch, 2008). However the sharp rise in inflation (although the Reserve Bank of India had set the inflation level at 4% for 2008, it was a whopping 11%, the highest level witnessed by the nation in over a decade) and the impact of the global slowdown are proving to be extremely testing at this point (EconomyWatch, 2008). Given that over half of India’s services and merchandise exports are to the United States, India is greatly impacted by the slowdown in the US economy. In addition India has to counter the fact that its government is partially influenced by the ‘Left parties’ or socialist movements. There has been a great deal of control in the Indian economy in allowing the participation of the private sector in the economic progress, the FDI (Foreign Direct Investment) cap and also foreign trade. The biggest challenge faced by the nation at this point is to tackle the nations poverty and bridge the widening disparity between the rich and the poor. As of 2004, as per official surveys, 27% of India’s populace lived below the poverty line. In order to reduce the inflation, the government has been forced to implement a tighter monetary policy and this will further slow the Indian economy. An enormous challenge the country is up against is India’s public debt, which is 58% of the GDP. Currently the Indian government is focused on the growth of the country’s infrastructure as they believe that this will eventually lead to economic growth. In fact, 23.8 trillion rupees, approximately $559 billion, has been earmarked towards this sector in the 11th Five year plan (EconomyWatch, 2008). Investment will be pumped into the railways, ports, roads and airports as policymakers believe that this will be vital for the progress of the Indian economy. At this stage, the Indian government has taken several positive steps such as implementing appropriate exchange rate methods and good external debt management. Also, in February 2009, the government further opened-up certain sectors such as insurance, telecom and retail, to Foreign Direct Investment. These positive policies and maturity in governance have assisted India in maintaining an enviable growth rate in spite of the recession worldwide. The fact is that India as a nation has added more new members to the Forbes Global 2000 than any other country in the last four years (EconomyWatch, 2008). Indian Economy: Future Prospect According to a recent report from the Asian Development Bank (ADB), India’s growth rate has been pegged at a mere 6.5% due to the fact that the country is staggering from the effects of the financial crisis worldwide (Asian Development Bank, 2008). This has deeply influenced the country’s banking and financial markets. Rapidly rising inflation (mainly due to the rising oil prices) has eased up to a certain extent with oil prices falling considerably. Although the Indian economy is not entirely dependant on the US and Europe, one can be sure that the slowdown experienced by these countries will affect India’s exports in its own capacity. India’s economic slowdown is well underway with reduced industrial production, decreased manufacturing and weaker exports (Asian Development Bank, 2008). The liquidity crunch will only worsen in 2009 and it is predicted that the real GDP will be at a low 3.5% this fiscal. Elevated interest rates and a damp global and domestic outlook have caused companies to scale back investment drastically. Investment growth will be hampered by lack of business confidence, a tremendous drop in risk appetite by Foreign Financial Institutions and the inability to secure domestic financing, amongst others. The country’s fiscal deficit will be considerably higher than the budgeted 2.5 % of India’s GDP when the budget was presented last year ( this was revised to 6% in the interim budget that was presented in February 2009) due to the various stimulus packages announced by the government (Thaindian News, 2009). The effects of the stimulus packages announced are expected to show in the first quarter of the next fiscal. At present there are several issues that are plaguing the Indian economy. For one, the country is experiencing job losses across sectors from aviation, software, BPO’s (Business Process Outsourcing) and export-oriented industries like textiles and gems (Thaindian News, 2008). Then there is the issue of an extremely volatile stock market and most companies that were looking at a public issue in the year 2009, have now had to shelve their plans until things look up. Many predict that the next logical step for many industries such as aviation would be consolidation with mergers and acquisitions being the order of the day in order to survive the slowdown. According to experts, US businesses will ultimately reduce outsourcing and hold back growth plans (The ASSOCHAM Business Barometer, 2007). The outsourcing industry which was deemed as the ‘sunrise’ industry is experiencing a slowdown as well and one can only wait and see whether the industry will be able to bag contracts like they once did. Another fallout of the slowdown in the economy is the lack of entrepreneurs who hold the key to the future of India’s economy. The main threats that the nation will have to tackle are to first get inflation under check, then, spread the benefits of growth more equitably and across all sections of society, next, accelerate the pace on infrastructure and investment projects that will determine the long term development of the economy of the nation and finally take steps to deal with financial uncertainty effectively (Economic Help, 2009). Clearly in order to rise above the global slowdown, policy makers need to accelerate the country’s reforms and vie for more investment. The fact of the matter is that the Indian economy has the advantage of being savings and investment driven and this has put the prospect of fiscal recovery slightly higher that most other nations in the face of a global slowdown (EconomyWatch, 2008). The correct fiscal and monetary measures can see India pushing forward and rising above the crises effectively and successfully (EconomyWatch, 2009). BIBLIOGRAPHY 1. April 29, 2009; http://www.adb.org/Media/Articles/2008/12614-indian-developments-outlooks/default.asp (WWW page) 2. April 29, 2009; http://business.mapsofindia.com/india-economy/history.html (WWW page) 3. April 29, 2009; http://www.culturalindia.net/indian-history/economic-history.html (WWW page) 4. April 29, 2009; http://www.economicshelp.org/blog/economics/indian-economy-2009/ (WWW page) 5. April 29, 2009; http://www.economywatch.com/indianeconomy/indian-economy-overview.html (WWW page) 6. April 29, 2009; http://www.economywatch.com/indianeconomy/ (WWW page) 7. April 29, 2009; http://www.economywatch.com/world_economy/india/India_Economy_2009_Forecast.html (WWW page) 8. April 29, 2009; http://www.edc.ca/english/docs/gindia_e.pdf (WWW page) 9. April 29, 2009; http://www.edc.ca/english/docs/gindia_e.pdf (WWW page) 10. April 29, 2009; http://news.in.msn.com/business/article.aspx?cp-documentid=1767990 (WWW page) 11. April 29, 2009; http://www.thaindian.com/newsportal/business/indian-economy-will-turn-significantly-worse-in-2009-ahluwalia_100171959.html (WWW page) 12. April 29, 2009; http://www.thaindian.com/newsportal/politics/ten-issues-india-inc-has-to-contend-with-in-2009-comment_100135767.html (WWW page) 13. April 29, 2009; http://www.window2india.com/cms/admin/article.jsp?aid=4654 SOURCE: The ASSOCHAM Business Barometer. Read More