The Indian Economy

India Economic Profile, India Economy, Economy of India, India's Economy

Large, dynamic and steadily expanding, the Indian economy is characterized by a

huge workforce operating in many new sectors of opportunity.

The economy of India is as diverse as it is large, with a number of major sectors

including manufacturing industries, agriculture, textiles and handicrafts, and
services. Agriculture is a major component of the Indian economy, as over 66% of
the Indian population earns its livelihood from this area.

However, the service sector is greatly expanding and has started to assume an
increasingly important role. The fact that the Indian speaking population in India is
growing by the day means that India has become a hub of outsourcing activities for
some of the major economies of the world including the United Kingdom and the
United States. Outsourcing to India has been primarily in the areas of technical
support and customer services.

In general, the Indian economy is controlled by the government, and there remains
a great disparity between the rich and the poor. Ranked by the exchange rate of the
United States Dollar, the Indian economy is the twelfth largest in the world.

In Purchasing Power Parity GDP, the figure for India was 1.5 trillion US Dollars in
2008. The per capita income of India is 4,542 US Dollars in the context of
Purchasing Power Parity. This is primarily due to the 1.1 billion population of India,
the second largest in the world after China. In nominal terms, the figure comes
down to 1,089 US Dollars, based on 2007 figures. According to the World Bank,
India is classed as a low-income economy.

Recent trends have seen India exporting the services of a numerous information
technology (IT) professionals. IT professionals have been sought for their expertise
in software, software engineering and other financial services. This has been
possible as a result of the high skill levels of Indian IT professionals.

Other areas where India is expected to make progress include manufacturing,

construction of ships, pharmaceuticals, aviation, biotechnology, tourism,
nanotechnology, retailing and telecommunications. Growth rates in these sectors
are expected to increase dramatically.

Over the years the Indian government has taken an economic approach that has
been influenced, in part, by the Socialist movements. The Indian national
government has maintained a high and authoritative level of control over certain
areas of the Indian economy like the participation of the private sector, foreign
direct investment, and foreign trade.
It may be observed that in spite of the tremendous debate about the justification of
the privatization of industries traditionally owned by the government, the process of
privatization has still continued at a steady pace.

One of the major challenges before the Indian economy, or those who are
responsible for operating it, is to remove the economic inequalities that are still
persistent in India after its independence in 1947. Poverty is still one of the major
issues although these levels have dropped significantly in recent years. As per
official surveys, it has been observed that in the 2004, almost 27% of the working
Indian populace was living below the poverty line.

Poverty is a challenge that’s becoming increasingly important in relationship to the

alarming rate of new births. This implies that ever more rapid change, or birth
control policies like the ‘One Child’ policy in China, are needed to reduce the
numbers affected by poverty in the vast Indian economy.

Inflation in India

India’s 2008 Economic Survey Report targeted a drop in India’s Inflation Rate – but
with food, oil and commodity price rises worldwide, the opposite is happening.

According to the 2008 Economic Survey Report, India’s inflation rate was targeted
by the Reserve Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007.
Inflation rates for many investment goods have decreased dramatically in recent
years. The price of basic goods such as lentils, vegetables, fruits and poultry were
expected to slow their rise. The price of various manufactured goods also fell in
2007, and this contributed to a reduced inflation rate

However, the beginning of 2008 has seen a dramatic rise in the price of rice and
other basic food stuffs. There has also been a no-less alarming rise in the price of oil
and gas. When coupled with rises in the price of the majority of commodities, higher
inflation was the only likely outcome.

Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has
risen above 11%, its highest rate in 13 years. This is more than 6% higher than a
year earlier and almost three times the RBI’s target of 4.1%.

Inflation has climbed steadily during the year, reaching 8.75% at the end of May.
There was an alarming increase in June, when the figure jumped to 11%. This was
driven in part by a reduction in government fuel subsidies, which have lifted
gasoline prices by an average 10%.

The Indian method for calculating inflation, the Wholesale Price Index, is different to
the rest of world. Each week, the wholesale price of a set of 435 goods is calculated
by the Indian Government. Since these are wholesale prices, the actual prices paid
by consumers are far higher.

In times of rising inflation this also means that cost of living increases are much
higher for the populace. Cooking gas prices, for example, have increased by around
20% in 2008.

With most of India’s vast population living close to – or below – the poverty line,
inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food prices rise,
since food represents more than half of the expenditure of this group.

The dramatic increase in inflation will have both economic and political implications
for the government, with an election due within the year.

Economic growth in emerging markets has slowed but is far from over. With the
BRIC countries (Brazil, Russia, India and China) alone accounting for more than 3
billion people, and with these people consuming more resources every year, it is
likely that higher inflation rates will be with us for a good while yet – and that is
worrying news for the government of India.

Indian Inflation Rate Through the Roof

New Delhi, 15 July 2008. India's inflation rate has grown from 8.75% at the end of
May to 11.89% at the end of June, a 35.9% increase.

The Reserve Bank of India (RBI) had set a target for Whole Price Index inflation to be
4.1% in 2008, but currentl levels are almost three times that amount. Government
economic advisors expect inflation to stay in double digits into 2009.

Analysts are now worried that the RBI will get more aggressive in fighting inflation,
and will further raise the short term or overnight borrowing rate.

The rate was hiked twice in June, the first increases in a year and a half, and now
stands at 8.5%, its highest level since 2000.

Santos de la Raya, EconomyWatch.com

India Economic Development

Agriculture, services and manufacturing industries all contribute to the development

of the Indian economy. The IT outsourcing, software and call center/ BPO industries
in particular have helped propel Indian economic development in recent years.

Economic development in India depends on the various sectors that constitute the
Indian economy – these are primarily the agriculture, services and manufacturing
industries.
India is rated as one of the top economies in the world in terms of the purchasing
power parity of the gross domestic product by leading financial entities of the world
such as the International Monetary Fund, the World Bank, and the CIA (as
referenced in the CIA World Factbook).

As far as agriculture is concerned, India is in the second largest in volume of output.

Certain connected sectors of the agricultural sector 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.

During 2005, the agricultural sector contributed 18.6% to the entire GDP, and at
least 60% of the total labor force working in India was 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 credited to the various five-year plans that
were instituted for the development of Indian agriculture. Developments in
irrigation processes, as well as various modern technologies used have contributed
to the overall improvement of agricultural processes.

Substantial amounts of research and development have been carried out in the
agricultural sphere 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 volume of factory output. Economic

developmental roles are also being played 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 work production by 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%, which is more than the 4.5% rate during the 30-year period from
1951 to 1980.

Sectors 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 sectior of the Indian economy.

An increasing number of Indian companies are becoming global players. The

following Indian companies are part of the Forbes Global 2000 list:

Infosys Technologies

Oil and Natural Gas Corporation

ICICI Bank

Reliance Industries

Steel Authority of India

State Bank of India

Tata Consultancy Services

Indian Oil Corporation

Tata Steel

National Thermal Power Corporation

India Economy Statistics & Indicators

Indian Economy Statistics & Indicators, and in particular GDP growth, IT

& Services growth, manufacturing growth, Foreign Direct Investment, Inflation and
foreign exchange reserves, help us form a detailed understanding of the Indian
Economy.

Indian economy statistics paint a telling and accurate picture of the ins and outs of
a large and dynamic economy on the move. Thanks to a steady trend of growth
observed in recent years, supported by a flourishing real estate and service sector,
the Indian economy continues to grow at an incredible rate.

Originally, the catalyst for this recent growth was a boom in the IT industry, which
has had sustained growth for a number of years. Industrial production has also
increased at a considerable rate. With exports growing in both the manufacturing
and services sectors, foreign exchange reserves have grown year-on-year.

Indian Economy Statistics & Indicators: An Overview

The Reserve Bank of India, the Securities and Exchange Board of India (SEBI), the
Center for Monitoring the Indian Economy (CMIE) and other key organizations
publish statistics on different aspects of the Indian economy on a monthly,
quarterly, and yearly basis. Some of the primary economic indicators for India are
as follows:

GDP and Economic Growth Statistics

The growth rate of Gross Domestic Product (GDP) was 9% in 2006, whereas the
corresponding figure was 7.4% in 2007. The rate of GDP growth for 2008 is
projected to be 8.7 %.

The growth rate of the Indian IT and ITES sector was around 20% in 2007.
The figures for foreign direct investment (FDI) have also recorded substantial
growth over the last few years. In 2004, the FDI figure was US$ 4.11 billion. In the
next year it stood at US $8.2 billion. The corresponding figure for 2006 was US
$12.35 billion – this is an incredible 73.35% compounded annual growth.

Industrial, manufacturing, and service sectors together amounted to 77% of India’s

GDP in 2007.

Indian Economy Statistics & Indicators: Further Details

The foreign exchange reserve of India amounted to US $271 billion on 16th

November, 2007.

India’s GDP was US $911 billion in 2007.

Exports contributed US $127 billion to the Indian GDP in the 2007 with a growth rate
of 20.9%.

Import figures stood at US $192 billion during 2007, with a growth rate of 21.59%.

Portfolio investment amounted to US $7.1 billion in 2007.

The 2007-2008 Indian Economic Survey has projected inflation to be just above 4%
for 2008. However the rapid rise in food, oil and other commodities prices pushed
inflation above 11% by July 2008.

A target has also been set to lower the fiscal deficit below 3% per annum.

Indian Economy Overview

India has been one of the best performers in the world economy in recent years, but
rapidly rising inflation and the complexities of running the world’s biggest
democracy are proving challenging.

India’s economy has been one of the stars of global economics in recent years,
growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets
reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real
estate boom, and a flourishing capital market.
Like most of the world, however, India is facing testing economic times in 2008. The
Reserve Bank of India had set an inflation target of 4%, but by the middle of the
year it was running at 11%, the highest level seen for a decade. The rising costs of
oil, food and the resources needed for India’s construction boom are all playing a
part.

India has to compete ever harder in the energy market place in particular and has
not been as adept at securing new fossil fuel sources as the Chinese. The Indian
Government is looking at alternatives, and has signed a wide-ranging nuclear treaty
with the US, in part to gain access to nuclear power plant technology that can
reduce its oil thirst. This has proved contentious though, leading to leftist members
of the ruling coalition pulling out of the government.

As part of the fight against inflation a tighter monetary policy is expected, but this
will help slow the growth of the Indian economy still further, as domestic demand
will be dampened. External demand is also slowing, further adding to the downside
risks.

The Indian stock market has fallen more than 40% in six months from its January
2008 high. $6b of foreign funds have flowed out of the country in that period,
reacting both to slowing economic growth and perceptions that the market was
over-valued.

It is not all doom and gloom, however. A growing number of investors feel that the
market may now be undervalued and are seeing this as a buying opportunity. If
their optimism about the long term health of the Indian economy is correct, then
this will be a needed correction rather than a downtrend.

The Indian government certainly hopes that is the case. It views investment in the
creaking infrastructure of the country as being a key requirement, and has ear-
marked 23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades
during the 11th five year plan. It expects to fund 70% of project costs, with the
other 30% being supplied by the private sector.
Ports, airports, roads and railways are all seen as vital for the Indian Economy and
have been targeted for investment.

Further hope comes from the confidence of India’s home bred companies. As well as
taking over the domestic reins, where they now account for most of the economic
activity, they are also increasingly expanding abroad. India has contributed more
new members to the Forbes Global 2000 than any other country in the last four
years.

Recent Growth Trends in Indian Economy

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%, but with 60% of India’s
1.1 billion population living off agriculture and with droughts and floods increasing,
poverty alleviation is still a major challenge.

The structural transformation that has been adopted by the national government in
recent times has reduced growth constraints and contributed greatly to the overall
growth and prosperity of the country. However there are still major issues around
federal vs state bureaucracy, corruption and tariffs that require addressing. India’s
public debt is 58% of GDP according to the CIA World Fact book, and this represents
another challenge.

During this period of stable growth, the performance of the Indian service sector
has been particularly significant. The growth rate of the service sector was 11.18%
in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the
same period and is now 29% of GDP. Agriculture is 17% of the Indian economy.

Growth in the manufacturing sector has also complemented the country’s excellent
growth momentum. The growth rate of the manufacturing sector rose steadily from
8.98% in 2005, to 12% in 2006. The storage and communication sector also
registered a significant growth rate of 16.64% in the same year.
Additional factors that have contributed to this robust environment are sustained in
investment and high savings rates. As far as the percentage of gross capital
formation in GDP is concerned, there has been a significant rise from 22.8% in the
fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings
as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same
period.

Poverty in India

Poverty in India is reducing but it is still a major issue. Rural Indians depend on
unpredictable agriculture incomes, while urban Indians rely on jobs that are, at best,
scarce.

Since its independence, the issue of poverty within India has remained a prevalent
concern. According to the common definition of poverty, when a person finds it
difficult to meet the minimum requirement of acceptable living standards, he or she
is considered poor.

Millions of people in India are unable to meet these basic standards, and according
to government estimates, in 2007 there were nearly 220.1 million people living
below the poverty line.

Nearly 21.1% of the entire rural population and 15% of the urban population of India
exists in this difficult physical and financial predicament. The following chart
presents the poverty situation:

The division of resources, as well as wealth, is very uneven in India – this disparity
creates different poverty ratios for different states. For instance, states such as
Delhi and Punjab have very low poverty ratios. On the other hand, 40-50% of the
populations in Bihar and Orissa live below the poverty line.
The poverty ratios illustrated here are divided in two types: urban and rural. Specific
reasons for poverty vary in the urban and rural settings.

A number of factors are responsible for poverty in the rural areas of India. Rural
populations primarily depend on agriculture, which is highly dependant on rain
patterns and the monsoon season. Inadequate rain and improper irrigation facilities
can obviously cause low, or in some cases, no production of crops.

Additionally, the Indian family unit is often very large, which can amplify the effects
of poverty. Also, the caste system still prevails in India, and this is also a major
reason for rural poverty – people from the lower casts are often deprived of a
number of facilities and opportunities. The government has planned and
implemented poverty eradication programs, but the benefits of all these programs
have yet to reach the core of the country.

The phenomenal increase in the city populations is the main reason for poverty in
the urban areas of India. A major portion of this additional population is due to the
migration of the rural families from villages to cities. This migration is mainly
caused by poor employment opportunities in villages. This situation is exacerbated
by the fact that there are few job opportunities in the urban areas of India.

Since 1970, the Indian government has implemented a number of programs

designed to eradicate poverty, and has had some success with these programs. The
government has sought to increase the GDP through different processes, including
changes in industrial policies. There is also a Public Distribution System, which has
been somewhat effective so far. Other programs include the Integrated Rural
Development Programme, Jawahar Rozgar Yojana, the Training Rural Youth for Self
Employment (TRYSEM) and to the credit of the government, other on-going
initiatives.