Indian Economy and Its Salient Features

Indian Economy - Overview

- Second largest country in the world in terms of population - Has 16% of the world s population and roughly 12% of the world land - Fourth largest economy in terms of GDP - Extremely diversified, ranging from technology to agriculture - Agro prodn. 23% of GDP / employs 65% of workforce - Advantage in terms of considerable command over English / technological abilities in the population - Problems faced : Unemployment, inequality, poverty - Poor infrastructure, fiscal deficit - Sellers mkt to buyers mkt : liberalized economy

Indian Economy - Overview

- Strong BOP position in recent years - Level of FOREX reserves crossed the US $100 billion mark on Dec 2003, $140 billion/2005, $260 billion/2007 - Current account BOP in surplus in recent years - Trade deficit neutralised by higher surplus in invisibles (mainly by software service exports and private transfers) - 20% growth in exports - Higher imports mainly due to petroleum and oil - Compensated by the service exports

India - A Underdeveloped or Developing Economy

UN publications have preferred to use term Developing economy instead of Underdeveloped economy because the process of development has been initiated in such countries. Characteristics of Underdeveloped Economy An underdeveloped economy is characterized by the existence, in greater or less degree of unutilized or underutilized manpower on the one hand and of unexploited natural resources on the other. This state of affairs may be due to stagnancy of techniques or to certain inhibiting socio-economic factors which prevent the more dynamic forces in economy from asserting themselves . - The First Five- Year Plan

India as an Underdeveloped Economy

Characteristics of Indian Economy as Underdeveloped Economy
Low Per Capita Income Rapid Population Growth Inequitable Distribution of Income and Poverty Unemployment Predominance of Agriculture

Scarcity of Capital

Technological Backwardness

Low Per Capita Income

Indian economy was appallingly poor in the early 1950s. - Inherited from the colonial rule - 2006 India s PCI : $820 - a little more then one-fiftieth of the USA s PCI
Country Per capita GNI @ Market Prices (2007) 46,060 46,040 37,670 38,860 Country Per capita GNI @ Market Prices (2007) 42,740 950 2360

Switzerland USA Japan Germany

UK India China

Inequitable Distribution of Income and Poverty

- After 63 years of independence, about 1/4th of India s population / Not much capacity to contribute to capital accumulation and create large demand for industrial goods - Distribution of income and wealth is inequitable - Reflected in Household Expenditure
% Population in respective class Household Expenditure

Lowest class household Middle category Upper category

20%

8.9%

- Problem of Mass poverty -1979-80 /50.7% -1993-94 / 36% - 1998-99/ 31.6% U/ 44.9% R

60% 20%

50.5% 41.6%

Predominance of Agriculture
- Occupational distribution of population reflects economic backwardness of the economy - 1951 / 69.7% of the population dependent upon agriculture - 2001 / 64.8% of working population employed in agriculture - In developed countries like USA only 2% - Second indicator, proportion of national income originating from the sector - 2006-07/18.5% - 1950-51/55%

Rapid Population Growth

- Over the years population in India has been growing at a fast rate. - 1951 361 million - 2006 1,100 million - Major constraint on business growth (i) requirement of feeding additional numbers / use of resources in low return agriculture activities (ii) growing pressure of population / slowly growing employment opportunities

Unemployment
- Labour availability in abundance - unemployment is structural and result of deficiency of capital - it is associated with the inadequacy of productive capacity to create adequate jobs for those people who are able and willing to work. - Employment avenues have not increased - In agriculture sector, marginal productivity of labour is negligible - Common in LDCs like India ( agricultural sector). - Disguised unemployment in rural areas - Alternative job opportunities - 1999-00/7.32% - 2004-05/8.36%

Unemployment
- surplus labor from this sector is transferred to some other sector, the national output would be raised and the country's capacity to save would also increase. - This would have a favorable impact on the country's development. But it is impossible to employ the surplus labor force drawn from agriculture in other sectors due to the shortage of capital. - Ragner Nurkse- the services of these persons should be utilized to create real capital. They should be transferred to capital projects such as irrigation, drainage, roads, railways, houses, factories, and so on. - The question is, from where would the capital be mobilized to undertake the capital projects mentioned above?

Scarcity of Capital
- During the 50s and 60s of 20th century Indian Economy characterized by having deficiency of capital - Amount of capital per head / Rate of capital formation
India s savings and investment rates had shot up to record levels of 37.7 per cent and 39.1 per cent, respectively, of the country s GDP in the year to March 31, 2008
Country Gross capital formation 1990 USA UK Japan Germany China India 18 20 33 24 35 24 2003 18 16 24 18 44 24 Gross Domestic Saving 1990 16 18 34 24 38 23 2003 14 13 26 22 47 22

Technological Backwardness
- Wide range of productive activity, techniques of production are backward in India - Agriculture sector / large scale of industries energy, transport, communications - Modern techniques introduced - Still wide gap exists

India A Developing Economy

- Growing National Income - Structural Changes i. No longer an agrarian economy ii. Congenial environment for business iii. Growth of basic capital goods industries iv. Infrastructure development v. Progress in the banking and financial sector

SWOT ANALYSIS OF INDIAN ECONOMY

Strengths - Huge Pool of Labour Force - High percentage of cultivable land -Diversified nature of the economy -Huge English speaking population, availability of skilled manpower - Extensive higher education system, third largest reservoir of engineers - High growth rate of economy - Rapid growth of IT and BPO sector bringing valuable foreign exchange
Weakness - Very high % of workforce involved in agriculture which contributes only 23% of GD - Around quarter of population below poverty line - High unemployment rate - Stark inequality in prevailing socio economic conditions - Poor infrastructure facilities - Low productivity - Huge population leading to scarcity of resources - Low literacy rates - Unequal distribution of wealth - Rural Urban divide leading to inequality in living standards

SWOT ANALYSIS OF INDIAN ECONOMY

Opportunities - Scope for entry of private firms in various sectors for business - Inflow of FDI likely to increase - Huge foreign exchange earning prospects in IT & ITES sector - Area of biotechnology/infrastructure - Huge domestic market: Opportunity for MNCs - Huge natural gas deposits - Vast forest area and diverse wildlife - Agricultural resources, fishing, plantation crops, livestock

Threats - High fiscal deficit - Threat of government intervention in some states - Volatility in crude oil prices across the world - Growing import bill - Population explosion, rate of growth of population still high - Agriculture excessively dependent on monsoons