Reasons For The Sharp Development Of India Economics Essay

A South-Asia country, India has a sharply development in recent years. It is deserved that India is listed in BRCI (is a grouping acronym that refers to the countries of Brazil, Russia, China and India that are deemed to all be at a similar stage of newly advanced economic development) . There are big progresses in the developed cities in India such as New Delhi and Mumbai. In the last five years, the economic growth of India are keeping 5% or above.

In this project, the main objective is that to study why the economy of India had a sharply development in recent years. We will discuss the reasons why India develops so fast in detail. Is it related to the economic structure of India? Is it because of the liberalization after 1900s? We will have some completed explanations in the follow parts.

India today

According to IMF and World Bank, India has become the eleventh largest economy in the world by nominal GDP, and the distance between Canada, Spain, Brazil and India is small; consider another measure living standard, which is the purchasing power parity. India is the fourth economy in 2009, and in 2008, India is ranked at 5th.(Figure1 and figure 2) Indian’s economy is growing very fast in recently ten years, from 2000 to 2009, the average growth rate is about 6.9% , especially in 2007, the grow rate is 9.2%, which is one of the most fast growing economy. (Figure 3)

Figure 1: List of countries by GDP (nominal)

Figure 2: List of countries by PPP

Figure 3: The ten largest economies in the world measured in PPP

Figure 4: GDP growth rate

It seems that India is one of the leading economies if we only look at the aggregate results, but actually, if we compare the GDP per capita, the rank is 142 and 123 respectively, we find that India still is a relatively poor country.(Figure 5)

Figure 5: List of countries by GDP (nominal) per capita

History of India economy

India’s economic can be mainly divided into 4 periods, beginning with Pre-colonial period (last up to 18th century), followed by colonial period which ended with independence in 1947, from the independence of India to 1991, and last period is since 1991 to now.

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Pre-colonial

Indus Valley civilization is the first permanent and predominantly urban settlement that flourished from 2800 BC to 1800 BC. The citizens of Indus valley civilization is skilled in agriculture, raise animals, made sharp tools, weapons and traded with other cities. Most of the populations are resided in villages, according to 1872 census, 91.3% of the population of the region India living in villages.The economy is highly isolated and self-sustaining with agriculture. The religion in this period played an important role in affecting the economic activities, especially Hinduism, cast and joint family systems. Caste system ensured the division of labors, the barrier restricted the economic transaction on different castes. Joint-family systems reduce the initiative of people through providing support, these two religions became resistances for the economic development. For the next 1,500 years, India is the largest economy of the world.

Period

Share of world income

Rank

500 BC

32.90%

1

1000

28.90%

1

1500

24.50%

2

1700

24.40%

1

Colonial period

Under the control of British, company rule in India which refers to rule or dominion of the British East India Company on the Indian subcontinent, has changed the taxation and agriculture policy, this policy protects colonist, but harms the benefits of farmers, lead to numerous famines. India’s largest handicrafts industry was bankrupted because of the economic policies of British Raj. The impact of British imperialism on India economy can be seen as a form of plunder and a catastrophe. At the end of colonial period, India is one of the poorest countries in developing countries. Two reasons lead to the situation, industrial development stagnation and lower agriculture growing than population.

Independence to 1991

After India became independence, the policy tended to protectionism, strongly emphasis on import substitution, industrialization, state intervention, a large public sector, business regulation, and central planning. State interventionism is government takes an action to affect its own economy, India government launched a Five-Year Plans similar to central planning in the Soviet Union. Mining,steel, water, machine tools, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.The rate of growth of the Indian economy in the first three decades after independence was quite low(about 3.5%), and the growth rate was referred to a term called “Hindu rate of growth”, by comparing with the growth rate in other Asian countries, especially the East Asian Tigers. (Figure 6)

Figure 6: GDP per capita of South Asian economies

From 1991 to now

India government faced a big problem, which is the balance of payment crisis because of the collapse of its major trade partner. Have no other choices, India asked IMF for help, and IMF required India government to do the reform. Then India began to do the reform, which was called “economic liberalization of 1991”. The reforms canceled the Licence Raj (investment, industrial and import licensing) and ended the monopoly position of state-owned company, at the same time, relaxed foreign investment. Since 1991, India’s liberalization followed this direction, with the objective to change from planned economy to market-based economy gradually. These reforms can be summarizing as below:

Cut industrial licensing; rationalize Industrial regulation, and only 18 industries subject to licensing.

Repealing the Controller of Capital Issues in 1992, stock price and no of shares were decided by market.

Introducing the “SEBI” in 1992 and the Security Laws,the law gave SEBI the legal authority to register and regulate all security market intermediaries.

Tariffs were reduced from an average of 85 percent to 25 percent, and return to quantitative controls.

Increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent, to encourageforeign direct investment.

Equity markets were Opening up in 1992, Indian firms could raise capital on international markets.

Initiating privatization of government corporations which were large, but inefficient

Impact of the economy liberalization

India’s economy was benefit from these reforms, and India’s government realizes that they need to continue liberalize their economy. In 1991, the growth rate was 2.1%, after the liberalization of economic, growth rate next year is 4.2% which is double. (Figure 7) By 2006, the average weight of imports and exports in GDP had risento 24%,the weight in 1985 is just 6%. At the end of 2006, inflows of foreign direct investment also increased to 2% of GDP, whileless than 0.1% of GDP in 1990.Now India’sGDP per capita isrising by 7½ per cent annually, and the potential growth rate is keep increase. (Figure 8)Consider the annual growth of GDP per capita of from1950 to 1980, isjust 1¼ per cent. The fast growth rate hasbrought India to become the fourth largest economy.

Figure 7:

Figure 8:

Why the economy of India can grow so fast. We analyze this question in the following points:

1. Economic reforms:

The economy of India once famous for the “Hindu rate of growth”, of 3% a year, was opened up by the reforms of the 1990s, many of them pushed through by the man who is now Prime Minister, Manmohan Singh. The government’s latest five-year plan sets that India can sustain average growth of around 9%. Since the eighties and nineties in the 20th century, the economic liberalization reforms include relaxing industrial regulations to reduce the monopoly, encouraging competition and trade and investment liberalization and other market-oriented reform measures, which nurtured the international competitiveness of enterprises. And the economic reforms focus on the OM (open market) economic policies. Foreign investments have come in different sectors and there has been a good growth in the standard of living, per capital income and Gross Domestic Product. And until now, India growth rate rises to 8.8% until the third quarter of 2010. Let’s see the picture of economic growth after liberation:

Figure 9: the economic growth in recent years

The economic growth rate is get rid of the “Hindu rate of growth”, it becomes the eleventh largest economy in the world by nominal GDP and had established itself as the world’s second-fastest growing major economy.

2. Continued growth of service sector:

The continued growth of services provided for the Indian economy continued growth. After India’s independence last century, in the fifties or sixties, the proportion of service sector output accounted for 31.1% GDP, while in 2001-2009, the services sector share of GDP, reached 63.9%. Service-oriented development strategy has potential for sustainable development and potential of India’s economic development it provides a great opportunity. The table below is the GDP by sector of India in recent years:

Table1: GDP by sector of India

Year/Sector

1950

1980

2001

2004

2007

2009

Agriculture

57.4%

38%

25.0%

21.2%

18.5%

15.0%

Industry

14.7%

26%

26.0%

27.5%

26.4%

28.0%

Services

27.9%

36%

49.0%

51.3%

55.1%

57.0%

Through the table, we can see that Service Sector in India of 2000s accounts for more than half of India’s GDP. There was high growth rate in services sector growth in the 1980s and 2000s. And the weight of service sector of India’s GDP increases by around 21% in about 50 years between 1950 and 2001. While most service sectors participated in this expansion, growth was fastest in trade, communications, community services, hotels and restaurants, and business services, such as the IT (information Technology) industry. One reason for the sustained growth in the services sector of India in the 2000s is the liberalization in the regulatory framework that improves innovation and increase exports from the services sector.

3. Fast growing of IT and BPO industries:

As you know, the Information Technology industry and the business process outsourcing (BPO) industry in India is one of the fastest growing industries. Indian IT industry has built up the goodwill and the brand equity in the world. So, why Global organizations are willing to choose outsourcing call center services to India, when compared to outsourcing to Malaysia, Philippines, China and other Asian countries. Here is why, the call centers in India can provide a wide variety of advantages that other countries do not offer so that India can be dominant in the IT and outsourcing market. Let’s look at the following graph.

Figure 10: The outsourcing weight in the world.

Figure 11: The 6 advantages of the outsourcing in India

The rapid development of information industry ensures sustained and rapid economic growth in India. India’s software industry is its economic development focus of the most striking, especially in its business process outsourcing industry. Indian software services industry in 2003-2004 reached 15.9 billion U.S. dollars, up 28.2%, with exports 12.5 billion, an increase of 30.5%, while the BPO industry is 3.6 billion U.S. dollars, up by 54%. India’s outsourcing of services involving a wide range, including customer management, financial management, financial services, digital services, engineering and design services, animation production, network management and biotechnology research and other business. There is no doubt that IT and BPO industry in India has become the engine of economic growth. International software giant, Microsoft chairman Bill Gates suggested that the software superpower in the 21st century, not America, not Europe, not Japan, but India.

4. Stable and efficient financial sector:

India has a relatively stable and efficient financial sector. Financial sector is connected to the owner and user of capital funds as a bridge between the financial sector efficiency is directly related to economic development. India has a relatively sound banking system and capital markets more transparent, and India’s capital market has been liberalized. The government has approved significant banking reforms. While some of these relate to nationalized banks like encouraging mergers, reducing government interference and increasing profitability and competition, other reforms have opened up the banking and insurance sectors to private and foreign players. India in the interest rate market, and promote financial sector competition, the development of the domestic securities market, strengthen supervision have made certain achievements: By 2002, India’s commercial banks to bad debt ratio of 10.8%, the proportion of non-performing assets accounted for only 2.8% of GDP; Now there are 23 stock exchanges in India (please notice that China only has 2), in exchange more than 6,000 listed companies, the Indian stock market daily trading volume combined 40 billion Yuan in 2003, hitting a 73% growth recorded. Robust and diversified financial system help to further improve the financing sources of the small Indian companies and corporate governance structure, long-term growth for the economy and create the conditions.

5. Human resources:

The abundant human resources are a source of economic growth in India. India’s science and technology in a leading position in the third world, especially in basic sciences has a strong advantage. India attaches great importance to education and training of personnel, since independence, and gradually increased investment in education. As a part of the tenth Five year Plan (plans to all children in India in school by 2003, all children to complete 5 years of schooling by 2007, Reduction in gender gaps in literacy and wage rates by at least 50% by 2007, Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2%, increase in Literacy Rates to 75% within the Tenth Plan period among 2002-2007), the central government of India outlined an expenditure of 65.6% of its total education budget of US$ 9.95 billion. Moreover, to strengthen basic education in India also attaches great importance to investment in higher education, the current total number of Indian students after the United States and China account for third in the world. India’s policy of personnel training, making India have a strong research team, there are 400 million scientific and technical personnel, after the United States and Russia, ranking third in the world, intellectuals, the number was 3.6 million, it even more than the total number of France and Japan. India has invested heavily in education to accelerate the process of human capital formation; to help India formed a unique mode of economic development in India. The table below shows the budget of education.

Table 2: Budget of education in India: measure by billion (Indian Rupee)

Plan

Total Amount

First

1.53

Second

2.70

Third

5.80

Fourth

7.80

Fifth

9.10

Sixth

25.0

Seventh

76.0

Eighth

196.0

Tenth

438.3

Here are the other factors which also affect the economic growth of India:

The consumption.

Consumption growth in India’s GDP is relatively large, the marginal output of 1.410 units. This shows that India’s economic growth was mainly driven by domestic demand. India is the world’s second most populous country, and by 2010 the total population of 1.19 billion, accounting for 17.5% of the world’s population, and the population is still increasing at a rate of 1.40% per year. The large population of goods purchased enormous potential, but only the middle class in India to 2.5 million people, this part of the strong purchasing power of residents, the other, with the economic development of rural India, India, and a large number of rural residents also formed a huge commodity market, which greatly stimulated domestic demand in India. Especially, the energy consumpution has been universally considered as one of the most important inputs for human developmentand economic growth. There are two main relationships between energy consumption and economic development. The first point is growth of an economy, with its global competitiveness, cruxes on the availability of environmentally and cost-effective benign energy sources.And the second point is that the level of economic development has been observed to be reliant on the energy demand.

As a fast developing country, India consumes plenty of energy every year, and the consumption of energy are increasing in recent years (figure 12). Let’s discuss the consumption of the energy in India.

Figure 12: the toal energy consumed increased

India’s primary energy consumption has increased 4.6 times in the last 30 years: compound growth of 5.2% pa. The consumption of main energy, coal is shown in figure 13. The net import of coal is decreasing in recent years. That means the growth of coal export is larger than the import of coal import. It is because to fulfill the demand of the energy on the India’s development.

Figure 13: the consumpution of coal

The total investment.

Of the total investment is also an important factor in India’s GDP growth one, the marginal output is 0.652. This is closely related to stage of development in India, according to Burt’s theory of stages of economic growth, India is still in the stage to promote the development of factor inputs, for a long period of time, capital formation will remain the main support India’s economic growth. However, India’s economic growth model can be seen that the marginal product of investment in India is only 0.625, reflecting the particular mode of economic growth in India, India’s economy is a “high efficiency”, “low cost” economy, the investment rate 20% -25%, foreign direct investment in China is only 1 / 10, but its economic growth rate has reached about 8%. The features and services in India accounted for a higher proportion of GDP in India are not unrelated. India’s economic liberalization and reform has greatly improved the investment environment in India, a relatively stable and efficient financial sector provide a financing facility, which greatly promoted the efficiency of investment in India. Let’s see the foreign direct investment in detail.

As one of the top five economies in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, apparels,chemicals, jewelryand pharmaceuticals. In figure 14, it shows the proportion of different products in India in 2004 and 2005.

Figure 14: The foreign direct investments in India

India’s recently liberalized FDI policy (2005) allows up to a 100% FDI stake in investment. Industrial policy reforms have substantiallyremoved restrictions on expansion and facilitated easy access to foreign technology, reduced industrial licensing requirements and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, built-up infrastructure and construction development projects including housing, resorts, hospitals, commercial premises, hotels, educational institutions, recreational facilities,housing and city- and regional-level infrastructure.

Further more, India have experienced a substantial increase in their holdings of international reserves in recent years. Figure 15 (the purple curve) shows the international reserves of India. Nonetheless, the growth rates of their international reserves are quite comparable – from 1990-2007, the average annual growth rate of India’s is 37% and, from 2000 to 2007, the Indian growth rate is 33%.

Figure 15: international reserves of India

3. International trade.

India’s economy is mostly dependent on its large internal market with external trade accounting for just 20% of the country’s GDP. In recent year, India accounted for 1.45% of global commodity trade and 2.8% of global commodity services export.Until the liberalization in 1991, India was deliberately and largely separated from the world markets, to protect its economy and to achieve self-dependence.

The Federation of Indian Export Organizations (FIEO), non profit organizations contributed by the Ministry of Commerce, Govt. of India in 1965 to coordinate and focus the influence of all organizations in the country committed in export promotion. The Federation has evolved into a hinge player in the promotion of trade, collaboration and investment. FIEO provides the direction, content and thrust to India’s expanding international trade.

FIEO offers a sole platform to the businessmen dealing in Multi Products. FIEO membership is provided to exporters dealing in different services and goods, and nearly all the products fall under its range. It is the unique organization authorized in India to register exporters not covered under any other Export Promotion Council of India. With customer oriented approach, the satisfactionand confidence of the business community on FIEO has increased which has reflected in the continuous growth in membership. In figure 16, it shows that the members of FIEO were increasing in recent years.

Figure 16: The growth in membership

FIEO operates as a partner of the Government of India in providing inputs on different trade policy issues and also acts a strong connection between the Industry and the Government. It takes up problems /issues of its members, organizes capacity building courses to offer a conducive domestic atmosphere and to increase their competitive edge on one hand and organizes international activities to give its members a global reach.

FIEO is the most important organization for any foreign buyer, seller of investers looking for a trade partner in India. It has played amain role as linking with counterpart organizations in difference countries as well as international agencies to enable direct communication and interaction between world businessmen and India.

We have already discussed about India’s rapid economic growth reasons in the previous sections, then we have to discuss is to maintain this rapid economic growth, India needs to pay attention to the problem.

According to the research, India’s development could be 40 times bigger by the year 2050. In order to obtain this goal, What India needs is to implement many changes. What India needs to improve is: its governance, control inflation, introduces credible fiscal policy, liberalize financial markets and increase trade with its neighbors.

India needs both to significantly raise its basic educational standards, and increase the quality and quantity of its universities. India needs to boost agricultural productivity, improve its infrastructure and environmental quality.

Improve governance.

If India has better governance, delivery systems and effective implementation, India will do a much better job to educate its citizens, build its infrastructure, improve agricultural productivity and make sure that it establish the fruits of economic growth well.

Raise educational achievement.

Raising India’s educational achievement is a important requirement to help reach the nation’s potential. Base on our basic indicators, there is a lot India’s young people receive no (or only the most basic) education. Boosting basic education is needed quite badly. Quite lot initiatives, such as a continued expansion of Pratham and the introduction of Teach First need to be pursued.

Increase quality and quantity of universities.

According to the data, India needs to make a great effort to improve the numbers and quality of its universities.

Control inflation.

Despite that India has not suffered particularly from dramatic inflation, it is currently experiencing a rise in inflation similar to that seen in a number of emerging economies. We think a formal adoption of Inflation Targeting would be a very sensible move to help India persuade its huge population of the (permanent) benefits of price stability.

Introduce a credible fiscal policy.

We also believe that India shouldintroduce a more credible medium-term plan for fiscal policy. Targetinglow and stable inflation is not easy if fiscal policy is poorly maintained. Wethink it would be helpful to develop some ‘rules’ for spending over cycles.

Liberalize financial markets.

To improve further the macro variableswithin the GES framework, we believe further liberalization of Indianfinancial markets is necessary.

Increase trade with neighbors.

In terms of international trade, Indiacontinues to be much less ‘open’ than many of its other large emergingnation colleagues, especially China. Given the significant number of nationswith large populations on its borders, we would recommend that India targeta major increase in trade with China, Pakistan and Bangladesh.

Increase agricultural productivity.

Agriculture, especially in these timesof rising prices, should be a great opportunity for India. Better specific anddefined plans for increasing productivity in agriculture are essential, andcould allow India to benefit from the BRIC-related global thirst for better-qualityfood.

Improve infrastructure.

Focus on infrastructure in India is legendary, andtales of woe abound. Improvements are taking place, as any foreignbusiness visitor will be aware, but the need for more is paramount. Without such improvement, development will be limited.

Improve Environmental Quality.

the final area where greater reforms areneeded is the environment. Achieving greater energy efficiencies andboosting the cleanliness of energy and water usage would increase thelikelihood of a sustainable stronger growth path for India.