"India's Economy Has Been
The World's Fastest Growing Major
Economy, Surpassing China"
The economy of India is a developing mixed economy. It is the world's seventh-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). The country ranks 139th in per capita GDP (nominal) with US$2,134 and 122nd in per capita GDP (PPP) with US$7,783 as of 2018. After the 1991 economic liberalization, India achieved 6-7% average GDP growth annually. Since 2014, with the exception of 2017, India's economy has been the world's fastest growing major economy, surpassing China. The long-term growth prospective of the Indian economy is positive due to its young population, English proficiency, corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. India topped the World Bank's growth outlook for the first time in fiscal year 2015–16, during which the economy grew 7.6%. Despite previous reforms, economic growth is still significantly slowed by bureaucracy, poor infrastructure, and inflexible labor laws (especially the inability to lay off workers in a business slowdown). India has one of the fastest growing service sectors in the world with an annual growth rate above 9% since 2001, which contributed to 57% of the GDP in 2012–13. India has become a major exporter of IT services, Business Process Outsourcing (BPO) services, and software services with US$154 billion revenue in FY 2017. This is the fastest-growing part of the economy. The IT industry continues to be the largest private-sector employer in India. India is the third-largest start-up hub in the world with over 3,100 technology start-ups in 2014–15. The agricultural sector is the largest employer in India's economy but contributes to a declining share of its GDP (17% in 2013–14). India ranks second worldwide in farm output. The industry (manufacturing) sector has held a steady share of its economic contribution (26% of GDP in 2013–14). The Indian automobile industry is one of the largest in the world with an annual production of 21.48 million vehicles (mostly two and three-wheelers) in 2013–14. India had a US$600 billion retail market in 2015 and one of world's fastest growing e-commerce markets. Economic liberalization in India was initiated in 1991 by Prime Minister P. V. Narasimha Rao and his then-Finance Minister Dr. Manmohan Singh. Rao was often referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government. The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a US$1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded de-regulation. In response, the Narasimha Rao government, including Finance Minister Manmohan Singh, initiated economic reforms in 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberal-isation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labor laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalization. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than rural residents. GDP grows exponentially, almost doubling every five years. The Indian GDP growth rate from 1985 to 2016 was in red, compared to that of China in green. While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by Standard & Poor's (S&P) and Moody's. India experifrom 2003 to 2007. Growth then moderated in 2008 due to the global financial crisis. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, United Kingdom and Russia by 2025 and Japan by 2035, making it the third-largest economy of the world, behind the United States and China. India is often seen by most economists as a rising economic superpower which will play a major role in the 21st-century global economy. Starting in 2012, India entered a period of reduced growth, which slowed to 5.6%. Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's decision to taper quantitative easing, foreign investors began rapidly pulling money out of India – though this reversed with the stock market approaching its all-time high and the current account deficit narrowing substantially. India started recovery in 2013–14 when the GDP growth rate accelerated to 6.4% from the previous year's 5.5%. The acceleration continued through 2014–15 and 2015–16 with growth rates of 7.5% and 8.0% respectively. For the first time since 1990, India grew faster than China, which registered 6.9% growth in 2015. However the growth rate subsequently decelerated, to 7.1% and 6.6% in 2016–17 and 2017–18 respectively, partly because of the disruptive effects of 2016 Indian bank note demonetization and the Goods and Services Tax (India). As of October 2018, India is the world's fastest growing economy, and is expected to maintain that status for at least three more years. India is ranked 77th out of 190 countries in the World Bank's 2018 ease of doing business index, up 23 points from the last year's 100 and up 53 points in just two years. In terms of dealing with construction permits and enforcing contracts, it is ranked among the 10 worst in the world, while it has a relatively favorable ranking when it comes to protecting minority investors or getting credit. The strong efforts taken by the Department of Industrial Policy and Promotion (DIPP) to boost the ease of doing business rankings at the state level is said to impact the overall rankings of India. Until the liberalization of 1991, India was largely and intention-ally isolated from world markets, to protect its economy and achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quanti-tative restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI averaged only around US$200 million annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians. India's exports were stagnant for the first 15 years after independence, due to the general neglect of trade policy by the government of that period; imports in the same period, with early industri-alization, consisted predominantly of machinery, raw materials and consumer goods. Since liberalization, the value of India's international trade has increased sharply, with the contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 47% in 2009–10. Foreign trade accounted for 48.8% of India's GDP in 2015. Globally, India accounts for 1.44% of exports, 2.12% of imports for merchandise trade, 3.34% of exports and 3.31% of imports for commercial services trade. India's major trading partners are the European Union, China, the United States and the United Arab Emirates. In 2006–07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewellery, textiles and gar-ments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver. In November 2010, exports increased 22.3% year-on-year to US$12 billion, while imports were up 7.5% at US$17 billion. The trade deficit for the same month dropped from US$6.5 billion in 2009 to US$5.6 billion in 2010. India is a founding-member of the General Agreement on Tariffs and Trade (GATT) and its successor, the WTO. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world. For instance, India has continued its opposition to the inclusion of labor, environmental issues and other non-tariff barriers to trade in WTO policies. Since independence, India's balance of payments on its current account has been negative. Since economic liberalization in the 1990s, precipitated by a balance-of-payment crisis, India's exports rose consistently, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. However, the global economic slump followed by a general deceleration in world trade saw the exports as a percentage of imports drop to 61.4% in 2008–09. India's growing oil import bill is seen as the main driver behind the large current account deficit, which rose to US$118.7 billion, or 11.11% of GDP, in 2008–09. Between January and October 2010, India imported US$82.1 billion worth of crude oil. The Indian economy has run a trade deficit every year from 2002 to 2012, with a merchandise trade deficit of US$189 billion in 2011–12. Its trade with China has the largest deficit, about US$31 billion in 2013. India's reliance on external assistance and concessional debt has decreased since the liberalization of the economy, and the debt service ratio decreased from 35.3% in 1990–91 to 4.4% in 2008–09. In India, external commercial borrowings (ECBs), or commercial loans from non-resident lenders, are being permitted by the government for providing an additional source of funds to Indian corporations. The Ministry of Finance monitors and regulates them through ECB policy guidelines issued by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act of 1999. India's foreign exchange reserves have steadily risen from US$5.8 billion in March 1991 to US$426 billion in April 2018. In 2012, the United Kingdom announced an end to all financial aid to India, citing the growth and robustness of Indian economy. India's current account deficit reached an all-time high in 2013. India has historically funded its current account deficit through borrowings by companies in the overseas markets or remittances by non-resident Indians and portfolio inflows. From April 2016 to January 2017, RBI data showed that, for the first time since 1991, India was funding its deficit through foreign direct investment inflows. The Economic Times noted that the development was "a sign of rising con-fidence among long-term investors in Prime Minister Narendra Modi's ability to strengthen the country's economic foundation for sustained growth". As the third-largest economy in the world in PPP terms, India has attracted foreign direct invest-ment (FDI). During the year 2011, FDI inflow into India stood at US$36.5 billion, 51.1% higher than the 2010 figure of US$24.15 billion. India has strengths in telecommunication, information techno-logy and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewelry. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance. Over time, India has adopted a number of FDI reforms. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing con-sumer market. India liberalized its FDI policy in 2005, allowing up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and investment. The upward 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% FDI in the construction sector, including built-up infrastructure and construction develop-ment projects comprising housing, commercial premises, hospitals, educa-tional institutions, recreational facilities, and city- and regional-level infrastructure. Between 2012 and 2014, India extended these reforms to defense, telecom, oil, retail, aviation, and other sectors. From 2000 to 2010, the country attracted US$178 billion as FDI. The inordinately high investment from Mauritius is due to routing of interna-tional funds through the country given significant tax advantages – double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel. FDI accounted for 2.1% of India's GDP in 2015. As the government has eased 87 foreign investment direct rules across 21 sectors in the last three years, FDI inflows hit US$60.1 billion between 2016 and 2017 in India.★