Economy of India

Economy of India

The economy of India, measured in USD exchange-rate terms, is the twelfth largest in the world, with a GDP of around $1 trillion (2008). [ The Times of India] ] It recorded a GDP growth rate of 9.1% for the fiscal year 2007–2008 which makes it the second fastest big emerging economy, after China, in the world.cite news | title=India Defies TurmoilWith Growth of 8.8% | date= May 31, 2007 | publisher=MarketWatch | url=] At this rate of sustained growth many economists forecast that India would, over the coming decades, have a more pronounced economic effect on the world stage. Despite this phenomenal rate of growth, India's large population has a per capita income of $2,659, measured by PPP, and $978, measured in nominal terms (revised 2007 estimate).India's economy is diverse and consist of various activities including manufacturing, agriculture and services. Although most of the Indian workforce still earns its livelihood directly or indirectly through agriculture and manufacturing, high tech services are a growing sector and play an increasingly important role in India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global outsourcing of customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering. Other sectors like manufacturing, pharmaceuticals, biotechnology, nanotechnology, telecommunication, shipbuilding, aviation , tourism and retailing are showing strong potentials with higher growth rates.

India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatisation of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate.

India faces a fast-growing population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence.


India's economic history can be broadly divided into three eras, beginning with the pre-colonial period lasting up to the 17th century. The advent of British colonisation started the colonial period in the 17th century, which ended with independence in 1947. The third period stretches from independence in 1947 until now.


The citizens of the Indus Valley civilisation (based around the river Indus in modern day Pakistan and Northern and Western India), a permanent and predominantly urban settlement that flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and measures, made tools and weapons, and traded with other cities. Evidence of well planned streets, a drainage system and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems and the existence of a form of municipal government.cite book|author=Nehru, Jawaharlal|title=Discovery of India|publisher=Penguin Books|year=1946|id=ISBN 0-14-303103-1]

The 1872 census revealed that 99.3% of the population of the region constituting present-day India resided in villages,cite book|author=Kumar, Dharma (Ed.)|title=The Cambridge Economic History of India (Volume 2) c. 1757 - c. 1970|publisher=Penguin Books|year=1982|pages=519] whose economies were largely isolated and self-sustaining, with agriculture the predominant occupation. This satisfied the food requirements of the village and provided raw materials for hand-based industries, such as textiles, food processing and crafts. Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while its craftsmen received a part of the crops at harvest time for their services.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|publisher=S.Chand|year=2005|id=ISBN 81-219-0298-3|pages=15–16|chapter=2]

Religion, especially Hinduism, and the caste and the joint family systems, played an influential role in shaping economic activities.cite book|author=Sankaran, S|title=Indian Economy: Problems, Policies and Development|publisher=Margham Publications|year=1994|id=ISBN|pages=50|chapter=3] The caste system functioned much like medieval European guilds, ensuring the division of labour, providing for the training of apprentices and, in some cases, allowing manufacturers to achieve narrow specialization. For instance, in certain regions, producing each variety of cloth was the speciality of a particular sub-caste.

Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon, opium and indigo were exported to Europe, the Middle East and South East Asia in return for gold and silver.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|pages=16|chapter=2]

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. One estimate puts the revenue of Akbar's Mughal Empire in 1600 at £17.5 million, in contrast with the total revenue of Great Britain in 1800, which totalled £16 million.cite news | title = Economy of Mughal Empire| work = Bombay Times| publisher = Times of India| date= 2004-08-17] India, by the time of the arrival of the British, was a largely traditional agrarian economy with a dominant subsistence sector dependent on primitive technology. It existed alongside a competitively developed network of commerce, manufacturing and credit. After the fall of the Mughals, India was administered by Maratha Empire. The maratha empire's budget in 1740s, at its peak, was Rs. 100 million. After the loss at Panipat, the maratha empire disintegrated into confederate states of Gwalior, Baroda, Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior state had a budget of Rs. 30M. However, at this time, British East India company entered the Indian political theatre. Until, 1857, when India was firmly under the British crown, the country remained in a state of political instability due to internecine wars and conflicts.cite book|author=Kumar, Dharma (Ed.)|title=The Cambridge Economic History of India (Volume 2)|pages=32–35|chapter=1]


Colonial rule brought a major change in the taxation environment from revenue taxes to property taxes resulting in mass impoverishment and destitution of the great majority of farmers. It also created an institutional environment that, on paper, guaranteed property rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures, capital markets, a well developed system of railways and telegraphs, a civil service that aimed to be free from political interference, and a common-law, adversarial legal system.cite paper | author=Williamson, John and Zagha, Roberto | title=From the Hindu Rate of Growth to the Hindu Rate of Reform | publisher=Center for research on economic development and policy reform | year=2002 | version=Working Paper No. 144 | url=] India's colonisation by the British coincided with major changes in the world economy—industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world,cite book | author=Roy, Tirthankar | title=The Economic History of India | publisher=Oxford University Press | year=2000 | id=ISBN 0-19-565154-5 | pages = 1 | chapter = 1] with industrial development stalled, agriculture unable to feed a rapidly growing population, one of the world's lowest life expectancies, and low rates of literacy.

An estimate by Cambridge University historian Angus Maddison reveals that India's share of the world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8% in 1952.cite news|title=Of Oxford, economics, empire, and freedom|date=October 2, 2005|publisher=The Hindu|url=] While Indian leaders during the Independence struggle, and left-nationalist economic historians have blamed colonial rule for the dismal state of India's economy in its aftermath, a broader macroeconomic view of India during this period reveals that there were sectors of growth and decline, resulting from changes brought about by colonialism and a world that was moving towards industrialisation and economic integration.cite book|author=Roy, Tirthankar|title=The Economic History of India|publisher=Oxford University Press|year=2000|id=ISBN 0-19-565154-5|pages=304|chapter=10] cite book|author=Roy, Tirthankar|title=The Economic History of India|publisher=Oxford University Press|year=2000|id=ISBN 0-19-565154-5|chapter=preface] While the exact sectors of growth and decline is of questionable importance, the overall effect of the changes brought about by colonialism, and India's degree of industrialisation and economic integration of India under the British rule on India's economy can be assessed from the kind of economy India inherited after the end of the colonial rule in India.

Independence to 1991

Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization, state intervention in labour and financial markets, a large public sector, business regulation, and central planning.cite paper | author=Kelegama, Saman and Parikh, Kirit|title=Political Economy of Growth and Reforms in South Asia|year=2000|version=Second Draft|url=] Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic policy. They expected favourable outcomes from this strategy, because it involved both public and private sectors and was based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system.cite paper|author=Cameron, John and Ndhlovu, P Tidings|title=Cultural Influences on Economic Thought in India: Resistance to diffusion of neo-classical economics and the principles of Hinduism|year=2001|url=|archiveurl=|archivedate=2006-08-23] The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticized by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers.cite web|title=Milton Friedman on the Nehru/Mahalanobis Plan|url=| accessdate = 2005-07-16]

India's low average growth rate from 1947–80 was derisively referred to as the Hindu rate of growth, because of the unfavourable comparison with growth rates in other Asian countries, especially the "East Asian Tigers".

After 1991

In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. While this increased the rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. cite paper
last = Ghosh
first = Arunabha
title = India's pathway trough economic crisis
publisher = Global Economic Governance Programme GEG Working Paper 2004/06
date= 2004-06-01
url =
accessdate = 2007-10-02
] In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.cite paper | author=Panagariya, Arvind | title=India in the 1980s and 1990s: A Triumph of Reforms | year=2004 | url=] Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.cite news | title=That old Gandhi magic | date= November 27, 1997 | publisher=The Economist | url=]

Since 1990 India has emerged as one of the wealthiest economies in the developing world; during this period, the economy has grown constantly, but with a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security.

While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to investment level in 2007 by S&P and Moody's.cite web|url=|title="S&P raises India's credit rating] Dead link|date=April 2008cite web|url=,dwp_uuid=a6dfcf08-9c79-11da-8762-0000779e2340.html|title="India's sovereign credit upgraded"] In 2003, Goldman Sachs predicted that India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind US and China.cite web|last=Wilson|first=Dominic|coauthors=Purushothaman, Roopa|url=|title=DreamingWith BRICs: The Path to 2050|publisher=Goldman Sachs|work=Global economics paper No. 99|date=2003-10-01|accessdate = 2007-10-04] cite web|first=Damian|last=Grammaticas |url=| title="Indian economy 'to overtake UK'"|publisher=BBC News|accessdate=2007-01-26]

Government intervention

tate planning and the mixed economy

After independence, India opted for a centrally planned economy to try to achieve an effective and equitable allocation of national resources and balanced economic development. The process of formulation and direction of the Five-Year Plans is carried out by the Planning Commission, headed by the Prime Minister of India as its chairperson.cite web|title=History of the Planning Commission|url=| accessdate = 2005-07-22]

India's mixed economy combines features of both capitalist market economy and the socialist planned economy, but has shifted more towards the former over the past decade. The public sector generally covers areas which are deemed too important or not profitable enough to leave to the market, including such services as the railways and postal system. Since independence, there have been phases of nationalizing such areas as banking. More recently, there have been phases of privatizing such sectors.

Public expenditure

India's public expenditure is classified as development expenditure, comprising central plan expenditure and central assistance and non-development expenditures; these categories can each be divided into capital expenditure and revenue expenditure. Central plan expenditure is allocated to development schemes outlined in the plans of the central government and public sector undertakings; central assistance refers to financial assistance and developmental loans given for plans of the state governments and union territories. Non-development capital expenditure comprises capital defense expenditure, loans to public enterprises, states and union territories and foreign governments, while non-development revenue expenditure comprises revenue defence expenditure, administrative expenditure, subsidies, debt relief to farmers, postal deficit, pensions, social and economic services (education, health, agriculture, science and technology), grants to states and union territories and foreign governments.Public expenditure was classified as plan and non-plan expenditure in the 1987–1988 union budget. It is now referred to as development and non-development expenditure, but the definition remains the same. Development expenditure is a capital expenditure.] cite book | author=Datt, Ruddar & Sundharam, K.P.M. | title=Indian Economy | pages = 943 | chapter = 55]

India's non-development revenue expenditure has increased nearly fivefold in 2003–04 since 1990–91 and more than tenfold since 1985–1986. Interest payments are the single largest item of expenditure and accounted for more than 40% of the total non development expenditure in the 2003–04 budget. Defence expenditure increased fourfold during the same period and has been increasing due to India's desire to project its military prowess beyond South Asia. In 2007, India's defence spending stood at US$26.5 billion. [,25197,23474033-23850,00.html] Administrative expenses are compounded by a large salary and pension bill, which rises periodically due to revisions in wages, dearness allowance etc. subsidies on food, fertilizers, education and petroleum and other merit and non-merit subsidies account are not only continuously rising, especially because of rising crude oil and food prices, but are also harder to rein in, because of political compulsions.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|pages=943–945|chapter=55]

Public receipts

India has a three-tier tax structure, wherein the constitution empowers the union government to levy income tax, tax on capital transactions (wealth tax, inheritance tax), sales tax, service tax, customs and excise duties and the state governments to levy sales tax on intrastate sale of goods, tax on entertainment and professions, excise duties on manufacture of alcohol, stamp duties on transfer of property and collect land revenue (levy on land owned). The local governments are empowered by the state government to levy property tax and charge users for public utilities like water supply, sewage etc.Service tax and expenditure tax are not levied in Jammu and Kashmir; Intra-state sale happens when goods or the title of goods move from one state to another.] cite paper | author=Bernardi, Luigi and Fraschini, Angela | title=Tax System And Tax Reforms In India | year=2005 | version=Working paper n. 51 | url=] More than half of the revenues of the union and state governments come from taxes, of which half come from Indirect taxes. More than a quarter of the union government's tax revenues is shared with the state governments.Tax revenue was 88% of total union government revenue in 1950–51 and has come down to 73% in 2003–04, as a result of increase in non-tax revenue. Tax revenues were 70% of total state government revenues in 2002 to 2003. Indirect taxes were 84% of the union governments total tax revenue and have come down to 62% in 2003–04, mostly due to cuts in import duties and rationalisation. The states share in union government's tax revenue is 28.0% for the period 2000 to 2005 as per the recommendations of the eleventh finance commission. In addition, states that do not levy sales tax on sugar, textiles and tobacco, are entitled to 1.5% of the proceeds.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|publisher=S.Chand|year=2005|id=ISBN 81-219-0298-3|pages=938, 942, 946]

The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increase compliance by taking steps in the following directions:
*Reducing the rates of individual and corporate income taxes, excises, customs and making it more progressive
*Reducing exemptions and concessions
*Simplification of laws and procedures
*Introduction of permanent account number (PAN) to track monetary transactions
*21 of the 29 states introduced value added tax (VAT) on April 1, 2005 to replace the complex and multiple sales tax systemcite news|title=Indif_real_GDP_per_capitaa says 21 of 29 states to launch new tax|date=March 25, 2005|publisher=Daily Times|url=]

The non-tax revenues of the central government come from fiscal services, interest receipts, public sector dividends, etc., while the non-tax revenues of the States are grants from the central government, interest receipts, dividends and income from general, economic and social services.

Inter-State share in the federal tax pool is decided by the recommendations of the Finance Commission to the President.

Total tax receipts of Centre & State amount to approximately 18% of national GDP. This compares to a figure of 37-45% in the OECD and explains why the country remains under-developed as evident inter-alia from the poor state of its infrastructure and social services compared to OECD countries. The limited resources of Government affect its ability to pay fair wages to public servants. This may well be the cause of endemic corruption at all levels of government.

General budget

The Finance minister of India presents the annual union budget in the Parliament on the last working day of February. The budget has to be passed by the Lok Sabha before it can come into effect on April 1, the start of India's fiscal year. The Union budget is preceded by an economic survey which outlines the broad direction of the budget and the economic performance of the country for the outgoing financial year. This economic survey involves all the various NGOs, women organizations, business people, old people associations etc.

India's union budget for 2005–06, had an estimated outlay of Rs.5,14,344 crores ($118 billion). Earnings from taxes amount to Rs. 2,73,466 crore ($63b). India's fiscal deficit amounts to 4.5% or 1,39,231 crore ($32b).cite web|title=Union Budget & Economic Survey|url=| accessdate = 2006-07-29] The fiscal deficit is expected to be 3.8% of GDP, by March 2007.cite web|title=Revenue surge boosts fiscal health|url=]

Currency system

The rupee is the only legal tender accepted in India. The exchange rate as of September 24, 2008 is about 46.005 to a US dollar, [ [ U.S. Dollar to Indian Rupee Exchange Rate - Yahoo! Finance India ] ] 67.373 to a Euro, and 85.244 to a UK pound. The Indian rupee is accepted as legal tender in the neighboring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee. The rupee is divided into 100 paise. The highest-denomination banknote is the 1,000 rupee note; the lowest-denomination coin in circulation is the 1 rupee coin (it earlier had 25 & 50 paise coins which have been discontinued by the Reserve Bank of India). [ [ RBI] ]

Natural resources

India's total cultivable area is 1,269,219 km² (56.78% of total land area), which is decreasing due to constant pressure from an ever growing population and increased urbanisation.

India has a total water surface area of 314,400 km² and receives an average annual rainfall of 1,100 mm. Irrigation accounts for 92% of the water utilisation, and comprised 380 km² in 1974, and is expected to rise to 1,050 km² by 2025, with the balance accounted for by industrial and domestic consumers. India's inland water resources comprising rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly 6 million people in the fisheries sector. In 2008, India had the world's third largest fishing industry. []

India's major mineral resources include Coal (fourth-largest reserves in the world), Iron ore, Manganese, Mica, Bauxite, Titanium ore, Chromite, Natural gas, Diamonds, Petroleum, Limestone and Thorium (world's largest along Kerala's shores). India's oil reserves, found in Bombay High off the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the country's demand.cite book | author=Datt, Mihir Bhojani & Vivek Sundharam, K.P.M. | title=Indian Economy | pages =90,97,98,100 | chapter = 7] cite web
title =CIA - The World Factbook - India
publisher = [ CIA]
date= 2007-09-20
url =
accessdate =2007-10-02

Rising energy demand concomitant with economic growth has created a perpetual state of energy crunch in India. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Though India is rich in Thorium, but not in Uranium, which it might get access to if a nuclear deal with US comes to fruition. India is rich in certain energy resources which promise significant future potential - clean / renewable energy resources like solar, wind, biofuels (jatropha, sugarcane).

Physical infrastructure

Development of infrastructure was completely in the hands of the public sector and was plagued by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale investment.cite book|author=Sankaran, S|title=Indian Economy: Problems, Policies and Development|publisher=Margham Publications|year=1994|id=ISBN]

India's low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. This had prompted the government to partially open up infrastructure to the private sector allowing foreign investmentcite web | title=Infrastructure the missing link | url= | accessdate = 2005-08-14] cite web | title=Infrastructure in India: Requirements and favorable climate for foreign investment | url= | accessdate = 2005-08-14] which has helped in a sustained growth rate of close to 9% for the past six quarters. [ [ India's Economic Growth Unexpectedly Quickens to 9.2%] ] India holds second position in the world in roadways' construction, more than twice that of China.cite web | title=Infrastructure Rankings | url=] As of 2005 the electricity production was at 661.6 billion kWh with oil production standing at 785,000 bbl/day. India's prime import partners are: China 8.7%, US 6%, Germany 4.6%, Singapore 4.6%, Australia 4% as of 2006 [ CIA FactBook] As of January 15, 2007, there were 2.10 million broadband lines in India. [] Low tele-density is the major hurdle for slow pickup in broadband services. Over 76% of the broadband lines were via DSL and the rest via cable modems.

Financial institutions

India inherited several institutions, such as the civil services, Reserve Bank of India, railways, etc., from its British rulers. Mumbai serves as the nation's commercial capital, with the Reserve Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) located here. The headquarters of many financial institutions are also located in the city.

The RBI, the country's central bank was established on April 1, 1935. It serves as the nation's monetary authority, regulator and supervisor of the financial system, manager of exchange control and as an issuer of currency. The RBI is governed by a central board, headed by a governor who is appointed by the Central government of India. The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30 companies with April 1979 as the base year (100). These companies have the largest and most actively traded stocks and are representative of various sectors, on the Exchange. They account for around one-fifth of the market capitalisation of the BSE. The Sensex is generally regarded as the most popular and precise barometer of the Indian stock markets. Incorporated in 1992, the National Stock Exchange is one of the largest and most advanced stock markets in India. The NSE is the world's third largest stock exchange in terms of transactions. There are a total of 23 stock exchanges in India, but the BSE and NSE comprise 83% of the volumes.cite web|title=Regional stock exchanges—Bulldozed by the Big Two|url= | accessdate = 2005-08-10] The Securities and Exchange Board of India (SEBI), established in 1992, regulates the stock markets and other securities markets of the country.



India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 16.6% of the GDP in 2007, employed 60% of the total workforce and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since Green revolution in India. However, international comparisons reveal that the average yield in India is generally 30% to 50% of the highest average yield in the world.cite book | author=Datt, Ruddar & Sundharam, K.P.M. | title=Indian Economy | pages = 485–491 | chapter = 28]

The low productivity in India is a result of the following factors:
* Illiteracy, general socio-economic backwardness, slow progress in implementing land reforms and inadequate or inefficient finance and marketing services for farm produce.
* The average size of land holdings is very small (less than 20,000 m²) and is subject to fragmentation, due to land ceiling acts and in some cases, family disputes. Such small holdings are often over-manned, resulting in disguised unemployment and low productivity of labour.
* Adoption of modern agricultural practices and use of technology is inadequate, hampered by ignorance of such practices, high costs and impracticality in the case of small land holdings.
* Irrigation facilities are inadequate, as revealed by the fact that only 52.6% of the land was irrigated in 2003–04,cite paper | author=Multiple authors | title=Agricultural Statistics at a Glance 2004 | year=2004 | url=,%20Production%20and%20Yield%20of%20Rice.xls] which result in farmers still being dependent on rainfall, specifically the Monsoon season. A good monsoon results in a robust growth for the economy as a whole, while a poor monsoon leads to a sluggish growth.cite book|author=Sankaran, S|title=Indian Economy: Problems, Policies and Development|pages=492–493|chapter=28] Farm credit is regulated by NABARD, which is the statutory apex agent for rural development in the subcontinent.


India is fourteenth in the world in factory output. They together account for 27.6% of the GDP and employ 17% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only. [] Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods.cite news | title=Economic structure| date= October 6, 2003 | publisher=The Economist | url=]

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology.cite news | title=Indian manufacturers learn to compete | date=February 12, 2004 | publisher=The Economist | url=]

34 Indian companies have been listed in the Forbes Global 2000 ranking for 2008.cite web | title=Forbes Global 2000 (Ger-Ind) | url=| accessdate=March | accessyear=2008 ] The 10 leading companies are:


India is fifteenth in services output. It provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 55% in 2007 up from 15% in 1950. Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialisation, availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers. On the supply side and on the demand side, increased demand from foreign consumers interested in India's service exports or those looking to outsource their operations. India's IT industry, despite contributing significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th of the total services.cite paper|author=Gordon, Jim and Gupta, Poonam|title=Understanding India's Services Revolution|year=2003|version=November 12, 2003|url=]

Banking and finance

The Indian money market is classified into: the organised sector (comprising private, public and foreign owned commercial banks and cooperative banks, together known as "scheduled banks"); and the unorganised sector (comprising individual or family owned indigenous bankers or money lenders and non-banking financial companies (NBFCs)). The unorganised sector and microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans.cite book | author=Datt, Ruddar & Sundharam, K.P.M. | title=Indian Economy | pages = 847–850 | chapter = 50]

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Since then, the number of bank branches has increased from 10,120 in 1969 to 98,910 in 2003 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total deposits increased 32.6 times between 1971 to 1991 compared to 7 times between 1951 to 1971. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 32,270 or 48%, only 32,270 out of 5 lakh (500,000) villages are covered by a scheduled bank.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|pages=850–851|chapter=50] cite web|author=Ghosh, Jayati|title=Bank Nationalisation: The Record|work=Macroscan|url=| accessdate = 2005-08-05]

Since liberalisation, the government has approved significant banking reforms. While some of these relate to nationalised banks (like encouraging mergers, reducing government interference and increasing profitability and competitiveness), other reforms have opened up the banking and insurance sectors to private and foreign players.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|pages=865–867|chapter=50]

General Economy

Services or the "tertiary sector" of the economy covers a wide gamut of activities like trading, banking & finance, infotainment, real estate, transportation, security, management & technical consultancy among several others. The various sectors that combine together to constitute service industry in India are:Trade Hotels and Restaurants Railways Other Transport & Storage Communication (Post, Telecom) Banking Insurance Dwellings, Real Estate Business Services Public Administration; Defence Personal Services Community Services Other Services There was marked acceleration in services sector growth in the eighties and nineties, especially in the nineties. While the share of services in India's GDP increased by 21 per cent points in the 50 years between 1950 and 2000, nearly 40 per cent of that increase was concentrated in the nineties. While almost all service sectors participated in this boom, growth was fastest in communications, banking, hotels and restaurants, community services, trade and business services. One of the reasons for the sudden growth in the services sector in India in the nineties was the liberalisation in the regulatory framework that gave rise to innovation and higher exports from the services sector.

The boom in the services sector has been relatively "jobless". The rise in services share in GDP has not accompanied by proportionate increase in the sector's share of national employment. Some economists have also cautioned that service sector growth must be supported by proportionate growth of the industrial sector, otherwise the service sector grown will not be sustainable. In the current economic scenario it looks that the boom in the services sector is here to stay as India is fast emerging as global services hub.

ocio-economic characteristics


Large numbers of India's people live in abject poverty. 24.3% of the population earned less than $1 a day in 2005 down from 33.3% in 1990. [ [ India has fewer poor people: World Bank] ] According to the new World Bank's estimates on poverty based on 2005 data, India has 456 million people, 41.6% of its population, down from 60% in 1981 living below the new international poverty line of $1.25 (PPP) per day. The World Bank further estimates that 33% of the global poor now reside in India. Moreover, India also has 828 million people, or 75.6% of the population living below $2 a day, compared to 72.2% for Sub-Saharan Africa. [ [] ] [ [] ] [ [] ] [ [] ]

Wealth distribution in India is improving since the liberalization and with the end of the socialist rule termed as the license raj. [ [ Income classes:India's income distribution widens] ] While poverty in India has reduced significantly, official figures estimate that 27.5% [ This figure is extremely sensitive to the surveying methodology used. The Uniform Recall Period (URP) gives 27.5%. The Mixed Recall Period (MRP) gives a figure of 21.8% ] of Indians still lived below the national poverty line in 2004-2005.Planning commission of India. Poverty estimates for 2004-2005 [] ] A 2007 report by the state-run National Commission for Enterprises in the Unorganised Sector (NCEUS) found that 65% of Indians, or 750 million people, lived on less than 20 rupees per day [ [ NCEUS Report] ] with most working in "informal labour sector with no job or social security, living in abject poverty."cite news | title=Nearly 80 Percent of India Lives On Half Dollar A Day | date= August 10, 2007 | publisher=Reuters | url=|accessdate=2007-08-15]

Since the early 1950s, successive governments have implemented various schemes, under planning, to alleviate poverty, that have met with partial success. All these programmes have relied upon the strategies of the "Food for work" programme and "National Rural Employment Programme" of the 1980s, which attempted to use the unemployed to generate productive assets and build rural infrastructure. In August 2005, the Indian parliament passed the "Rural Employment Guarantee Bill", the largest programme of this type in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in 200 of India's 600 districts. inote|ani-REGB|REGB The question of whether economic reforms have reduced poverty or not has fuelled debates without generating any clear cut answers and has also put political pressure on further economic reforms, especially those involving the downsizing of labour and cutting agricultural subsidies.cite book|author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy|pages=367,369,370|chapter=22] cite web|title=Jawahar gram samriddhi yojana|url=| accessdate = 2005-07-09]


Corruption has been one of the pervasive problems affecting India. The economic reforms of 1991 reduced the red tape, bureaucracy and the "Licence Raj" that had strangled private enterprise and was blamed for the corruption and inefficiencies. Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office.

The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive action, computerisation of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances.Cite web|url=| title= India Corruption Study 2005| author= Transparency International India| publisher = Centre for Media Studies|accessdate = 2008-03-14] The 2007 report by Transparency International ranks India at 72nd place and states that significant improvements were made by India in reducing corruption. Cite web|url=| title= 2007 Corruption Perceptions Index reinforces link between poverty and corruption|publisher=Transparency International|accessdate=2008-03-15] Cite web|url=| title =CPI Table | publisher= Transparency International| accessdate= 2008-03-15]

Occupations and unemployment

Agricultural and allied sectors accounted for about 57% of the total workforce in 1999–2000, down from 60% in 1993–94. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 1999–2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7.32%, with rural areas doing marginally better (7.21%) than urban areas (7.65%).

Unemployment in India is characterized by chronic underemployment or disguised unemployment. Government schemes that target eradication of both poverty and unemployment (which in recent decades has sent millions of poor and unskilled people into urban areas in search of livelihoods) attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decreased role of the public sector after liberalization has further underlined the need for focusing on better education and has also put political pressure on further reforms.cite book | author=Datt, Ruddar & Sundharam, K.P.M.|title=Indian Economy | pages = 403–405 | chapter = 24]

Regional imbalance

One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development.cite book | author=Datt, Ruddar & Sundharam, K.P.M. | title=Indian Economy | pages = 471–472 | chapter = 27]

The five-year plans have attempted to reduce regional disparities by encouraging industrial development in the interior regions, but industries still tend to concentrate around urban areas and port citiescite book | author=Bharadwaj, Krishna | year=1991 | chapter = Regional differentiation in India | editor=Sathyamurthy, T.V. (ed.) | title = Industry & agriculture in India since independence | pages=pp. 189–199 | publisher=Oxford University Press | id=ISBN 0-19-564394-1] After liberalization, the more advanced states are better placed to benefit from them, with infrastructure like well developed ports, urbanisation and an educated and skilled workforce which attract manufacturing and service sectors. The union and state governments of backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc., and focusing more on sectors like tourism, which although being geographically and historically determined, can become a source of growth and is faster to develop than other sectors.cite paper | author=Sachs, D. Jeffrey; Bajpai, Nirupam and Ramiah, Ananthi | title=Understanding Regional Economic Growth in India | year=2002 | version=Working paper 88 | url= | archiveurl= | archivedate=2007-07-01] cite web | author=Kurian, N.J. | title=Regional disparities in india | work= | url= | accessdate = 2005-08-06]

External trade and investment

Global trade relations

India currently accounts for 1.2% of World trade as of 2006 according to the WTO. [ India's Trade policy review by the wto] Until the liberalisation of 1991, India was largely and intentionally isolated from the world markets, to protect its fledging economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment 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 $200M annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians.cite paper | author=Srinivasan, T.N. | title=Economic Reforms and Global Integration | year=2002 | version=January 17, 2002 | url=]

India's exports were stagnant for the first 15 years after independence, due to the predominance of tea, jute and cotton manufactures, demand for which was generally inelastic. Imports in the same period consisted predominantly of machinery, equipment and raw materials, due to nascent industrialisation. Since liberalisation, the value of India's international trade has become more broad-based and has risen to Rs. 63,080,109 crores in 2003–04 from Rs.1,250 crores in 1950–51.Fact|date=June 2007 India's major trading partners are China, the US, the UAE, the UK, Japan and the EU.cite book | author=Datt, Ruddar & Sundharam, K.P.M. | title=Indian Economy | pages = 767,772–76 | chapter = 46] The exports during April 2007 were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06% over the previous year. [ [ INDIA’S FOREIGN TRADE: APRIL-DECEMBER, 2007] ]

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the World Trade Organization. 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 such matters as labour and environment issues and other "non-tariff barriers" into the WTO policies.cite web | title=India & the World Trade Organization | url= | accessdate = 2005-07-09]

Balance of payments

Since independence, India's balance of payments on its current account has been negative. Since liberalisation in the 1990s (precipitated by a balance of payment crisis), India's exports have been consistently rising, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. Although India is still a net importer, since 1996–97, its overall balance of payments (i.e., including the capital account balance), has been positive, largely on account of increased foreign direct investment and deposits from non-resident Indians; until this time, the overall balance was only occasionally positive on account of external assistance and commercial borrowings. As a result, India's foreign currency reserves stood at $285 billion in 2008, which could be used in infrastructural development of the country if used effectively.

India's reliance on external assistance and commercial borrowings has decreased since 1991–92, and since 2002–03, it has gradually been repaying these debts. Declining interest rates and reduced borrowings decreased India's debt service ratio to 4.5% in 2007. [ [ India`s external debt rises to US$190.5bn] ] inote|rbi-handbook-aug2004|rbiIn India, External Commercial Borrowings (ECBs) are being permitted by the Government for providing an additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates these borrowings (ECBs) through ECB policy guidelines. [ [ External Commercial Borrowings] ]

Foreign direct investment in India

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); [] India has strengths in information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. [] India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 50 million and represents a growing consumer market. [ [ Next Big Spenders: India's Middle Class] ]

India's recently liberalized FDI policy (2005) allows 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 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. [ [ The Hinduonline] ] This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24bn [ [ Hindustan Times "India attracts $ 25 billion FDI in 2007-08"] ] and for 2008-09, it is expected to be above $35 billion. [ [ Economic Times "FDI inflows to exceed USD 35 billion target in 2008-09"] ] A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going to depend on how the government can create incentives for FDI flow across a large number of sectors in India. [ [Indian Economic Superpower: Fiction or Future? edited by Jayashankar M. Swaminathan, World Scientific Publishing, 2008] ]

See also

*Economic development in India
* List of Indian companies
* International investment position
* Bilateral Investment Treaty
* Energy policy
* List of Cooperative Banks in India





;Government publications

*cite news | title=India’s next 50 years | date= August 14, 1997 | publisher=The Economist | url=
*dead link|date=April 2008

*cite web | title=CIA - The World Factbook | url= | accessdate = 2005-08-02

External links

; Government of India websites
* [ Finance Ministry of India]
* [ India in Business] - Official website for Investment and Trade in India
* [ Reserve Bank of India's database on the Indian economy]
* [ India Brand Equity Foundation]
* [ Finance Tools]

; Reports and statistics
* [,,contentMDK:21002801~menuPK:2792475~pagePK:64156158~piPK:64152884~theSitePK:461198,00.html India and the Knowledge Economy] - a World Bank Institute report.
* [ Ernst & Young 2006 report on doing Business in India]
* [ CIA - The World Factbook – India]

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