35.4.5: India’s Growing Economy

Economic Policies After Independence

Indian economic policy after independence was influenced by the colonial experience and its exploitative nature, as well as by British social democracy and the planned economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialization, economic interventionism, a large government-run public sector, business regulation, and central planning. At the same time, trade and foreign investment policies were relatively liberal. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalized in the mid-1950s. Economists referred to the rate of growth of the Indian economy in the first three decades after independence as the Hindu rate of growth because of the unfavorable comparison with growth rates in other Asian countries.

The collapse of the Soviet Union, 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. The country asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded deregulation. In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated economic liberalization in 1991. The reforms did away with the Licence Raj (a system of licences, regulations, and accompanying red tape required to set up and run businesses), 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 liberalization has remained the same, although no government has tried to take on powerful lobbies. 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.

Today, the economy of India is the sixth-largest in the world measured by nominal GDP and the third-largest by purchasing power parity (PPP). The country is classified as a newly industrialized country, one of the G-20 major economies, a member of BRICS, and a developing economy with an average growth rate of approximately 7% over the last two decades. Maharashtra is the wealthiest Indian state and has an annual nominal GDP of US$330 billion, nearly equal to that of Portugal and Pakistan combined, and accounts for 12% of the Indian GDP followed by the states of Tamil Nadu (US$150 billion) and Uttar Pradesh (US$130 billion). India’s economy became the world’s fastest growing major economy in the last quarter of 2014, replacing the People’s Republic of China.

India has one of the fastest growing service sectors in the world with an annual growth rate of above 9% since 2001, which contributed to 57% of GDP in 2012-13. India has become a major exporter of IT services, business process outsourcing services, and software services, with $167.0 billion worth of service exports in 2013-14. It is also the fastest-growing part of the economy. The IT industry continues to be the largest private sector employer in the country. India is also 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 sector has held a constant 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 fiscal year 2013-14. India has $600 billion worth of the retail market in 2015 and one of world’s fastest growing e-commerce markets.

Outcomes of Economic Development

India has made huge progress in terms of increasing the primary education attendance rate and expanding literacy to approximately three-fourths of the population. The literacy rate has grown from 52.2% in 1991 to 74.04% in 2011. The right to education at elementary level has been made fundamental,  and legislation has been enacted to further the objective of providing free education to all children. However, the literacy rate of 74% is still lower than the worldwide average and the country suffers from a high drop-out rate (impacted by economic challenges faced by the poorest segments of the society). Further, the literacy rates and educational opportunities vary greatly by region, gender, urban and rural areas, and among different social groups.

There is a continuing debate on whether India’s economic expansion has been pro-poor or anti-poor. Studies suggest that the economic growth has reduced poverty in India although it remains at a substantial level. In 2012, the Indian government stated 21.9% of its population is below its official poverty threshold. According to United Nation’s Millennium Development Goal (MDG) program, 270 million or 21.9% people out of 1.2 billion of Indians lived below poverty line of $1.25 in 2011-2012 as compared to 41.6% in 2004-05. It is important to note, however, that the World Bank and UN-accepted poverty line is very low and many of those whose purchasing power falls above it still face massive economic struggles.

A critical problem facing India’s economy is the sharp and growing regional variations among India’s different states and territories in terms of poverty, availability of infrastructure, and socioeconomic development. Severe disparities exist among states in terms of income, literacy rates, life expectancy, and living conditions.

Economic disparities among the States and Union Territories of India, on GDP per capita, PPP basis in 2011. After liberalization, the more advanced states have been better placed to benefit, with well-developed infrastructure and an educated and skilled workforce that attract the manufacturing and service sectors. The governments of less-advanced regions are trying to reduce disparities by offering tax holidays and cheap land and focusing more on sectors like tourism which although geographically and historically determined, can become a source of growth and develop faster than other sectors.

Map shows the per capita gross domestic product (GDP) on a purchasing parity basis (PPP), for 35 states and union territories of India at 2011 US$ equivalent basis. The highest GDP per capita, on PPP basis, was observed in Chandigarh ($9,345 per person), while the lowest was observed in Bihar ($1,019 per person).

Continuous Challenges

Corruption has been one of the pervasive problems affecting India. A 2005 study by Transparency International (TI) 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 in the previous year. In 1996, bureaucracy and the Licence Raj were suggested as a cause for the institutionalized corruption and inefficiency. More recent reports suggest the causes include excessive regulations and approval requirements, mandated spending programs, monopoly of certain goods and service providers by government-controlled institutions, bureaucracy with discretionary powers, and lack of transparent laws and processes. The Right to Information Act (2005), which requires government officials to furnish information requested by citizens or face punitive action, computerization of services, and various central and state government acts that established vigilance commissions have reduced corruption and opened up avenues to redress grievances.

In 2011, the Indian government concluded that most spending fails to reach its intended recipients. A large, cumbersome bureaucracy sponges up or siphons off spending budgets. India’s absence rates are one of the worst in the world. One study found that 25% of public sector teachers and 40% of government-owned public sector medical workers could not be found at the workplace. Similarly, there are many issues facing Indian scientists, with demands for transparency, a meritocratic system, and an overhaul of the bureaucratic agencies that oversee science and technology.

Despite the impressive economic growth, India continues to experience a plethora of social issues, many associated with countries that lag economically. These include the lack of proper sanitation, debt bondage and other forms of bonded labor, child labor, child marriage, gender-based violence, and poor access to quality health care and education faced by a substantial segment of the caste-based society.

Attributions

• India’s Growing Economy
  • “Economy of India.” https://en.wikipedia.org/wiki/Economy_of_India. Wikipedia CC BY-SA 3.0.
  • “Social issues in India.” https://en.wikipedia.org/wiki/Social_issues_in_India. Wikipedia CC BY-SA 3.0.
  • “BRICS.” https://en.wikipedia.org/wiki/BRICS. Wikipedia CC BY-SA 3.0.
  • “Economic development in India.” https://en.wikipedia.org/wiki/Economic_development_in_India. Wikipedia CC BY-SA 3.0.
  • “G20.” https://en.wikipedia.org/wiki/G20. Wikipedia CC BY-SA 3.0.
  • “Licence Raj.” https://en.wikipedia.org/wiki/Licence_Raj. Wikipedia CC BY-SA 3.0.
  • “35_India_States_and_Union_Territories_GDP_per_capita_on_PPP_basis_in_2011.svg.png.” https://commons.wikimedia.org/wiki/File:35_India_States_and_Union_Territories_GDP_per_capita_on_PPP_basis_in_2011.svg. Wikimedia Commons CC BY-SA 3.0.