India – an overview of the economy
The Indian economy is the twelfth largest in the world, with its GDP measured in USD exchange rate terms crossing the trillion dollar mark (US $ 1.17 trillion, to be precise) in 2007.
Since these developments, India has joined the club 12 countries with a trillion dollar economy. Further, in terms of GDP at purchasing power parity (PPP), India retained its position as the fourth largest economy in 2007. The World Development Indicators (WDI) database of the World Bank estimates India’s GDP in PPP terms at 3.1 trillion dollars. GDP growth was 9% 2007-2008, which - coming on top of the above 9% growth in the previous two years - put the economy on the fulcrum of an ever increasing growth curve.
With positive indicators such as a stable annual growth rate, rising foreign exchange reserves, a booming capital market and rapidly expanding foreign direct investment (FDI) inflows, India emerged as the second fastest growing major economy in the world, after China. And significantly, the industrial and service sectors have been contributing a major part of this growth. The country’s macroeconomic fundamentals are strong and the investment climate continues to inspire confidence.
The reform process in India was initiated with the objective of accelerating the pace of economic growth and eradication of poverty. Economic reforms of the last decade and a half – since 1991 – signaled a paradigm shift to a more open economy with greater reliance on market forces, a larger role for the private sector including foreign investment and a restructuring of the role of government.
Industrial policy was restructured to a great extent and most industrial controls were dismantled. Massive deregulation of industrial sector was done to bring in the element of competition and increase efficiency.
India has emerged as a premier global manufacturing hub with the foray of a number of multinational corporations such as General Motors, Ford, Suzuki, Hyundai, Coca Cola etc. Manufacturing is the backbone of the economy. Global competitiveness in manufacturing fosters growth, productivity and employment, and strenghthens the agriculture ( a very important sector which accounts for 18.5 % of India’s GDP) and the services sector ( which accounts for 55 % of GDP). India has the potential to become a manufacturing hub for textiles, automobiles, steel, metals and petroleum products for the world market.
The government has liberalized the foreign investment regime substantially over the last decade. Today, FDI is allowed in almost all sectors barring a few sensitive sectors such as defence. Further, FDI upto 100 % is allowed in most sectors under the automatic route, which means that in such cases, prior approval of the government is not required. The FDI policy rationalization and liberalization have led to increased inflow of FDI over the years.
The 10 sectors attracting highest FDI into India are:
- electrical equipments (including computer software and electronics);
- services sector ( financial and non-financial);
- telecommunications (radio paging, cellular mobile, basic telephone services);
- transportation industry;
- fuels (power plus oil refinery);
- chemicals (other than fertilizers);
- construction activities;
- drugs and pharmaceuticals;
- food processing industries and
- housing and real estate.
Due to the financial crisis, that began in industrialized nations and spread to the real economy across the world, there was a slowdown in the growth rate in 2008-09 when GDP growth was 6.7 per cent.
The continued recession in the developed world, for the better part of 2009-10 meant a sluggish export recovery and a slowdown in the financial inflows into the economy. Yet, over the span of the year, the economy posted a remarkable recovery, not only in terms of the overall growth figures (over 7% in 2009-10) but, more importantly, in terms of certain fundamentals, which justify optimism for the Indian economy in the medium to long term. The growth estimate being projected for 2010-11 is close to 9%. The recovery also foreshadows renewed momentum in the manufacturing sector with manufacturing growth more than doubling from 3.2% in 2008-09 to 8.9% in 2009-10.