TheEconomyofIndia:Past,PresentandFuture

IndiagainedindependencefromBritainin1947.Atthetime,thecountrymodeleditseconomy
afterthatoftheSovietUnion.Majorindustrieswerelargelygovernmentcontrolled,andextensive
permitswererequiredinordertostartabusiness.Inaddition,duetoapastrifewithcolonial
exploitation,thenationseverelylimitedoutsidetradeenactinglargetariffsandputtingrestrictionson
foreigninvestment.WhilethecountrymaintainedfairlysignificanttraderelationswiththeformerSoviet
Unionthroughoutthe1970sand1980s,tradeasapercentageofIndiasGDPhoveredbetween10and
15percentfrom1960until1990.Thislevelwaswellbelowtheworldaveragewhichmovedfrom25to
40percentinthesameperiod.Overthecourseofthe1980s,Indiafounditselffinancingincreasingly
largebudgetdeficits.This,incombinationwithadisruptionintradefromthecollapseoftheSoviet
Empirein1989,eventuallyledtoaBalanceofPaymentcrisiswithinthecountryinwhichtheIndian
governmentfounditselfwithoutthefundsnecessarytooperateformorethantwoweeksduring1991.
Inresponsetothiscrisis,thegovernmentsoughtanemergencyloanfromtheIMF.Aloanwasgranted
however,asistypicalwithsuchloans,itwasgrantedupontheconditionthatIndiamakeeconomic
reforms.DemandingthatIndiareduceitsbudgetdeficit,openitsmarketstoforeigncompetition,
diminishitsmazeoflicensingrequirements,cutsubsidies,andliberalizeinvestment...(Weinraub,1991),
thereforms,enactedthroughoutthe90s,representedasignificantchangefromthenationseconomic
norms.Thereformswereapositivestepforthecountryfromaneconomicperspective,buttheywere
notfullyvisibleinmanyrespectsuntiloveradecadelater,andgrowthsignificantlyfalteredin2012.
Whilethechangesmadethroughoutthe90swerepositive,Indiastillhasmanyproblemswhichmustbe
solvedbeforethenationreachesitsfullpotential.TodeterminehowIndiacanreachthispotential,
severalstepsmustbetaken.First,theeffectofthe90sreformsshouldbedetermined.Thiscanbedone
byanalyzingIndiaseconomicstatisticsbothbeforeandafterthereform.Afterthis,mechanismsby
whichthereformscouldhaveeffectedchangesinthestatisticsmustbeidentified.Finally,lookingat
thesemethodsinthecontextoftheresourcesandadvantageswhichIndiahas,theactionsIndiamust
taketoincreaseitseconomicgrowthandmovetowardbecomingadevelopednationcanberealized.
(Arun&Nixson,2000DCosta,95Kale,2009Vietor,2003WorldBankGroup)
KeyStatisticsandTheirMeanings
KeystatisticsinanalyzingIndiasgrowthandtheeffectofthereformsareGDP,GDPper
Person,Employment,FDIasaPercentageofGDP,andTradeasaPercentageofGDP.Changesin
GDPgiveanoverallsenseofthesizeoftheIndianeconomy.ChangesinGDPperPersonrelatethesize
oftheeconomytopopulationinordergiveasenseofthewellbeingoftheaveragecitizenwithinthe
country.Employment showsthepercentageoftheIndianpopulationwhichislikelybenefitingfromthe
1
countrysgrowth.FDIasapercentageofGDPshowsthelevelofforeigninvestmentinIndiain
comparisontothesizeofitseconomy.TradeasapercentageofGDPshowshowreliantthenationis
upontrade.Additionally,boththeFDIandtradestatisticsindicatethedegreetowhichthenationis
benefittingfromtradeandtheglobalisingworld.Themostimportantofthementionedstatisticsto
increaseareGDPperPersonandemployment.Whileallofthestatisticsgiveusefulinformation,these
twostatisticsindicatethegeneralqualityoflifetobefoundwithinacountry,andthenumberof
individualswhoareactuallyabletopartakeinthatqualityoflife.Increasingtheotherstatisticsispositive
asitworkstowardincreasingthesetwo.(Taylor&Weerapana,2012)
IndiaBeforeandAfterReform:AStatisticalView
1
Employmentistheonlystatisticmentionedwhichisnotdirectlyavailable.Indiadoesnothave
employmentdataavailablebeforetheearly90s.Todeterminechangeswithinemploymentfromthe1980sto
the1990s,thenumberofpeopleregisteredwithIndiasEmploymentExchangeswasused.Afterthe1990s
theLaborForceParticipationRateandUnemploymentareconsidered.
Afterreformsbeganin1991,IndiasawsignificantimprovementsinFDIasapercentageof
GDP,tradeasapercentageofGDP,andemployment.GDPandGDPperCapitacontinuedgrowing
asnormal.Whatthisindicatesisthatthereformsdidnotinitiallyimprovelifefortheaverageemployed
Indian.However,thereformsdidmuchtointegrateIndiawiththeworldeconomy.In2002,GDPand
GDPperPersonjoinedFDIandtradeintheirupwardmovement.Thisisthepointatwhichthereforms
seemtohavetrulystartedtovisiblybenefitthecountry.Highlevelsofeconomicgrowthcontinuedup
untilthe2008worldrecessionwhenEmployment ,TradeandFDIsawmoderatetolargedecreases.In
2
2012,growthinGDPandGDPperCapitabeganslowing.(Pandey,WorldBankGroup)
TheoverallstorytoldbyIndiaseconomicstatisticsovertheendofthe20thcenturyisan
optimisticone.Indiaseconomygrewatafasterpacethanitspopulation,andthenationbecame
wealthier.Itsfirmsbecameincreasinglyinvolvedininternationaltrade,andalargeamountofforeign
capitalwasinvestedinthecountry.The2008recessionprovidedasetbackhoweveritdidlittletodent
theoverallimprovementsseeninthenation.Ifthereformsofthe90saretobepointedtoasthecause
ofIndiasgrowth,anexplanationmustbegivenastowhythisisthecase.Inansweringthis,itishelpful
tolookattheeconomicexplanationsofgrowthandthewaysinwhichtradebenefitsanation.
IncreasedGDPThroughIncreasedEfficiency
EconomistsconsideranationsGDPtobeafunctionofthelabor,capital,andtechnologyit
contains.Themorelaborandcapitalacountryhas,andthemoretechnologyavailabletoincrease
productivity,thehigherthenationsGDPwillbe.Givenaparticularamountoflaborandcapital,anda
certainleveloftechnology,acountryshouldtheoreticallybeabletoproducesomepotentialoutput.This
2
AccordingtoWorldBankstatistics,whileUnemploymentremainedfairlystable,TheLaborForce
ParticipationRatedecreasedbyseveralpercentagepoints.Barringmajorsocialchanges,thiscanbe
viewedasareductioninEmployment.
potentialoutputisdependentuponlaborandcapitalbeingusedefficientlyhowever.Itisentirely
possiblethatinefficientuseoflaborandcapitalmightcauseaneconomytoproducelessthanits
potentialoutput.Alackofcompetition,subsidies,orhavingtodealwithexcessivegovernment
regulationswouldbeexamplesoffactorswhichmightcauselaborandcapitaltobeallocated
inefficiently.Allofthesefactorswerereducedbythe90sreforms.Firmswereforcedtodealwith
foreigncompetitionastariffsandquotaswerereduced,subsidieswerereducedoreliminated,andmuch
bureaucraticredtapewasdoneawaywith.Thesechangesallprovidemechanismsthroughwhichthe
reformsmayhaveimprovedIndiasGDPandGDPperPerson.(Arun&Nixson,2000DCosta,95
Kale,2009Taylor&Weerapana,2012Vietor,2003)
IncreasedGDPThroughTrade
Asidefrombeingforcedtocompetewithforeignfirms,increasedtradeandparticipationinthe
globaleconomyprovidedanothermechanismthroughwhichthereformsmighthavecausedgrowthin
India.Differentnationshavedifferentadvantageswhenitcomestoproducingagivenproduct.This
mightbeanabsoluteadvantageinwhichonenationcanproduceatalowermonetarycostthananother.
Itcouldalsobeacomparativeadvantageinwhichonenationcanproduceagoodwithalower
opportunitycostthananother.Alternatively,anationcouldhaveacompetitiveadvantageinwhichthey
haveaccesstosomeunderlyingresourceorinfrastructurewhichgivesanadvantagetooutput.The90s
reformsreducedimportlimitations,tariffs,andlimitsonFDI.Doingsoallowedforeignfirmstoinvestin
Indiainordertoproducegoodsatalowercostviaabsolute,comparative,andcompetitiveadvantages.
ItalsoallowedIndianstodothesameperhapspurchasingcapitalatalowerpriceorbuyingconsumer
goodsatlowerprices.Abletopurchasegoodsefficientlyproducedinothercountriesandfocuson
producingthatwhichitcouldproducemostefficientlywouldhaveincreasedthetotalcapitalinIndiaand
enabledthecountrytomoreeffectivelyutilizethelaborandcapitalavailabletoit.Theresultofthis
wouldbetonotonlymovethecountrysoutputtowarditspotential,butalsotoincreasepotential
output.(DCosta,1995Henry,2008Kale,2009Kotwal&Rhamaswami&Wadhwa,2012
Mukherji,2009Taylor&Weerapana,2012Vietor,2003)
TheImportanceofGlobalisationonTrade
Acountrysabsolute,comparative,andcompetitiveadvantageshavebecomeincreasingly
importantoverthelastseveraldecadesastheworldhasbeenrapidlyglobalising.Globalisationisthe
processofgeographicallyseparatedareasoftheworldbecomingmoreinterconnectedand
interdependentononeanother.Thisiscausedlargelybyimprovementsincommunicationand
transportationtechnology.Thesetechnologiesformthebasisoftrade,andduetotheirrapid
improvementcountriesandfirmscannowmorethanevercoordinateproductionacrossmultiple
continents.Firmscannow,toanunprecedenteddegree,utilizetheabsolute,comparative,and
competitiveadvantagesfoundindifferentnationsinordertoproducegoodsatthelowestpossiblecost.
Thus,whiletradehasalwaysbeencapableofincreasingacountryspotentialoutput,itsabilitytodothis
hasbeenatanalltimehigh.TheglobalizedstateoftheworldmakesitcriticalthatIndiaparticipatein
tradeifthenationwishestoseelevelsofprosperitycomparabletothatoftheworldsrichernations.It
isonlythroughtradethatthesewealthiernationshaveachievedtheirstandardsofliving.(Lechner,2000
Taylor&Weerapana,2012)
IncreasedEmploymentThroughIncreasedEfficiencyandTrade
Itisonlynaturalthataninfluxofforeigninvestment,areductiononimportrestrictions,andmore
efficientallocationoflaborandresourceswould,inraisingGDPandincreasingtrade,alsoincrease
employment.Nothavingtodealwithadditionalregulationsandsavingonforeignboughtcapital,Indian
firmswouldhavemorefundsavailabletohireadditionalemployeestoincreaseproduction.Additionally,
becauseIndiahasanabsoluteadvantageintermsofthepriceoflaborincomparisontoindustrialized
nations,itismoreattractiveformanyforeignfirmstopurchaseIndianlaboroverdomesticlabor.
IncreasedefficiencywithinIndiaincombinationwithanopennesstowardtradewouldthusattract
foreignfirmswishingtopurchaseinexpensivelabor.Inthismanner,thereformswouldacttoincrease
employmentlevelswithinIndia.Itisworthmentioningonceagainthatemployment,alongwithGDPper
Person,isoneofthekeystatisticsacountrymustimprovetoincreasethequalityofitscitizenslives.
ThosewhoareinvoluntarilyunemployedcannottrulybenefitfromincreasesinGDPperPerson.
(Raman&Chadee,2011Weede2010)
IncreasedGDPThroughImprovedTechnology
Justascheapercapitalandmoreefficientutilizationofcapitalandlaborwouldincrease
opportunitiesforemployment,itwouldalsoincreaseinvestmentinnewtechnology.Indianfirmswould
havehadanincreasedaccesstonewtechnologyastraderestrictionswerelifted.Withmoreforeign
investmentavailable,moreeffectivelyallocatedcapitalandlabor,andforeignorlocalcompetition
pushingfirmstobeasproductiveaspossible,itisonlylogicalthatfirmswouldseektoinvestinthis
newlyavailabletechnologytoimprovetheiroutput.Again,GDPisafunctionoflabor,capital,and
technology.Asfirmsimplementedneworimportedtechnologies,Indiastotalpotentialoutputwould
haveincreased.(Taylor&Weerapana,2012)
IndiasEconomicStrategy
Usingbasiceconomictheory,allofthereformsIndiamadecanbelinkedtoincreasesintheir
economicstatisticsviaincreasedtradeorbetterallocationofcapitalandlabor.Itseemsthatthe
countrysstrategyforeconomicgrowthhasbeentoimplementpolicieswhichincreasetheeffective
utilizationofcapitalandlabor,andtoengageintradeinordertobenefitfromthevariousadvantagesof
othernations.Thisfitswithstatementsthenationsgovernmenthasmade,andthegeneraloutlookof
thosereportingontheregion.Theideabehindthisstrategyiseconomicallysound,andstatisticsshow
thattheIndiangovernmenthasgreatlyincreasedthestandardoflivingofitspeople.Thereisstillmuch
worktobedonehowever.Usingtheestablishedmethodsofcreatingeconomicgrowth,itisnow
possibletoanalyzethecurrentsituationwithinIndia,alongwiththenationsvariousadvantages,and
determinetheactionswhichmustbetakentopushIndiasemploymentandGDPperPersonstillhigher.
(Arun&Nixson,2000DCosta,1995Kale,2009Vietor,2003)
IndiasCompetitiveAdvantagesandDisadvantages
Indiahasacompetitiveadvantageinitslargesupplyofnaturalresources.Theseincludeitsvast
forestsandfishablecoastlinereservesofcoal,oil,andnaturalgasandvariousmetalandmineral
deposits(CentralIntelligenceAgency).Additionallythecountryhasalargesupplyofyoungworkers,a
largenumberofEnglishspeakers,andastatefundededucationsystemwhichhasenabledagood
fractionoftheworkforcetobecomehighlyskilled(Bernstein,2011CentralIntelligenceAgency
Kotwal&Rhamaswami&Wadhwa,2012Raman&Chadee,2011).Indiaisdisadvantagedbyits
geographiclocationsurroundedbymanypoorcountrieswhicharenotcapableofengaginginlarge
volumesoftrade.Astradinggoodswithneighboringstatesislesscostlyandsimplerthantradingwith
distantnations,Indiaisthusatadisadvantagewhenitcomestotradinggoodsincomparisonto
developingcountrieslikeChina(withneighborsJapanandRussia)orMexico(borderingtheUS).
(Kaul,2013)Indiaisalsodisadvantagedbyitslackofinfrastructure,limitationsonFDI,andthe
prevalenceoforganizedlaborwithinthecountry.(Henry,2008Mukherji,2009Raman&Chadee,
2011Veeramani)
Indiahastakenadvantageoftheeducatedenglishspeakingportionofitsworkforceand
moderncommunicationsystemsinordertoworkaroundsomeofitscompetitivedisadvantages.The
nationhasbecomeahubforlowcostITsupport,backendofficeservices,andsoftwaredevelopment.
TheseservicesarenotdependentonIndiasgeographiclocation,andhaveledIndiasgrowthoverthe
pasttwodecades.Thisgrowthinserviceshasbeenpossiblebothbecauseofthenationscompetitive
advantages,andbecausethenationhasanabsoluteadvantagewhenitcomestoskilledandsemiskilled
labor.(Bernstein,2011Kaul,2013Kotwal&Rhamaswami&Wadhwa,2012Raman&Chadee,
2011)
IndiasComparativeAdvantagesandFailuretoCapitalizeOnThem
Indiahascomparativeadvantagesinvariousmanufacturedgoodsduetoitslowcostunskilled
laborandcompetitiveadvantages.ManyoftheseadvantagesareconsideredtobegreaterthanChinas,
theworldleaderinmanufacturing.However,despitethis,Chinasmarketshareinthesegoodsis
typicallyhigherbeyondthatwhichisexplainablebythedifferenceinthesizeofChinaandIndias
economies.ItisthoughtthatIndiaslackofinfrastructure(nearlyaquarterofIndianslackelectricity),
strictlaborlawswhichpreventhiring,andprevalentlaborunionsarediscouragingforeigninvestmentin
manufacturinginIndiaevenwhenthenationseeminglyhasacomparativeadvantage.(Batra&Khan,
2005Henry,2008Weed,2010Veeramani)
IndiasTradingPartners
Despiteexistingdifficultiesthenationfaces,itstillengagesinenormousamountsoftrade.Indias
tradeasapercentageofGDPmovedfrom11to55percentbetween1960and2012.Indiahasa
diverselistoftradingpartners.Itstop15tradingpartnersin2012includedeconomicpowerhouseslike
theUSandChina,smalldevelopednationslikeBelgiumandSwitzerland,anddevelopingnationssuch
asIranandIndonesia.Indiastradewithdevelopednationscentersaroundthecountryslowcostlabor
andtechnicalservicesindustry.Whilethenationisinvolvedinregionaltradeagreementstofacilitate
tradewithneighborssuchasIndonesia,thelimitedwealthoftheseneighborskeepsthistradefrom
dominatingthatfromothersources.IndiaslargesttradepartneristheUAE.Therelationshipbetween
thesetwocountriescentersaroundIndiasgrowingneedforpetroleumpetroleumbeingIndiaslargest
itemofimportfromtheUAE.IndiasexportstotheUAEarevariedandrangefrommanufactured
petroleumproductstoagriculturalexportsandnaturalresourcessuchasmetalsandwood.Whatis
clearisthat,evenwithitsabundantnaturalresources,Indiangrowthisdependentontrade.(Department
ofCommerceHenry,2008Kale,2009MinistryofExternalAffairs,2013WorldBankGroup)
IndianPoliticsasaCompetitiveAdvantage/Disadvantage
ThepoliticsofIndiaandthepoliciesofitsgovernmenthaveprovidedcompetitiveadvantages
anddisadvantagesforIndiathroughoutitsrecenthistory.Thesocialistandprotectionistoutlookofthe
governmentfromthetimeofthecountrysindependenceupuntilthe90sreformsclearlyheldthenation
backeconomically.Thepositiveresultsofreformhavechangedthepoliticallandscapewithinthe
countryhowever.Whilethisreformwasinitiallyforceduponthenation,itisnowviewedinapositive
lightbymanyinIndia.Thenationstillhassomeprotectionistpoliciesespeciallyintheagricultural
sectorandrestrictionsonFDIarestillfairlysevereincomparisontopolicieselsewhereintheworld.A
politicalreadinessforadditionalreformexistshowever,anditstandstobetakenadvantageof.
Additionally,between2005and2013,thegovernmentreduceditsdebtfrom61to48percentofGDP.
Theresultofthisshouldbetoincreasethenationsbondratingsandhopefullyattractadditional
investment.(Arun&Nixson,2000DCosta,1995Elkhoury,2008Fernandez,2004Hasan,2006
Indiascreditrating,2012Kale,2009Kaul,2013Upadhya,2009WorldBankGroup)
IndiasFuture
IfIndiawishestocontinuetobenefitfromhighlevelsofeconomicgrowth,itmustcontinueon
thepathofreform.ThereismuchthenationcandotostrategicallyincreaseGDPperPersonand
Employment.ThenationmustremoverestrictionsonFDIitmustcontinuetolowertariffs,especiallyin
theagriculturalsectorandthegovernmentmustmakethecountrymoreattractivetoinvestmentfrom
manufacturersthroughchangesinlaborlawsandinvestmentininfrastructure.
ImprovingFDI
RegardingFDI,themostimportantactionsthatIndiacantakearetobereadyforincreasesin
thelevelofworldinvestmentbyremovingrestrictionsonFDIbeforetheyoccur,andtoensurethat
investmentinthenationisperceivedasstable.ThefigurebelowshowsIndiasFDIasapercentageof
GDPincomparisontoFDIasapercentageofworldGDP.ChangesinIndiasbondratingsarealso
shown.
(CountryEconomy.comWorldBankGroup)
Twomainobservationscanbemadelookingatthefigure.ThefirstisthatIndiasFDIrisesandfalls
withworldwideFDI.Thesecondisthatpositivebondratingsarecorrelatedwithlargerincreases(and
decreases)inFDIinresponsetoworldchanges.ThelargestchangeinFDIcameasaresultofthe
nationopeningitselftoFDIin1991.ShouldthenationremovetheremainingrestrictionsonFDIwhile
maintainingorimprovingitsbondratings,itshouldexpecttoseelargeincreasesinforeigninvestmentthe
nexttimeworldwideFDIsurges.(Elkhoury,2008Indiascreditrating,2012Kaul,2013)
ReducingArtificialSupportforAgriculture
ExistingsubsidiesandtariffsfortheIndianagriculturalindustrymustbeloweredoreliminated.
IntroducingforeigncompetitionandmoreefficientlyproducedforeigngoodswillspurgrowthinIndia,
aspreviouslyexplainedwhendiscussingthereductionofothertariffsandsubsidies.Nearlyhalfof
Indiasworkforceisinvolvedinagriculturalproduction,andsolongasthegovernmentprovidesthese
protectionstheagriculturalsectorwillnotbecomemoreproductive.Thiswillpreventotherareasofthe
economyfromexpandingasagricultureconsumesanoverlylargeportionoftheeconomy.Sudden
changesintradepolicycanhavedetrimentalimpactsonindustrieshowever.Assuch,duetothe
importanceofagriculturewithinIndia,itisimperativethatreformsaremadegraduallyandpredictably.
(Bhattacharyya,2011Henry,2008Mukherji,2009Taylor&Weerapana,2012)
IncreasingManufacturing
Indiamustdevelopamanufacturingbase.GrowthinserviceshasgreatlybenefittedIndia.
However,themajorityofIndiasworkforceispoor,nothighlyeducated,andcannotparticipatein
servicebasedexportindustries.WhileIndiahasseenrapidgrowthinGDPperCapita,itisthoughtthat
themajorityofthisincreasehasbeenfeltonlybythenationsmosteducated.Anincreasedpresenceof
manufacturingwillallowIndiatoutilizeandimprovethelivesofitslessskilledanduneducatedmajority.
Asmentioned,Indiahascomparativeadvantagesinnumerousmanufacturingsectors.Becauseofthis,
firmsalreadyhaveamotivationtoproduceinIndia,theysimplyneedthemeans.Thekeytothiswillbe
governmentinvestmentininfrastructureandsimplifyinglaborlawssothatitismoredesirabletohire
permanentemployees.TheresultofthiswillbesignificantimprovementsinGDPperPersonasupward
mobilityisimprovedforthepoorestsegmentsofthecountryspopulation.(Bernstein,2011Kotwal&
Rhamaswami&Wadhwa,2012Mukherji,2009Raman&Chadee,2011Subramanian,2013
Weede,2010)
AHopefulOutlook
Indiahascomeveryfarsincebothitsindependenceandsincethe1990seconomicreforms.
However,thenationstillhasalongpathaheadifitsgoalistoattainastandardoflivingforitscitizens
comparabletothatinthedevelopedworld.Growthinthenationhavingrecentlystagnated,the
governmentmustmakeswifteffortstorepeattheeventsofthe1990sandshowtheworldthatIndiais
bothwelcometoandripeforforeigninvestmentandcapital.Shouldthenationsucceedinthiseffort
reducingimpedimentstobusiness,tradeandinvestmentitwillseegrowthasitneverhasbefore.
Shouldthenationfailrelyingsolelyonthereformsofthe1990sthenitseconomywillflounderandits
peoplewillnotprosper.Economicsisnotthescienceofbusiness,itisthestudyofsatisfyinghuman
wantsandneedsinanenvironmentofscarceresources.Failingtofolloweconomicallyprudentpolicies
willnotsimplyleaveIndiasbusinesseshurtingitwillleavetheneedsandwantsoftheIndianpeople
unsatisfied.Assuch,thepathwhichIndiaembarksontodaywillfundamentallydeterminethewellbeing
ofitspeopleinthefuture.
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