Indian Economy Overview
INTRODUCTION
Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each. Within Asia, the rising share of China and India has more than made up the declining global share of Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP.
According to some experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India GDP to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.
Indian Economy experienced a GDP growth of 9.0 percent during 2005-06 to 9.4 percent during 2006-07. By 2025 the India's economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US.
India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years.
ISSUES AND PRIORTIES FOR INDIA
As India prepares herself for becoming an economic superpower, it must expedite socio-economic reforms and take steps for overcoming institutional and infrastructure bottlenecks inherent in the system. Availability of both physical and social infrastructure is central to sustainable economic growth.
Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up gradation but the situation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India's performance has been far from satisfactory, showing a wide range of regional inequalities with urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken. Currently Indian economy is facing these challenges: - Sustaining the growth momentum and achieving an annual average growth of 7-8 % in the next five years.
- Simplifying procedures and relaxing entry barriers for business activities.
- Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (world bank figures).
- Boosting agricultural growth through diversification and development of agro processing.
- Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year.
- Developing world-class infrastructure for sustaining growth in all the sectors of the economy.
- Allowing foreign investment in more areas
- Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management.
- Empowering the population through universal education and health care. India needs to improve its HDI rank, as at 127 it is way below many other developing countries' performance. The UPA government is committed to furtering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.
India - a growing economy
 A growth rate of above 8% was achieved by the Indian economy during the year 2003-04 and in the advanced estimates for 2004-05, Indian economy has been predicted to grow at a level of 6.9 %. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in the 23-year growth record. In fact, the Indian economy has posted an excellent average GDP growth of 6.8% since 1994 ( the period when India's external crisis was brought under control). However, in comparison to many East Asian economies, having growth rates above 7%, the Indian growth experience lags behind. The tenth five year plan aims at achieving a growth rate of 8% for the coming 2-3 years.
Though, the growth rate for 2004-05 is less than that of 2003-04, it is still among the high growth rates seen in India since independence. Many factors are behind this robust performance of the Indian economy in 2004-05. High growth rates in Industry & service sector and a benign world economic environment provided a backdrop conducive to the Indian economy. Another positive feature was that the growth was accompanied by continued maintenance of relative stability of prices. However, agriculture fell sharply from its 2003-04 level of 9 % to 1.1% in the current year primarily because of a bad monsoon. Thus, there is a paramount need to move Indian agriculture beyond its centuries old dependency on monsoon. This can be achieved by bringing more area under irrigation and by better water management.
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Because of the weakening of the US dollar for the last two years, (caused mainly by widening US deficits), Indian Rupee has steadily appreciated vis-à-vis US dollar. Though, this trend saw a brief reversal during may-august 2004. The latest Re/$ Exchange rate (March 2005) stood close to 44. Despite strengthening nominally against US $, Rupee depreciated against other major non-dollar currencies. Thus, the Real Effective Exchange rate of the Rupee depreciated and this trend continued until end 2004. A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves crossed the US $100 billion mark on Dec 19, 2003 and was $142.13 billion on March 18, 2005. The capital inflows, current account surplus and the valuation gains arising from appreciation of the major non-US dollar global currencies against US dollar contributed to such a rise in Forex reserves.
The current account of BOP having been in surplus since 2001-02, turned into deficit in the first half of the current year( April-September 2004-05). Such a reversal was observed on the back of rise in POL and non POL imports which overwhelmed the growth of exports in US dollar terms at over 23 per cent. Growth momentum in exports was maintained; India's exports during Apr-Nov registered a growth of 24% from the last period but India's position was down from 30th to 31st rank in the top exporting countries of the world.
The main contributors to capital account surplus were the banking capital inflows, foreign institutional investments and other capital inflows. Alike current account, capital account too witnessed decline. The capital account surplus in April-September was also down by around US $ 1.5 million.
Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in 2002-03, driven entirely by the increase in the net foreign exchange assets of the RBI. However, it declined to 6.4% in the current year to January 28, 2005. During the current financial year 2004-05, broad money stock (M3) (up to December 10, 2004) increased by 7.4 per cent (exclusive of conversion of non-banking entity into banking entity, 7.3 per cent) as compared with the growth rate of 10.3 per cent registered during the corresponding period of the last year.
The downward trend in interest rates continued in 2004-05, with bank rate standing at 6% as on Dec 10, 2004. Banks recovery management improved considerably with gross NPAs declining from Rs 70861 crore in 2001-02 to Rs 68715 in 2002-03. During the current financial year (up to December 10, 2004) incremental gross bank credit increased by 20.5 per cent (exclusive of conversion, 16.6 per cent) as compared with a growth of 5.9 per cent in the same period of the previous year. Non-Food credit during the financial year so far, registered a growth of 20.5 per cent (exclusive of conversion, 16.5 per cent) as compared with an increase of 8.4 per cent during the same period of the last year indicated a positive outlook. Equity market return was 85% in 2003-04, second highest in Asia. With continued higher corporate earnings in 2004-05, the sensex crossed 6800 mark in March 2005 but high stock market volatility remained higher in India compared to other Asian countries. The expectation of sensex crossing 7 K mark is not yet realized. Fiscal deficit of states & center was decreasing in early 90s but due to rise in fiscal deficit in recent years, corrective measures have been adopted. The fiscal deficit decreased to 7.9% in 2004-05 from a 9.4% of GDP in 2003-04. According to recent estimates, fiscal deficit in April-October 2004 is 45.2 per cent of BE compared with 56.0 per cent of BE in the corresponding period last year.
For an Overview of the sectoral performance click here.
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