Economy of India

November 5, 2005

Economic Growth and Development

Economy of India

The economy of India has seen an explosive amount of growth during the past few years. India's economy is the fourth largest in the world in terms of purchasing power parity (PPP) followed by a Gross Domestic Product of $3.3 trillion. India also has 8.1% Gross Domestic Product growth rate, which is second in the world (Economy of India 2005).

India was the second fastest growing major economy in the world, with a GDP growth rate of 8.1% at the end of the first quarter of 2005-06. However, India's huge population results in a relatively low per capita income of $3,100 at PPP (Economy of India 2005).

India has an extremely diverse economy which includes many areas in agriculture, crafts, major industries and numerous miscellaneous services. The leading economic growth vehicle in India would be it's multitude of services, however two-thirds of the workforce in India earn their income through agriculture. The labor force of India is estimated to be around 482.2 million people with 57% in agriculture, 17% in industry, and 23% in other services (Economy of India 2005).

In recent times, India has also capitalised on its large number of highly educated people who are fluent in the English language to become a major exporter of software services, financial services and software engineers (Economy of India 2005).

Since India's independence it has adopted to a socialist government which has led to government control over all aspects of the economy. This includes strict policies over the private sector, foreign trade as well as direct foreign investment in India. However, India has recently developed new economic reforms that have limited the governments control on foreign investment and trade. These reforms have allowed the markets to be more open and accessible

for future investors and entrepenuers (Economy of India 2005).

The socio-economic problems India faces are a burgeoning population and lack of infrastructure, as well as growing inequality and unemployment. Poverty also remains a problem although

it has seen a decrease of 10% since the 1980s. India's economic history can be broadly compartmentalised into three eras, beginning with the pre-colonial period lasting up to the 17th century. The advent of British colonisation of the Indian subcontinent started the colonial period in the 17th century, which ended with the Indian independence in 1947. The third period is the post-independence period after 1947 (Economy of India 2005).

Indias growth rate of real GDP per capita(1950-2004)

Growth rate of India's real GDP per capita (Constant Prices: Chain series) (1950-2000).

Data Source: Penn World tables.

In 1947 India gained its indepeendence and started to develop its economic structure as well as its government. During this period India was extremlly poor and cosumed with viloence and economic instability. Since the late nineteenth century the economy of India had become stagnate with no signs of industrial development (Economy of India: Analysis, Character and Structure 2000).

In fiscal year 1950, agriculture, forestry, and fishing accounted for 58.9 percent of the gross domestic product and for a much larger proportion of employment. Manufacturing, which was dominated by the jute and cotton textile industries, accounted for only 10.3 percent of GDP at that time (Economy of India: Analysis, Character and Structure 2000).

During the 1950's India maintained somewhat steady economic growth in both private and public sectors of the economy. The established government leaders after independence wanted desperately to improve economic growth directly and develop agendas to respond to the poverty that had consumed India. The government felt the need for India to become more self-sufficient rather than rely on foreign investment and trade. This led to a split in the public and private sectors of the economy. The private sector which was controlled by the government and large private investors produced the majority of consumer goods. The public sector controlled the large industries, telecommunications, and transportation systems of India. During the 1970's India began to addressee the immense state control of the economy and sought to find ways of reducing government control. In the 1980's India experience greater than average foreign aid to help funding in numerous development plans throughout the country (Economy of India: Analysis, Character and Structure 2000).

As a result, when the price of oil rose sharply in August 1990, the nation faced a balance of payments crisis. The need for emergency loans led the government to make a greater commitment to economic liberalization than it had up to this time.

In the early 1990s, India's post-independence development pattern of strong centralized planning, regulation and control of private enterprise, state ownership of many large units of production, trade protectionism, and strict limits on foreign capital was increasingly questioned not only by policy makers but also by most of the intelligentsia (Economy of India: Analysis, Character and Structure 2000).

Private and public industry employment in India(2003)

No. of persons employed in non-agricultural occupations in Public and Private Sectors.

Data source: Economic Survey (2004-05)

India's current population has continued to grow at a remarkable rate and is estimated at 1.027 billion people and has an annual growth rate of around 1.93% (1991-2001). This is down somewhat from an annual growth rate of 2.15% during 1951-1981. While the Gross Domestic Product of India is considered low in dollar terms, India is however ranked 13th in the world for largest Gross National Product. Estimates of around 62% of India's total population depend directly or indirectly on agriculture output and products (Economy of India: Analysis, Character and Structure 2000).

Composition of indias agricultural output in 2003-04

Composition of India's total production (million tonnes) of foodgrains and commercial crops, in 2003-04.

Industry and services sectors are growing in importance and account for 26% and 48% of GDP,