The Indian Economics - II

The first part of this blog (https://www.thebusinessbanter.com/post/the-indian-economics) was a very basic one discussing the basic terminology of an economy and also the various segments in an economy. In this blog, we will look at the deeper more technical aspects of the economy. Understanding what was the growth strategy of the Indian economy which helped it reach where it is right now? What are the best and most profitable sectors in this economy? And finally what are the true drivers of the economy? So let's jump right in-

  • The Reforms of 1991- Before 1991 India did not believe in trade liberalisation India followed License Raj where the Centre had almost all the powers and the main struggle was not production but obtaining a license to produce(which was very hard to get) thus reducing production drastically, even in the mid-1950s it nationalised a lot of Banks and industries and introduced Monopolies and Restrictive Trade Practices (MRTP) Act of 1970 and even started the 5-year plans in 1951 but due to the poor foreign trade which was subject to import tariffs, export taxes and quantitative restrictions, while Foreign Direct Investment(FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals, and lack of resources and production accompanies by "swadeshi", a scarcity of resources, Lack of foreign reserves and a negative trade balance was formed and the economy was almost on the verge of collapse. In 1991 India had to ask for a bailout from the IMF for $2.2 billion by pledging 67 tons of India’s gold reserves as collateral which came at a price of abolishing License Raj. The reforms of 1991 were introduced which aimed at

  1. trade liberalisation and Market Determined exchange rate system was introduced which was initiated with LERMS

  2. relaxation of MRTPs to "anti-PSU",

  3. automatic approval of FDI in many industries,

  4. privatisation and globalisation of trade

  5. abolition of License Raj

  6. devaluation of INR from 17.5 per dollar to 43 per dollar to promote exports, India's BOP recovered to $15.8B and India progressed towards a free-market economy with a better focus on agricultural subsidies and reformed labour laws. India's GDP grew by 27% in the next 10 years from 27,000 cr USD to 47,000cr USD. Ever since the reforms, India had seen good and rapid growth in its GDP and FDI.

  • GDP growth- At the time of Independence India's GDP was a mere 3,000cr USD in 1960 but as of 2020, it rose to 2.72 lakh crore USD. More than that India now adds 17% to WGDP growth, giving it a considerable economic heft. It is the 5th largest GDP on a nominal basis and 3rd largest on PPP basis What is more important is that internal resources drive a good part of this growth. The savings rate has risen from 8% of GDP to 31% now and continues to be on an upward trend despite recent setbacks due to coronavirus. Agriculture is a driver of the Indian economy and after the Bihar famine of 1965 India's foodgrain production has risen substantially from 50 Million tonnes in 1947 to 280 million tonnes in 2019. The green revolution was one of the major reason for making India a self-sufficient economy in terms of agricultural produce and an exporter. GDP has grown at a very rapid pace primarily due to a liberal economy, inflow of FDI and foreign companies and the pattern of spending followed by the government. Increased labour forces and the development of the rural area by various government schemes like MNREGA, IRDP, Jawahar Rozgar Yojna, IAY, SGRY etc., technological advancements, increased supply and growing service sector contributed to its growth.


[Spending of the Indian government]

  • Sectors of economy- Even today Agriculture sector employs the maximum number of people in India but it contributes 17.32% to our GDP whereas the Service sector Is what actually drives India's GDP, contributing 53.66% and the Industrial Sector contributes 29.02%.

  1. Agricultural sector's - Crop-yield-per-unit-area of all crops has grown since 1950 India is the largest producer of milk, jute and pulses, and has the world's second-largest cattle population with 170 million animals in 2011, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India. India's inland water resources and marine resources provide employment to nearly six million people in the fisheries sector. In 2010, India had the world's sixth-largest fishing industry total GVA contribution of 17.1lakh crore from this sector.

  2. Manufacturing Industry- According to the world bank, the manufacturing industry GDP output was 6th largest in the world with a GVA of 39.90 lakh crore. This sector includes defence, electricity sector, Gems and jewellery, Infrastructure, pharmaceuticals, petroleum and chemicals, textiles and pulp and paper industry.

  3. Service Sectors- The service sector is the main driver of the Indian GDP contributing a GVA of 137.51 lakh crore Indian rupees and it includes the Aviation sector, Banking and Finance, Financial technology, information technology, Insurance, retail, tourism, media and entertainment, healthcare, logistics and telecommunication,

  • FDI and Trade- The FDI has gone up to 44.8B USD in 2018 from 24.15B USD in 2010. Singapore was the leading contributor to the FDI in 2019 with the amount of 11.65 B USD. Between April 2000 and June 2019, India received $139-billion FDI from Mauritius and $88.3 billion from Singapore. Among sectors, telecommunications garnered the maximum FDI at $4.2 billion, followed by the services sector ($2.8 billion).FDI has also increased by US$ 456.7 billion. So what d this means is that there is more and more inflow of foreign companies in India and they are willing to work with the Indian companies due to several benefits like low cost of labour, and tax benefits. India being a has gained the trust and being a developing economy has a growing market which is seen as a great opportunity for foreign companies, and due to such a fast-growing GDP, these companies view India as a source of profits. The outflows of FDI was 1.6% of GDP in 2008(https://data.worldbank.org/indicator/BM.KLT.DINV.WD.GD.ZS?locations=IN&name_desc=true), investments in Europe, USA and Africa being on the top. Trade, foreign trade in India has grown ever since the liberalisation of trade in 1991from 17.47 billion USD to 324 billion USD in 2019, trade is a key means to fight poverty and achieve the Millennium Development Goals, specifically by improving developing country access to markets, and supporting rules-based predictable trading system (https://tradingeconomics.com/india/exports). Until the liberalisation of 1991, India was largely and intentionally isolated from world markets, to protect its economy and to achieve self-reliance. All these issues were responsible for the stagnant growth and once the reforms of 1991 were introduced trade contribution to GDP increased from 16.2% to 48.8% of GDP in 2010. India's main trade is with USA, Europe, UAE and China. Since independence; the BOP has been negative as India still can't produce all it needs. A big reason is it's developing economy, a lot of poverty and illiteracy and slow technological growth and very less manufacturing reliance which is seen as a decline of its contribution to GDP, the biggest import cost is that of oil. 93% of the total oil is imported in India from overseas. The merchandise trade deficit in 2010 rose to -118 billion USD and to -183.5 billion $ in 2018-19; the current account deficit was up to US$ -17.7 billion (2.7% of GDP); India's trade deficit narrowed down to USD -6.76 billion in April 2020 as imports witnessed a broad-based contraction of 58.6% YoY, but this will not stay for long as imports will rise again but maybe not to the same levels as "Atmanirbhar Bharat"(self-sufficient India) is being promoted. So we need to wait and watch how the economy responds once this pandemic is over. (https://www.indiamacroadvisors.com/page/category/economic-indicators/international-balance/balance-of-trade/)



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