India, the land of culture, tradition and also one of the oldest civilizations in the world. Today, India is a rising as well as a struggling economy. Yet many economists believe in the future, India is going to contribute a much larger portion in the world economy and might get near the ranks of China.
First, let’s see what India is in terms of economics. Historically, India was an economic giant.
By 1700, Mughal India has become the world’s largest economy, ahead of China and Western Europe. The subcontinent contained approximately 24.2% of the global population while producing about a quarter of world’s output.
This was because, at that time, the world economy was dependent on agriculture. And India was one of the biggest producers.
But after the industrial revolution in Europe and subsequent colonization of India, the economy saw a major decline. It is estimated that Britishers extracted about $45 trillion dollars from India.
According to a British economist named Angus Madison, India’s share in the world economy went from 24.4% in 1700 to 4.2% in 1950.
In 1947, after 200 years of British rule, India gained their independence and this is where the story of modern India started.
After gaining independence from Britain, they formed a centrally planned economy. In this, the government made majority of economic decision regarding the manufacturing and the distribution of products.
The government focused on developing its heavy industry sector and it worked for some decades. But then in the 90’s, the Indian economy started to suffer and this was due to two major reasons.
First was the fall of the USSR which was India’s largest trading partner and second were the high oil prices due to the gulf war. To get out of this situation, India asked the help of the International Monetary Fund (IMF).
The IMF agreed to help but only if the country agrees to deregulate and open up their economy for world trade. This was the start of a new chapter for the Indian economy.
In 1991, India began to loosen its economic restrictions and started to increase liberalization. This led to growth in the country’s private sector.
Today, India is considered a mixed economy. However, in certain areas such as defense, power, banking and other industries, the government maintains a monopoly.
After the economic reforms, the country’s economy has grown exponentially. If you call for the numbers, it grew from $288 billion dollars in 1992 to $2.9 trillion dollars in 2019.
The reforms help the country to shift from an agriculture-based economy to industrial and service-based economy while the share of other sectors and GDP increased.
The share of agriculture has fallen to 16% of the country’s GDP as of 2019. Apart from the economic shift, this could also be because the agricultural industry in India faces some challenges.
The industry is not as efficient as it should be. Nearly 50% of the country’s workforce works in this sector. Still, the output is not as expected. Also the reliance on monsoons for the water needs in crop production is very high.
And if you see the agricultural infrastructure, it is also not well developed hence the produce is at the risk of spoilage due to lack of adequate storage facilities and distribution channels.
Still, India is a leading producer of wheat, rice, sugar cane, cotton, mangoes, and much more.
Now, coming to the industrial sector, it accounts for 26% of GDP and employs 22% of the total workforce. According to the world bank, India’s industrial manufacturing GDP output in 2015 was sixth largest in the world on the current US dollar basis.
In this sector, chemicals is a big business in India. The petrochemical industry which first entered the Indian industrial scene in the 1970’s experienced rapid growth in the 80’s and 90’s.
In addition to chemicals, the country produces a large supply of the world’s pharmaceuticals as well as billions of dollars worth of cars, bikes, tools, tractors, machinery, and also forged steel.
Now, heading to the major sector of the economy which is the services sector. Over the past 60 years, the service industry in India has increased from fraction of the GDP to approximately 56% between 2019 and 2020.
This growth is a result of India’s huge population of skilled, English speaking, and educated people. Among services industries in the country: Telecommunications, IT, software and BPO are leading.
Specifically, the business process outsourcing or BPO is a well-known industry in India. BPO’s are the fastest growing segments of the ITES industry in India thanks to economies of scale, cost advantages, risk mitigation, and competency. This makes the service sector the backbone of Indian economy.
But even after this massive growth in the two decades, India is still struggling through many fundamental problems.
You see, India’s big young population is giving a great advantage to country’s economic growth by creating huge domestic demand for goods and this population is still growing.
It is estimated that, India will surpass China’s population somewhere between 2025 to 2030. As it is a good thing for the economy, it is also creating a huge problem for the country. As the population of India is growing, it leads to problems that include food deficits, sanitation deterioration, and pollution.
So even though economic growth numbers look promising, the living standards of most citizens are not changing. Also, the government is struggling to provide social security and other facilities because more than 90% of India’s total workforce is working in the informal sector. Hence, this also makes tax collection and regulation very hard for the government.
Another challenge is, the country is struggling to improve its deteriorating infrastructure in business, education, and health care. Also, India’s power grid is over stressed and power failures occur in many parts of the country which is hurting many industries and businesses.
In addition, the public transportation and roadways have not kept pace with the population and economic growth of the country.
Next is corruption which is still a big problem in the country. India was ranked 80th out of 180 countries in 2019 for corruption. And doing business in a corrupt country is surely difficult as there is little respect for the rule of law.
This is one of the main reasons why foreign companies hesitate to invest in India. Also, due to high levels of bureaucracy, harsh labor laws, and corruption, India loses its competitiveness in the international market.
Well like every other developing country, India also has numerous problems. Yet from the last few years, we have been seeing improvements in some areas. However, achieving results will take time.
The improvements will help the government to expand the formal sector of the economy. For that, the government needs to create more jobs by attracting more FDI’s. Similar to what China did a few decades ago.
Another way to do that is to create a large number of labor-intensive industries. These industries require a large number of skilled and unskilled labor which India has plenty. These industries will create a large number of jobs and it will help to grow the middle income class in the country.
Now we know that India’s economy is struggling but we cannot deny that they are on the edge of an economic miracle where China was a couple of decades ago. All they need to do is the right things and in no time India could rise and get near the ranks of China.