Since 2000, India has been counted as one of the most aggressively growing economies in the world and has established itself as an imperative presence in the international economy. Let’s explore the history, structure, primary industries, government policies, and features of the Indian economy to understand how it has risen.
Brief introduction to the Indian economy
The Indian economy once relied solely on the revenue of the primary sector, specifically the production of British tea and cotton. This type of economy, which relies heavily on a single major source of revenue, can leave the country’s economy vulnerable to being crippled by unforeseen disruptions affecting that industry. India realized this and slowly evolved with time.
Today India has a well-diversified economy with a prominent service industry responsible for most of the activity and growth. Strong demand for the services and goods produced by the country have the primary driving factor for this growth. The country also has a substantial level of industrial activity to supplement this. In the year 2019 alone, the annual growth of India’s economy was 5%.
During the years 2020 and 2021, the GDP of India took a significant hit as the social and commercial restrictions sharply curtailed economic activity. The changes left the state of the Indian economy unstable. The statistics support this and show that India’s GDP in the second quarter of 2020 was nearly 24% lower than in the same quarter of 2019.
What type of economy is used in India, and what are the features of the Indian economy that have helped the country achieve so much? Let’s first rewind to learn a bit about the economic history of India.
Historical development of India’s economy
In 1947, the country gained independence from the British, and its economy became planned. So, the Indian economy followed the definition. With such an economy, the government has the power to make critical economic decisions related to the manufacturing and distribution of produced goods and services.
Using this power, the government molded the structure of the Indian economy to encourage the development of the heavy industry sector. However, this strategy eventually became unsustainable, and in 1991 India began to lax its previous economic restrictions.
The increased liberalization and the resultant synergistic relationship between the private and public sectors brought about significant growth in the major industries in India. The mixed economy of India also helped the country successfully leverage international trade.
However, the government maintains a stronghold in certain sectors of the Indian economy, such as power, defense, banking, and other critical industries in India. These features of the Indian economy have resulted in exponential growth, increasing from $288 billion in 1992 to a whopping $2,66 trillion in 2020.
Which sector contributes the most to India’s economy? Previously it was agriculture. However, as of 2020, it has fallen to around 18.32% of the country’s GDP. This statistic can be inferred in many ways. Still, most Indian economists agree that this fall does not equate to a decrease in production but illustrates the huge growth in the country’s industrial and service sectors. Either way, the agricultural sector is still undoubtedly among the top industries in India.
Unfortunately, the agricultural infrastructure has not been developed at the same pace as other sectors of the Indian economy, meaning that the agricultural industry in India has not reached its potential because of systemic problems. Sparse irrigation means millions of small farmers have to rely on the unpredictable monsoon rains to water their crops. On the other end, inadequate storage facilities and distribution channels risk spoilage of the sector’s produce.
Experts estimate that during 2018-2021, well over 400,000 tons of rice and wheat went to waste due to the lack of reliable storage and transportation systems. For comparison: the wasted produce would be enough to feed over 80 million of the country’s population. Thankfully, the Indian government has begun working on various solutions to the slacking government policies, infrastructure, and technology in this industry.
According to the government (despite these limitations), India is still the world’s second-largest fruit producer and the leading global producer of mangoes, bananas, lemons, papayas, and limes.
Forestry is another small but growing) sector responsible for supplying fuel, wood-based panels, paper pulp, paper, paper, and paperboard. Another small percentage of India’s economy is based on aquaculture and fishing, with shrimp, carp, mackerel, and sardines being the major products.
India’s petrochemical industry began during the 1970s. It experienced fast growth in the 1980s and 1990 and has become a big industry in India.
Along with chemicals, India’s industries supply many of the world’s pharmaceuticals and billions of dollars worth of machinery, motorcycles, cars, tools, tractors, forged steel, and machinery.
The country also produces large amounts of gems, iron ore, bauxite, gold, asbestos, uranium, limestone, and marble. From 2018 to 2019, 34,2 million tons of oil and 32,9 billion cubic meters of gas were extracted, respectively. From 2019 to 2020, India mined 729 million tons of coal (which surprisingly fell short of the local demand).
IT and Business Services Outsourcing
Perhaps the IT and Business Services Outsourcing industry is the most important sector to grow. The service industry in India has gradually increased from a small fraction of the GDP to around 55% in 2019 and 2020. This growth comes as no surprise. The country has become a great place to do business due to the favorable characteristics of the Indian economy, along with a vast population of skilled, educated, and English-speaking people.
The leading services of the country are software, IT, and telecommunications, with the employees working for domestic and international organizations including Yahoo (YHOO), Intel (INTC), Meta (META) – formerly Facebook, Texas Instruments (TXN), Google (GOOG), and Microsoft (MSFT).
Outsourcing of Business Process (BPO) is a well-known industry in India, with services being outsourced by leading companies like Hewlett-Packard (HPQ), American Express (AXP), IBM (IBM), and Dell. The BPO sector started around the mid-90s and has grown by leaps and bounds and is now the fastest-growing sector of India’s ITES (Information Technology Enabled Services) industry, thanks to risk mitigation, economies of scale, cost advantages, and competency.
India’s retail sector is enormous and holds the title of the 4th largest retail market in the world. The industry does not rely solely on electronics, apparel, or the booming traditional consumer retail. It also has a good amount of agricultural retail, which is significant in an inflation-conscious country such as India.
The size of this sector is because of the country’s large population (the world’s second-largest population, to be more specific), with the middle-income class accounting for most of it. Increasing urbanization, increasing household incomes, well-connected rural consumers, and rising consumer spending have also boosted the sector.
The shift to eCommerce is also very prominent here. India currently has an internet market with 830 million customers, making it the 2nd largest eCommerce hub in the world.
Electricity production and tourism make up the remaining parts of India’s service industry. For the most part, the country depends on fossil fuels such as oil, coal, and gas, while it is working on adding the capacity to produce more energy from renewable sources such as hydroelectricity, the solar, wind, and nuclear power.
The tourism sector saw over 10 million foreign tourists visiting India in 2018. During the same year, the foreign exchange earnings from tourism in the country were estimated to be around $28.585 billion. The World Travel and Tourism Council worked out that tourism accounted for 10.3% of India’s GDP in 2019.
A surprising reason for people visiting India for tourism is medical tourism. Medical tourism has gained popularity in India because of its significantly cheaper healthcare that still complies with all international standards. People from places all over the world visit India for plastic, hip, and heart surgery procedures.
A small number of people also visit to take advantage of the availability of commercial surrogate facilities. The medical tourism sector is constantly growing, and Ernst Young and The Federation of Indian Chambers of Commerce and Industry (FICCI) report expected the industry to reach the $9 billion mark by 2020.
The bottom line
Since gaining independence, the country’s economists have constantly been trying to perfect the basic features of the Indian economy. Their endeavors have finally borne fruit as the policies in place now have helped India establish itself as a prominent rising economic power in the 21st century.
In 2022 the government successfully managed to overcome the setbacks caused by COVID-19 and stabilized the current economic situation in India. With things back on track, the future of the Indian economy looks bright again, with the World Bank estimating economic growth in India to be 7,2% for this fiscal year. With such international acknowledgments, India has successfully drawn the attention of investors all over the globe, and the country’s future truly looks bright.