India's Economy

Challenges and Opportunities

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Shahrukh Khan Live In Sydney. Bollywood star Shahrukh Khan is the most famous actor in the world. By: Lisa Maree Williams/Getty Images

India is the world's fourth-largest economy. It produced $8.0 trillion in goods and services in 2015. However, it has a long way to go to beat the top 3: China ($19.5 trillion), the EU ($19.2 trillion) and the United States ($17.9 trillion).

India grew quickly despite the recession. It grew 7.3% in 2015 and 2014 and 6.9% in 2013. Prior to that, it grew 5.1% in 2012, 7.5% in 2011, 11.2% in 2010, 8.5% in 2006, 9.0% in 2007, and 7.3% in 2008.

That phenomenal rate of has reduced poverty by 10% in the last decade. (Source: CIA World Factbook, India's Economy)

On May 16, 2014, India elected Narendra Modi as Prime Minister. In so doing, it rejected 60 years of leadership by the party of independence leader Mahatma Gandhi.  Mr. Modi, a successful businessman, promised to reduce bureaucracy and regulation, greenlight infrastructure projects, and simplify the tax code. 

In March 2016, Mr. Modi dedicated $1.5 billion in funding and tax breaks to boost high-tech start-ups. The program will streamline patent applications and investments. That should double India's new start-ups to 11,500 in the next five years. (Source: "India Bets Big on Start-Up Companies,"  Global Finance , March 2016.)

Prime Minister Modi's promised to boost trade with the United States. Modi said he would level the playing field for U.S. companies by reducing policies that favor Indian manufacturing and intellectual property.

This could help U.S. pharmaceutical companies, Hollywood, and consumer electronics. (Source: WSJ, India Election: What Narendra Modi’s Victory Means for the U.S. Economy, May 19, 2014) See more in How India and U.S. Relations Affect Their Economies.  

India's Challenges

Mr. Modi is a Hindu nationalist leader.

Many blame him for the violence against Muslims while he was governor of India's western region of Gujarat.

Modi is up against India's bloated government bureaucracy. That makes the execution of any fiscal or monetary policy difficult. In August 2015, Modi was blocked from passing a bill to acquire land to promote infrastructure. He had not produced a bill to create a uniform goods and services tax. (Source: "Lights, Camera, Inaction!" The Economist, August 29, 2015)

In 2013, India fell victim to a form of stagflation -- inflation at 9.6%, with 0% GDP growth in the second quarter. Inflation was caused by a declining rupee, while slow growth resulted from contractionary monetary policy to stem inflation. By 2014, inflation had improved to 6%. In addition, India's combined current account and budget deficit is at 12% of GDP.

Investors backed off from India and other emerging markets when the U.S. Federal Reserve began tapering its quantitative easing program. When the dollar rose 15% in 2014, it forced the value of the rupee and other emerging market currencies down. 

Raghuram Rajan is the Governor of the Reserve Bank of India, the nation's central bank. He is poised to raise interest rates if needed to keep the currency strong and head off inflation.

 He is satisfied that inflation is "only" 6%. However, if Modi stimulates growth beyond the capacity of the country's infrastructure to produce it, that would stimulate inflation -- putting Modi and Rajan at odds. (Source: WSJ, India's Rajan May Have to Increase Rates to Head Off Modi, June 4, 2014; Guardian, India calls on Raghuram Rajan to run its central bank, August 6, 2013)

What Type of Economy Is India?

India has a mixed economy. Half of India's workers rely on agriculture, the signature of a traditional economy. One-third of its workers are employed by the services industry, which contributes two-thirds of India's output. The productivity of this segment is made possible by India's increasing move toward a market economy. Since the 1990s, India has deregulated several industries, privatized many state-owned enterprises, and opened doors to foreign direct investment.

India's Diversity

India has 1.3 billion people. Its diversity can be a strength but is often a challenge. Here's a summary of the major regions:

  • Southern: older, urban, educated, middle-class with fewer children.
  • West Coast (Gujarat, Goa, Mumbai): becoming more like Southeastern Asia.
  • North (Uttar Pradesh, Bihar, Delhi, Kolkata): low-income, rural, not well-educated. Poor public hygiene, rain-fed farming, inadequate electric distribution. Discrimination against women. Religious clashes and Maoist revolutions in some areas. 

Also, 11 million people annually are leaving the rural areas to live in the cities. Most of them are young and educated. They demand more amenities and a higher quality of life. (Source: "Special Report: India," The Economist, May 23, 2015)

Bollywood

The Indian film industry is known as "Bollywood," a combination of Bombay (now Mumbai) and America's Hollywood. However, Bollywood makes twice as many movies per year (1,000) as Hollywood, and the most well-known actor in the world is India's Shahrukh Khan. Bollywood contributed $3 billion to India's GDP in 2011 and is expected to reach $4.5 billion by 2016. Bollywood generates less revenue than Hollywood ($51 billion) only because its ticket prices are much lower. On the plus side, Bollywood films cost less to make: $1.5 million on average versus $47.7 million in Hollywood. (Source: International Business Times, How Big Is Bollywood?, May 3, 2013: LA Times, Shah Rukh Khan, November 4, 2011)

India's Tata Motors Built World's Cheapest Car

In 2009, India’s Tata Motor Corp. launched the Nano, priced to sell at $2,500. The market for an ultra-low-priced car is huge...90% of China's and India’s adult population do not own a car. Many experts were skeptical that Tata, which has only been making cars for the last 10 years, could manufacture a $3,000 car that met emission and safety standards. In fact, the Nano had many issues: slow sales, lack of amenities and faulty electrical switch that caused one car to burst into flames. However, Tata is fixing these problems and is planning to launch a Nano in the U.S. in the near future. (Source: HuffPo, Nano Coming to U.S., October 15, 2012)

Chindia

Chindia is the term used to describe a tight partnership between China and India -- two of the world’s largest and fastest growing economies. With one-third of the world’s people, Chindia could be a tremendous economic powerhouse in the global economy.

Former Chinese President Hu Jintao first met with Indian Prime Minister Manmohan Singh, and other high-ranking Indian officials including Sonia Gandhi, in 2006. This was the first visit to India by a Chinese head-of-state in ten years. They signed a trade agreement that strengthened cooperation in the areas of information technology, energy, and agriculture. In addition, they reopened border trade across the Nathu La pass, which links China's Tibet and India's Sikkim areas, and had been closed for 44 years.

China and India have complementary economies. India has raw materials, China has manufacturing. India has high tech, China has the businesses and consumers to use them.

However, they also have long-standing trade disputes stemming from their common borders, and China’s friendliness with India’s enemy, Pakistan. There are few airline routes and many visa delays. These disputes will not be solved by one friendly trade agreement. Fortunately, both realize the potential advantages of a partnership, and the trade agreement is a good first step towards a “Chindia” of some sort.