Mired with the dual of problem of overpopulation and poverty, and characterized by high unemployment rate and poverty, India's economy has historically been state-centric but government deregulation since 1991 has produced an expanding upper and middle class with relative high incomes.
The current state of the Indian Economy
India has a low per capita national income ranking in the lower middle income category as per the World Bank classification with an income per capita of roughly USD 2000. Despite that, the country is no stranger to quarterly growth rate of 7% and above, especially since the new millennium. However, the slowdown in the growth rates since Q3 2018-19 has dashed the nation’s hopes to remain the fastest growing major economy in the World. On par with global economy, India’s economy has contracted by 6.7% in the 2020-21 due to the pandemic. Indian economic development can be characterized as that is still in in developing phase with moderate growth rates.
The Nature of the Indian economy
India has an underdeveloped economy with medium economic growth and relatively high poverty. Its economic policy has historically been state centric but government deregulation since 1991 has produced an expanding upper and middle class with relative high incomes. India's political economy is one of state-centric but the country is seeing a rapid growth in the private sector. Independent India currently can be characterized as a developing economy with low per capita income. The country is mired with the dual of problem of overpopulation and poverty. Its population currently stands at 1.35 billion. High population growth remained a concern for the country since it gained independence.
India has a gross domestic product of USD 2.66 trillion in 2020-21. It has a total population of 1.36 billion (136.6 crore) with a high birth rate. It has a mixed economy with GDP growth between 5% and 7.5% in the last twenty five years and a moderately high capital formation ratio and 3% to 7% inflation. India scores very low on many aspects of economy and business when compared with the developed countries.
The Indian economy is dominated by agriculture sector and tertiary sector. The rural India is characterized by high unemployment rate and poverty. The private sector is most visible in the urban metropolis and has witnessed rapid growth since deregulation. The country has a weak manufacturing sector with low to medium skilled workforce. The service sector dominates the urban towns and cities while agriculture retains its heavy footprint in the rural economy. The country's infrastructural facilities have historically been poor, with the rural areas lacking the most basic facilities. However, there has been significant growth and development in the infrastructure space since the turn of the century.
The Indian economy has come a long way since 1985 when we first began to see significant change in the growth trend until that point. Income per capita has increased by ten-fold since then with the country boasting an increasingly vast number of millionaires and billionaires. However, India continues to lag behind on the income and development curve.
The features of Indian economy
India’s Product Exports composition
Consider the figure showing India’s product exports composition for each year from 2006 to 2015. We see that the ten different HS code classes of product trade together make up roughly 60% of total product exports of India (from 2010). In 2015, the four heavy industry classes of product exports Electrical machinery (HS85), Machinery (HS84), Vehicles (HS87), Pharmaceuticals (HS30), and Chemicals (HS29) composed roughly 23% of total product exports.
Figure 10.7 – India’s Exports Composition 2006 – 2015
Statistics Division, United Nations Comtrade database
India’s top product exports comprise processing trade in Mineral fuels (HS27) and Semi-precious stones (HS71). India’s largest exports in the past decade were mineral fuels, mineral oils and products of their distillation, which made up about 27% of total product exports. Lastly, another 10% comprises Cotton (HS52), Apparel (HS61), Apparel [not knitted] (HS62), and the rest of 40% of product exports comprises product classes wherein each make up less than 2% of total products exports by value. The top ten product classes in terms of export value as shown in the figure comprise the output of both light industry and heavy industry. India’s exports to other developing countries increased in the recent decade. But India’s share of manufacturing exports and the level of overall value content is still low compared to the performance of other developing countries.
India’s partially successful industrialization effort instead created competitive upstream industries such as mineral fuels, plastics, iron and steel, chemicals—the same reflected in the dominance of those products in the country’s total product exports. Export of final goods heavy industry products is still a long way from matching with the figures of the industrialized countries. India’s final goods heavy industry has been starved off of frontier technology, relegating its exports to a small percent of total product exports. In the future, India’s pace and ability to acquire frontier technology determines the growth in the share and the aggregate value of final goods heavy industry exports.
India’s Product Imports composition
Consider the figure showing India’s product exports composition for every year from 2006 to 2015. We can see that the ten different HS code classes of product trade together make up roughly 80% of the total product imports of India. In 2015, the five heavy industry class of product imports Electrical machinery (HS85), machinery (HS84), Optical and measuring devices (HS90), Chemicals (HS29) & Plastics (HS39) make up roughly 26% of total product imports. And up to 40% to 45% of India’s product imports comprises Mineral fuels (HS27) and Semi-precious stones (HS71)—a portion of mineral fuel imports as part of the processing trade of distilled fuel.
astly, another 12% of the imports comprises Edible oils (HS15), Apparel (HS61), Apparel [not knitted] (HS62), and the rest of 20% include classes that each make up less than 2% of total product imports by value. Much of the product classes in terms of import value are those of heavy industry, some final and some intermediate in the making. Whereas mineral fuels and semi-precious stones imports are part of India’s processing trade, the imports of machinery, electrical machinery, optical and precision instruments, iron and steel make up much of capital goods imports of India.
Figure 10.8 – India’s Imports Composition 2006 – 2015
Source: United Nations Statistics Division, United Nations Comtrade database
India's Economic Growth Capabilities
Rapid industrialization drives and enables a country’s economic growth and development. That also means there will be an explosion of demand for resources in the form of mineral ore turned to processed-raw material and turned to some form of intermediate or final heavy industry product and the energy to enable all of that. As we know, a country’s modernization through the industrialization route requires at least three-decade long construction boom in industrial plants, roads and bridges, urban housing, etc.
The early-industrialized countries such as the US required about a hundred years to modernize their economic activity and lifestyle. In contrast, the process of modernization in the late-developing countries requires compactness in the timeline for provisioning and mobilizing extraordinary resources unprecedented in history. Along those lines, China has set a number of records in terms of its capacity to raise production levels of many resources by a numerical factor within few decades. India has been able to do the same, although on a slightly smaller scale in terms of production volume.
Where is India's economy destined from here? What will its economic recovery be like? How will the economic development indiactors of the country fare going forward? Can the country replicate China's success? The options are clear. There are only two places India can see itself reaching in the future. India can either become a developed country or it can continue to remain a developing country indefinitely.
There exist many obstacles to economic development but the latest work The General Theory of Rapid economic development helps you understand them in detail and shows how a nation can achieve success at economic development.