9 minute read

The Economics of India

Roaring Tiger    9 minute read

The Economics of India

Now one of the world’s biggest economic powerhouses, India has established itself as a country to watch. Its massive population has shown more than just the will to grow: it has shown signs that it can deliver, too – if local decision-makers steer the country in the right direction, past its persistent structural problems.

The demonetisation programme implemented in November last year brought a lot of uncertainty when the country’s financial situation seemed to be stabilising, with many questioning the timing and motive behind the policy. Its consequences are still somewhat uncertain and there is scepticism towards its efficiency, but Prime Minister Narendra Modi seems to have the population firmly by his side.

A Roaring Tiger

The Asian nation’s growth is the envy of many Western countries who struggle to increase their GDP above 1 or 2% a year. India is playing a different game. The country became the fastest-growing large economy in 2015, overtaking China. It reached an all-time high growth rate of 11.4% in the first quarter of 2010, and in the first quarter of last year, the economy was still growing at a rate of 7.9%

$2.25trn India’s nominal GDP

Thanks to its solid economic growth, India is now the seventh economy in the world in terms of nominal GDP, standing at $2.25trn. According to estimations by the United States Department of Agriculture, it could be the third largest economy by 2030.

In fact, India’s economy is already the third largest in the world by purchasing power parity (PPP), even though a big percentage of its economy relies on agriculture (17% of its GDP), particularly compared to developed Western countries. The agricultural industry is, after all, India’s biggest employer.

However, the services sector has been registering a considerable surge in the latest years. It represented 57% of the total GDP of the country in 2014 and has been growing since 2001 with an annual rate always higher than 9%.

A Technological Powerhouse

Driving the services sector of India’s economy is its IT industry, which is the largest private employer in the country. In the fiscal year of 2013-2014, India became a major exporter of IT and software services, and cashed in a total of $167bn with those exports according to local lobbying firm Nasscom.

$167bn India’s IT and software exports in 2013-2014

Indeed, many multinational tech firms are from India: Cognizant, Infosys, Tata and Wipro – to name just a few. It is likely that this trend will continue to become even more pronounced as half of the population is younger than 35 years old and the middle class is on the rise.

Telecommunications services are huge too. With a mobile phone penetration rate of 77%, 900m Indian citizens use a smartphone, and phone calls are extremely cheap even for people who live in poor rural parts of the country.

77% of India’s population has a smartphone

As more of the population reaches middle-class status, with earnings of at least $10 per day, they will be potential customers for international tech brands and their products. In fact, companies like Sony, Samsung, Lenovo and Xiaomi are already preparing to establish their market base in the country.

The Bar Is Set High

The fact that 400m people in India still have no electricity is a drawback that some companies are trying to overcome by building micro powerplants to give access to citizens.

That many people without access to the Internet can be a challenge, but also a massive opportunity for the country to grow digitally in the near future. It will not be easy to drive that change, as only approximately 20% of the population is online.

400m Indian citizens without electricity

The city of Bangalore has been developing technology for years now and some even dare to label it the Silicon Valley of India. Initially focused on outsourcing from Western companies, it is now raising investment from other countries as the pool of local high-skilled talent grows year by year.

So far, the country has focused on dealing with what is absolutely necessary first, rather than diving into fantasising with innovative luxurious items and gadgets which a big part of the population would not be able to afford. But the tech sector might be able to include both necessity and desirability in the type of technology it produces in the future.

Moving Online

As a bigger chunk of the population gets access to the internet and increases their purchasing power, it is only natural that they will spend more. According to eMarketer, 82.3m Indians have bought items or services online at least once. It is estimated that the number will jump to a staggering 239.7m in 2019 – around 70% of total online users in the country.

$12.9bn Value of India’s e-commerce sales in retail

The retail market is perhaps where the economy’s biggest potential lies. While the Indian retail market as a whole was worth $600bn in 2015, e-commerce sales in the market stood at only $12.9bn, with $7.8bn through mobile – a small fraction of what they could potentially be. Statista’s digital market outlook forecasts that this number will be $31.1bn in 2019.

India on the World Stage

The country has clearly made efforts to reach not just better levels of competitiveness on a global level, but also to improve the standard of living of its population. The country’s crude death rate – the number of deaths during the year per 1,000 people – was 7.93 in 2013, a much lower number compared to what it used to be in decades gone by.

913,000 tourists arrived in India in December 2015

India has also seen many more tourists coming into the country. Although to an extent this goes according to the international trends and flows of tourism across the globe, it also shows that India might be turning into a major tourism destination.

From 2000 to 2016, the average arrival of tourists in India per month was 426,846, but the country hit an all-time high in December 2015. That month, 913,000 tourists arrived in India, according to the Department of Tourism. At the same time, consumer confidence has been strong, and hit an all-time high in the first quarter of 2016.

Closing Loopholes

Unfortunately, despite the good economic performance, India still has a long way to go when it comes to attracting investment. The common headlines on the GDP numbers make the country look good, but its gross fixed capital formation is expected to be negative in this fiscal year.

Admittedly this would be for the first time in the last five years, according to Indian Central Statistical Organisation – but it had already been declining for three-quarters before prime minister Modi implemented the demonetisation programme. Even India’s finance ministry acknowledged in an official document that getting more private investment was a challenge.

When Modi announced the demonetisation scheme in November of last year, taking the old 5,000 and 10,000 rupee notes out of the system, he promised to tackle the country’s big problem of black money. It is thought to be a major issue given that almost 90% of the country’s industries are a part of the informal (or unstructured) sector and an overwhelming majority of its transactions are made in cash.

90% of India’s industries are in the informal sector

According to an analysis published recently by the Reserve Bank of India, 96.5% of all the old notes taken out of circulation, with a total value of 15trn rupee or $2.23bn, have returned to the system. This seems to show an apparent success of the policy, suggesting that the black money was honestly deposited or that tax evaders found new ways to conceal their income. On the other hand, it is hard to gauge such a complex issue, and there is more than meets the eye when it comes to assessing the economic impact of demonetisation.

Is Demonetisation Working?

Did demonetisation really reduce corruption as promised? Will black money be hoarded again in the future?

It’s not simple answering these questions, and small-business owners might easily find new ways to bypass the policy. For example, they can pay suppliers and their employees in advance and pay with old notes. Bigger employers could also give their money to trusted senior managers for them to hold and slowly pay back later, as the government only flags bank transfers higher than 250,000 rupees.

For businessmen with contacts within banks, it has been possible for them to bribe their way into exchanging the old notes illegally into a different currency, moving the money overseas.

Critics of the policy say that, in the long run, it won’t change anything – firstly because people will hoard again, and secondly because it is likely that only a small percentage of black money is actually in cash. Most of it is stored in offshore accounts, invested in gold or being held by other people. Another criticism was that the poorer portion of the population was hit harder than the middle and upper class.

India’s future depends partially on whether this measure sees lasting success, tackling black money with brute force, and on political decisions that can affect the entire economy for better or for worse.

India’s people hope that, just like its cheap and successful space project which has been praised around the world, the economy will skyrocket. But in order to avoid the mistakes of other economies which have stagnated after rapid growth, like Japan, India will need to keep its eyes open and decide its own way towards a sustainable path.

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