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Study notes

India - Economic Growth and Development

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

India is one of the most populous countries in the world with a population in excess of 1.2 billion

Economic Growth and Development in India - Revision Video
Indian Economic Growth
  • India has sustained rapid growth of GDP for most of the last two decades leading to rising per capita incomes and a reduction in absolute poverty. Per capita incomes (measured in US $) have doubled in 12 years
  • But India has one third of all the people in the world living below the official global poverty line. It has more poor people than the whole of sub-Saharan Africa
  • Per capita income is $1,270, placing India just inside the Middle Income Country category
  • India's per capita income is 1/20th that of the UK
  • Life expectancy at birth is 65 years and 44% of children under 5 are malnourished. The literacy rate for the population aged 15 years and above is only 63% compared to a 71% figure for lower middle income countries.
  • Despite a strong attempt to become an open economy, exports of goods and services from India account for only 15% of GDP although this will rise further in the years ahead
  • India runs persistent trade and fiscal deficits and has suffered from high inflation in recent years
  • India's growth rate has slowed and high inflation is a constraint on competitiveness and growth.
  • Investments by Indian businessmen abroad have overtaken foreign direct investment for the first time – reflecting a lack of confidence among Indian entrepreneurs about their home economy

Development path

India has followed a different path of development from many other countries. India went more quickly from agriculture to services that tend to be less tightly regulated than heavy industry. That said there are some emerging manufacturing giants in the Indian economy.

Supply-side factors supporting Indian growth and development

  1. A fast-growing population of working age. There are 700 million Indians under the age of 35 and the demographics look good for Indian growth in the next twenty years at least. India is India is experiencing demographic transition that has increased the share of the working-age population from 58 percent to 64 percent over the last two decades.
  2. India has a strong legal system and many English-language speakers – this has been a key to attracting inward investment from companies such as those specialising in IT out-sourcing.
  3. Wage costs are low in India and India has made strides in recent years in closing some of the productivity gap between her and other countries at later stages of development.
  4. India's economy has successfully developed highly advanced and attractive clusters of businesses in the technology space – witness the rapid emergence of Bangalore as a hub for global software businesses. External economies of scale have deepened their competitive advantages in many related industries.

Growth and Development Limiters for India

Despite optimism for India's prospects for economic growth and development, there are a number of obstacles which may yet see growth and development falter.

  • Poor infrastructure - notably in transport and power networks
  • Low productivity and weak human capital. A high % of workers are low-skilled and work in small businesses
  • High inflation and a persistent trade deficit
  • Low national savings as a share of GDP, low share of capital investment
  • Relatively closed economy - India is a net importer of primary products

Indian Development – An Infrastructure Gap

India is a good case study to use when discussing the problems that persist when a country cannot rely on adequate critical infrastructure such as roads, railways, power and basic sanitation. India wants to build $1 trillion worth of infrastructure in the next five years but the government expects the private sector to fund half of it – this is unlikely! Poor infrastructure hurts the Indian economy in numerous ways:

  1. Causes higher energy costs and irregular energy supplies for nearly every business and especially India emerging manufacturing sectors – there were huge power black outs in 2012
  2. It is more expensive to transport products across the country and it creates delays at ports hamper export businesses and delays at airports which increases the cost of international freight.
  3. It makes India less attractive to inward FDI
  4. It adds to the cost of living and limits the extent to which millions of India's lowest income families can escape extreme poverty
  5. A creaking infrastructure damages the reputation and potential of India's tourism industry

Despite these growth constraints, India's expansion far exceeds that of the vast majority of developed nations – to put this into some context, India is delivering 30 years of US economic advance every ten years!

Relative importance of services in India

  • One of the key differences for India contrasted with countries such as China, Japan and South Korea is that the Indian economy is heavily reliant on service industries especially in her export sector
  • The country has a comparative advantage in many service industries such as business software.
  • One consequence of this structural difference in the economy is that India has not yet seen the rapid urbanization experienced in other nations; more than 60 per cent Indians still live in rural areas.
  • Productivity growth in Indian agriculture has been fairly low and this has limited the potential to release people from the land to move into towns and cities and find work in manufacturing sectors.
India's Budget Deficit
Cleaning the Ganges

In a report on India in the Financial Times in 2012, it was claimed that

“India's failure to adopt enough of the large-scale, labour-intensive manufacturing that has propelled the successful development of China and other east Asian countries is now regarded as one of the greatest weaknesses of the Indian economy."

India's growth has been impressive in recent years but this is a country whose development is hampered by endemic structural problems. India requires significant investment in infrastructure, manufacturing and agriculture for the rapid growth rates of the last fifteen to twenty years to be sustained.

Articles to read

Will Narendra Modi be India's Thatcher? (BBC news, February 2015)

Indian economy: Painting a brighter future (BBC, February 2015)

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