The economy is one of the benchmarks for the performance of a country as a whole. Economy not only measures the overall well being of the individuals of the country, but the scope of the study also allows opportunities for the betterment. In the study of a country’s economy, one thing that comes at the prime position is the GDP. GDP encompasses the overall economic activity and the health of the nation as a whole. GDP growth creates ripples in the economy that benefits different sectors of the economy. The purpose of this paper is to study the economic performance of one of the major developing nations in the world, India. The document carries out an analysis of the country’s performance and its impact on the generation of investment opportunities in the economy.
General overview of the Indian economy
The economy of India is among the fastest growing economies of the world. The GDP of the Indian economy is the fourth largest in terms of PPP and stands at 10.3 Trillion USD. One of the biggest features of the Indian economy is that it has a mixed economy and public sector and the private sector works hand in hand. The economy of India has been growing at an average rate of 6.5% since the year 2009. Agriculture and the service sector of the Indian economy are the two major sectors that contribute to the national GDP. While the contribution of agriculture is reducing, the contribution from the service sector is increasing over time. Despite the spectacular economic performance of India, one of the drawbacks that are worth mentioning is the unequal distribution of growth and the low per capita income of the economy. Ahmad et al. (2016) highlighted that low per-capita income and inequality is hampering the potentiality of the economy.
However, the huge pool of young population below the age of 29 years helps the economy to grow through the splendid growth of the service sector. The savings rates of the country have shown improvement since the last decade which has further boosted the capability of the economy to perform at its peak. The service sector of the economy is expected to grow at a healthy rate of 9% till the year 2025 and hence prospect of the economy to attract foreign investment is very high in the future (Kaushal and Pathak, 2015). Investment has been a major fuel for the economy of India since the country enacted the neo-liberal policies in the year 1990. It has integrated the Indian market to the global world and has generated immense opportunities for the Indian companies in the foreign markets. India ranked second in terms of the attractiveness as an FDI destination and hence magnificent performance of the country is expected to last more than 15- 20 years (Agrawal, 2015). The trade blocks and the participation of the Indian economy in global forums have paved the way for a further increase in foreign investment into the Indian economy.
Political, economic, socio-cultural and technological influences
The political orientation of the Indian economy has changed vastly since the last century. The government of India decided in the year 1990 to adopt the neoliberal policies paving the way for foreign investment in the indigenous markets and companies. Since then, capital and technological know-how have been extensively transferred to the Indian economy making it grow more than the normal rate. Economically also, the neoliberal policies have helped the economy of India to have an impressive GDP growth rate (Perdikis, 2018). The figure 1 below shows the abrupt reduction in the unemployment rate in the Indian economy after the year 1990.
Figure 1: The decreasing unemployment rate of the Indian economy
(Source: Shetty, 2017)
The rising employment, mainly in the service sector of the economy has influenced the performance in two major ways. First, through the increasing average disposable income of the consumer of the economy that further influenced the overall aggregate demand. Secondly, it has increased the size of the middle-class consumers giving the economy a chance to grow. India has become an attractive market for any given firm in the world. The number of absolute target customers is huge in the Indian economy (Santangelo, 2016). That inevitably has increased the investment inflow and hence has allowed the economy of India to grow consistently at an average rate of 6-7% per year since the year 1990. Apart from that, the economy of India has also got impacted by the technological advancement that it has experienced over the years. Economy devotes a sizable amount of resources for research and development that has lifted the economy a number of indigenous technologies that have helped the economy to grow since the last decade (Bose, 2018). One of the major advancement in technology has been catered by the space exploration organisation that has allowed the economy to generate a huge number of businesses that have distributed the growth in other parts of the economy.
National resources and factor endowment
One of the notable national resources of the Indian economy is the largest pool of young citizens that has the potential to foster the economic growth of India. As discussed above the service sector is the largest contributor to the GDP of India and this young population works as a fuel to the growing service sector that in turn increases the national product of India at an impressive rate (Mani and Durand, 2016). Apart from that, average technological skills of the labour pool of India have also improved over the years. Thus, currently, India has an attractive skilled labour pool that cannot only foster the growth of a single organisation but also the nation as a whole. In addition to that, good quality cultivable land in India is in abundance (Rasool, Adil, and Tarique, 2018). It has helped the economy of India to have a huge production of agricultural output and hence the high GDP growth rate.
Furthermore, the oil and natural gas industry of India has also flourished since the year 1990. Discovery of new oil deposits in many parts of the country have allowed the economy to reduce the oil export from the foreign nations. In the year, 1987, the economy of India imported 94% of the oil from the foreign country. This figure has reduced to 72% in the year 2016 giving the economy an opportunity to boost the natural gas and oil industry of India. The indigenous ethanol fuel and the thorium received along the coastline of India also generated a great value for the economy (Chavan and Murkute, 2016). Lastly, the natural resources and endowment have also contributed to the tourism industry of the country that has transformed into a catalyst for the growth of the Indian economy. The tourism industry growth in India has surged from 6.7% in the year 2004 to 9.7% in the year 2016. The high growth rate and the stability of most of the natural resources based industry have ensured a high investment inflow into the Indian economy.
Foreign currency and exchange influence
Despite the contribution from a different sector of the economy towards the economic growth of India, exchange rate and currency value is something that has performed below the par. The value of Indian rupee has not only decreased since the introduction of the neo-liberal policies, but it also has been unstable till now. The unstable exchange rate discounts the rate of return of the foreign investment and hence worries the foreign investors. In addition to that, decreasing value of the Indian currency also increases the overall amount of debt payable in the future. Rajan (2015) noted that the decrease in the value of Indian rupees have put an increased pressure on the Indian government. Investment from the side of the government for the infrastructure development has often been compromised due to the pressure and hence the economy failed to operate at the potential level.
Existing trade policies, barriers, and systems
Currently, the government of India uses a neoliberal policy that allows foreign firms to operate in the selected industry. In few of the industry, the government of India has reduced the cap to 0% making it easier for the global market to penetrate into the Indian economy. Apart from that, India has been a part of major trade blocs that has fostered the economic growth rate of India. Trade blocs such as AIFTA, BIMSTECH have allowed the Indian companies to use the growing markets of neighbouring Bangladesh, Nepal, Pakistan and other Asian countries (Bhat, Ganaie and Sharma, 2018). Additionally, trade blocs with advanced nations such as South Korea, Japan have allowed the economy to import important technological know-how. These gains not only helped the big players of the market, but this has also paved the ways for the small and the medium companies of the economy as well. Gupta (2018) noted that the transfer of technological know-how mainly impacted on the production process of the economy that eventually helped in the reduction of prices. The lower operating cost for the firms also made it attractive for the new domestic organisation to enter the market. This, in turn, has increased employment opportunities in the Indian economy. According to Nath (2017), the increasing participation of small companies and startups have been the most important indirect influence of international trade on the economic growth rate of India.
Existing level of FDI
The existing FDI into the Indian economy takes two different routes at that moment. First is the automatic route that, allows the foreign players to invest directly in the markets of India. The second is the government route which compels the investor to follow a complex route in order to invest in the Indian market. This route and the investment is strictly governed by the Indian government. Different sector of the economy has different norms in terms of FDI. Infrastructure sector got the highest investment according to the figure of 2017 (Benz, Khanna and Nordås, 2017). 1 Trillion USD has been invested by the Indian government along with the contribution from the private sector. The government allows 100% investment through FDI through the automatic route. In the automobile sector, 89% is permitted by the government through the automatic route of FDI. Due to the introduction of FDI in this sector, the contribution of this sector towards the national GDP has increased drastically to 9%. The service sector and the insurance sector currently allow 49% of FDI while 100% investment through FDI is allowed in the pharmaceutical industry (Kumar, 2017). The FDI cap for the airline sector of the economy has recently been increased to 100%. There are few industries where the FDI is not permitted by the Indian government and that include the real estate sector, lottery business, and the agriculture.
Therefore, the Indian economy has presented an impressive performance in front of the world in recent years. The introduction of the neo-liberal policies has been crucial for the Indian economy as it has increased investment from the foreign countries and reduced unemployment rate. One of the important achievements of the Indian economy has been the expansion of the middle-class segment of the consumer that has significantly increased the aggregate demand of the economy. Furthermore, the low dependency ratio and high youth workers of the economy have helped the savings rate of the economy to go up. As a result, the capital accumulation has increased in the economy leading to an improvement in the internal investment of the country. However, there are many drawbacks in terms of the operation of the economy that needs to be fixed in order to have a sustainable economic performance. The exchange rate fluctuations and the deteriorating value of Indian currency have reduced the potential gains of the Indian economy. Therefore the government of India needs to peg the value of Indian currency at a fixed level in order to have a better result from the external environment and the internal capabilities.
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