“We will be remembered only if we give to our younger generation a prosperous and safe India, resulting out of economic prosperity coupled with civilizational heritage.”
– Dr. A P J Abdul Kalam
“Economy” has been a term well in talks ever since the times of City states of Sumer in the Bronze Era (Sumer was the first urban civilization in Mesopotamia). The people of this civilization developed a market, based on the weight of commodity known as shekel, which was a certain weight measure of barley.
The Babylonians used a system of prices on the basis of metric of various commodities fixed in a legal code. The system was partly sexagesimal (of base 60) and partly decimal with the capacities given in term kurru, which was equal to 5 pannus. Further, 5 panu = 30 sutu = 180 qa = 180 litres. Thus, one qa in that unit roughly equaled a litre.
Coinage was introduced in the 650-600 BC. The Lydians were the first ones to use the coin system that primarily used gold and silver coins. They followed the stater coin denominations that consisted of stater coins, the trite (third) and the hekte (sixth).
With the industrial revolution era, the mathematics of economy took a complete shift. With the introduction of price mechanisms, industry-made new and better products and increasing standard of living enabled the ever static GDP per capita to grow. This was the era where the concept of economic growth began.
The Rise of Indian Economy
The early references to the Indian economy can be found in Arthshastra by Chanakya. Arthashastra covered the science of economics in contemporary India in the 4th century BC. During The Maurya and post-Mauryan Empire, India is estimated to have had the largest economy controlling almost a third of the world’s wealth, though GDP was stagnant.
India experienced GDP growth during the Delhi Sultanate. The Ming China overtook India by 1500 AD. Though India regained its position as the world leader by 1700s (after most of the subcontinent was reunited by the Mughals under Delhi Sultanate), it declined in the British rule in the late 18th century.
As the British rule spread its wings, India continued to lose its position as the global leader in GDP.
India was the world leader in manufacturing until the mid-1700s producing 25% of the world’s total industrial output. During the British rule, India went through Deindustrialization which led to the fall of its share in the world economy to decline from 24.4% in 1700 to 4.2% in the mid-1900s. Further, its share in the global industrial output shrunk from 25% to 2% in the same time span.
Re-evaluating the Past
Indian economy prior to 1991
Prior to Independence, a large part of India’s GDP came from the agriculture products. Industrial development was crawling due to less FDI. Even when there was FDI, it was only for a handful of sectors. Between the second world war and the Independence, Japanese companies entered Indian markets. However, British companies still remained the dominant players.
The first five-year plan, laid forward by the then Prime Minister Jawaharlal Nehru focussed on the grassroots development of the primary sector. Primarily based on Harrod- Domar Model, it allocated major amounts to irrigation, agriculture, energy, community development, and social services.
The focus later shifted to the development of industrial sectors to bridge the gap of technological investments. In the second five-year plan of 1956-61, the main focus was on imports from foreign investments and loans to focus on the rapid industrialization in India.
The progress story continued with its ups and downs. The Sino-India war exposed loopholes in the Indian Economy. The third plan, which was initially based on agricultural thrift, shifted to defense and building Strong Armed Forces.
The Fourth plan was lead under the charismatic leadership of Indira Gandhi. The major changes included Nationalization of Banks and further advancement in agriculture (Thanks to Green Revolution).The progress was also impacted by the tough situation in Indo-Pak war and tensions in Bangladesh.
The fifth and sixth plans focussed on self-reliance and marked an end of Nehruvian Socialism. An era of change was near inception, India was on the path of becoming an International superpower. The Indian National Highways focussed on developing communication. The plans kept changing very rapidly according to the needs of the economy.
The next part will discuss what India has gone through post Liberalization.
As seen above, GDP remained low due to less foreign investments and FDI increased at a very low rate. The unemployment rate grew during the period due to less focus on the Industrial sector and agriculture majorly being a seasonal employer.
After 1991 – The Liberalization of India
Indian economy was facing major setbacks in the fields of Industrialization and Technological advancements due to lack of foreign investment and the License Raj. Indian economy opened its doors for foreign investments in 1991. India had always been a profitable and growing market and hence it immediately saw rapid investments from major leaders in various sectors entering the markets.
There had been a gap between the imports and exports in the Indian economy, though the volumes of both remained low prior to 1991. After liberalization, both imports and exports showed immense increase primarily due to the increase in international trade, the economic development, and capital formation in the country.
In the meantime, every leader contributed their bit to the development of Indian Economic System. The Seventh Plan (1985-1990) given by the government led by Rajiv Gandhi focussed on technological enhancement and employment generation in a socially just manner.
In the later years (1992- 1997), Indian forex reserves dipped. In the time of crisis, the wonderful mind of Dr. Manmohan Singh drew India out expertly. The three triumphing words emerged – Liberalization, Privatization, and Globalization! Surprise!!
Dr. Manmohan Singh had Launched India’s free-market reforms!!
The successful 8th plan was followed by the Atal Bihari Vajpayee led government. India turned back to grassroots reforms and public and private firms started working together for a better economy.
It is noticeable that the rate of GDP growth was around 4 percent in between 1955 and 1990 while the GDP per capita increased only by 2 percent during the same period. Since the 1991 reforms, India showed a GDP growth rate that averaged about 7 per cent. During the same period by 2016, the population growth had also slowed down, increasing the GDP per capita by 5.5 percent.
The Recession of 2008
The period from December 2007 through June 2009 showed the movement of US housing market from a boom to a bust. The bursting of the housing bubble led to a massive job loss, loss of investments and inequality of wealth. The negative scenario, widely known as the Great Depression continued for a long duration. Even when the crisis ended, the shock was so prevalent and future so vague that the economies started thinking of a social security as a respite. Despite the tough period, Indian Economy wasn’t much impacted due to strong Indian Banking Industry that didn’t rely on foreign securities and credit default swaps. Though the merchandise exports fell, the service exports remained largely unscathed. RBI lowered interest rates and increased credits, the government cut excise duties. These measures cushioned the overall economic impact of the shock.
India’s performance in world economy from 2000-2015
India’s annual per capita income showed a spectacular increase in the period, it rose from 900 dollars in 2000 to 2,800 dollars in 2015. Seven out of 20 cities for the super-rich in Asia- Pacific were from India. During this period, in 2015, India was the 10th richest country in the world according to total individual wealth, (calculated by accumulating the total individual wealth of the citizens of a country).
Due to India’s massive population, the per capita income stayed low in spite of rapid economic development. India ranked 20th in the per capita wealth chart. Switzerland topped the chart with 2,85,100 dollars followed by Australia (2,04,400 dollars), USA (1,50,600 dollars) and UK (1,47,600 dollars) in 2014-15.
In 2015, Delhi was a home to around 1,350 multi-millionaires whereas it had only 430 multi-millionaires in 2004. Chennai ranked 9th in the list of cities for super-rich around Asia-Pacific region. Chennai’s tally increased from 130 to 390 in 15 years. Pune became the fastest growing city in India in terms of economic growth. Pune had seen a 317 percent growth in the number of multi-millionaires in 10 years and remained at the third spot in the list.
One of the major factors behind such economic boom during this period had been the large-scale infrastructure development and the improvement of public facilities such as inter-city rail connectivity, sustainable and secure energy, watershed management, dams policy, fiber connectivity, development of ports and airports and so on. India’s GDP growth was at 7.5 percent in the first quarter of 2015 whereas China was growing at a rate of 7 percent. This made India the fastest growing economy in the world at the end of 2015.
Present Day India
“If we decide, we can change the pitiable condition of Indian economy. We have to take up the responsibility and show commitment.”
– Shri Narendra Modi, Prime Minister of India
India’s Demographic profile
Population: 1.3268 billion (approx.)
Population Growth Rate: 1.2 percent (as in 2015)
Literacy Rate: 74.04 percent (2011 census provisional data)
Male: 82.14 percent
Female: 65.46 percent
Life expectancy: 66.9 years (men), 69.9 years (women) (2015 – WHO 2016 Report)
India’s Economic Profile
As predicted by the world bank, Indian economy grew by 7 percent in 2016-17. It is predicted to grow at 7.6 percent in 2017-18 and 7.8 percent in 2018-19.
- Services (45.4 percent), Industry (29.8 percent) and Agriculture (16.5 percent) remained prime contributors to the GDP Composition by Sector (2016)
- Forex Reserves of India: US$ 366.78 billion as on March 17, 2017
- Gross Fixed Capital Formation (GFCF) at current prices stood at US$ 135.36 billion in the fourth quarter of 2016
- With prime export partners as the US, Germany, UAE, China, Japan, Thailand, Indonesia and the European Union, India’s exports stood at US$ 29.23 billion in March 2017. India is also tapping newer markets in Africa and Latin America.
- Cumulative FDI Equity Inflows: US$ 324.357 billion (April 2000 to December 2016)
- The Top Investing Countries FDI Equity Inflows were Mauritius (34 percent), Singapore (16 percent), UK (8 percent), Japan (8 percent), USA (6 percent) and Netherlands (6 percent). (as in December 2016)
- Major Sectors Attracting Highest FDI Equity Inflows in India are Services Sector (18 percent), Construction Development (8 percent), Computer Software and Hardware (7 percent), Telecommunications (7 percent), Automobile (5 percent), Drugs and Pharmaceuticals (4 percent), Chemical (4 percent) and Trading (4 percent). (as in December 2016)
Change in Economic Reforms since 2014
Goods and Services Tax
GST came into effect from July 1, 2017, with a primary goal to subsume all indirect taxes to create one tax rate that would integrate the country into a single market. GST replaced at least 17 state and federal taxes and brought them under single unified tax structure becoming a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. The IMF (International Monetary Fund) Deputy Managing Director Tao Zhang said, “The government has made significant progress on important economic reforms that will support strong and sustainable growth going forward.” while appreciating India’s effort at reforming country’s taxation system.
A step was taken by the Government of India to phase-out black money and fake currency in the system, Demonetisation could not give the desired results as fake currencies were still running and corruption was still rampant but the government succeeded in profiling the people by getting to know the differences between actual flow of money and the undeclared money. Recently, it was reported that India has less number of taxpayers than car buyers in the country.
There was only 5.5 lakh people paid an income tax higher than 5 lakh and accounted for 57% of the total tax collection. That meant, out of 3.65 crore individuals who filed returns only 1.5 percent were contributing to 57 percent of tax kitty.
Jan Dhan Accounts
Pradhan Mantri Jan Dhan Yojana was India’s National Mission to provide access to formal banking services to approximately 15 percent of the unbanked population ensuring access to savings accounts, remittance, credit, insurance, pension in an affordable manner. As of now, more than 27.84 crore Jan Dhan Accounts has been created. The benefits of Jan Dhan Accounts included, ₹ 1 lakh accidental insurance, ₹ 30,000 life cover payable on the death of the beneficiary and ₹ 5000 overdraft limit.
Others schemes include Affordable Housing, Deen Dayal Upadhyaya Gram Jyoti Yojana and Pradhan Mantri Ujjwala Yojana.
India’s recent economic scenario
The economic momentum of India slowed down in the first quarter of FY 2017 with India witnessing slowest growth in the last three years. This was attributed to the poor performance by the external sector, which was hit by the confusion created by implementation of GST & a strong rupee. The investment sector too witnessed resistance by a stressed banking sector & overleveraged firms. But the impact of initial chaos by GST would be temporary, hence not impacting the growth of Indian economy in the long run, which has already started gaining pace.
The incoming data from the second quarter of 2017 FY, gives a brighter light to the Indian economy. The manufacturing sector saw a return to an expansionary PMI (Purchasing Managers Index) in the month of August & the industrial production on the same lines saw a rebound in the month of July. The GST resulted in higher tax collections than expected, in the first month of its implementation itself. Despite these enormous collections by the government, it seems that the government may not be able to meet its fiscal deficit target, as it rose to 92.4% of the full year target in July.
Current Status of India against global standards
The Bright Future – A step forward
“Growth is never by mere chance; it is the result of forces working together.”
– James Cash Penny
With the event like Demonetisation, implementation of GST, and low GDP growth rates following it, future seems unpredictable. But there are some things which we can talk about.
According to recent Morgan Stanley report, India is likely to be the world’s fastest-growing large economy in the next ten years and hit $6 trillion which would propel its equity markets to a fresh record high. It also says that, India will become third largest economy by 2026-27. Though GDP numbers are down from the last few quarters, the stock market is operating on a high note, with their optimistic projections of corporate earnings growth. The financial services firm, Motilal Oswal said the Sensex may touch 1,00,000 before 2025. Leveraging technologies will benefit India, helping to raise productivity, improving radically and altering the provision of services such as education and healthcare. These technologies could add $550 billion to $1 trillion a year of economic value in 2025.
Recently, International Monetary Fund (IMF) lowered India’s growth forecast for the current and the next year. It said Indian Economy is in a little bit of a short-term slowdown but believes that it will be on ‘Very Solid Track’ in the mid-term. India has the potential to grow at a reasonably high level for the next two decades.
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