Indian Economy:

An overview - 08
 Some General Facts
• India is the world’s second most populous country of over 1 billion
people.

• Urban population 28% of total. (China 39%)

• More than half of its population is 25 years of age. ‘Demographic

dividend’.

• Measured in USD exchange rate terms, 12th largest in the world, with a
GDP of $1 trillion (2008)

• PCI $4542 at PPP and $1089 in nominal terms (2007)

• National savings (24% of GDP) almost half that of China’s 45% .

• World Bank classifies India as a low income economy

2
• Labour force participation rate 71% in 2003. (China 87%)

• Rural workers constitute about 60% of the workforce.

• Urban informal sector – the growing sector – represents the residual.

• Unemployment rate is 7.3%.

• Organized sector employs 7% of workforce (two thirds of which are

in public sector), and produces 40% of GDP. Rest in informal sector
--with predominance of ‘women.’

• Despite a decline, poverty is a serious problem. 27% of Indians are

poor.(2004-5).

• 70% of Indians(800million), lived on less than 20 rupees( slightly less

than C50 cents) per day with most working in informal sector with no
social security. (2007 Report on National Commission for
Enterprises in the unorganized sector
3
Why India?

• GDP growth rate 9% ( 2007-2008)

• Services are a growing sector and play an important role in Indian

economy. India is an imp. ‘back office’ destination for global
outsourcing of customer services and technical support.

• Major exporter of highly skilled workers in financial, software,

software eng.

• Potentials are in , manufacturing, pharmaceuticals, biotechnology,

nanotechnology, telecommunication, shipbuilding, aviation, tourism
and retailing.

4
 Composition of India’s GDP
(at Factor Cost by Economic Activity –
at 1999-2000 prices, in%)

1999-0 2000-01 2007-08

(RE)

1)Agriculture etc 24.99 23.89 17.75

2)Industry 25.31 25.80 26.63
2.1 Manufacturing 14.78 15.30 15.36
2.2 Construction 05.71 05.81 07.26
3) Services 49.69 50.30 55.62
3.1 Trade, hotel, Restaurants 14.22 14.34 27.55*

3.2 Transport, storage $ communica. 07.46 07.96

3.2 Finance, insurance, etc 13.07 13.04 14.68
3.3 Community, social and per. 14.92 14.98 13.39
service
* Inclusive of 3.2. Source : EPW 14TH June , 2008
Source: EPW June 14, 2008

5
India- Structural Transformation-?

• Economic policy: Approach

i) Since independence (1947) – till almost late eighties followed a

socialist inspired approach- strict govt. control over -private sector
participation, foreign trade and FDI (Approach-import substituting
rather than export promoting) .

ii) India’s low average growth rate ( 3%) from 1947-80 was referred as
‘Hindu rate of growth’, because of the unfavorable comparison with
the other Asia countries, especially the ‘East Asian Tigers’.

6
• A period of import tariff, export taxes, quantitative
restrictions , approvals needed for 60% of new FDI in the
industrial sector.

• FDI averaged only $200M between 1985-1991.

• In 2004, net FDI inflow was about 78USD bn. ( China,

52 USD bn)

• A large percentage of the capital flows consisted of

foreign aid, commercial borrowing and deposits of non
resident Indians.

• Largely and intentionally isolated from world markets.

7
• Late eighties: the govt. led by Rajiv Gandhi eased restrictions on
capacity expansion for incumbents, removed price control and
reduced corporate taxes.

• Phase of high growth with high fiscal deficit and worsening current
account

• Collapse of soviet union – a major trading partner, first Gulf war

causing spike in oil prices led to major balance of payment crisis
with the prospects of defaulting on its loan.

• Prime Minister Narasimha Rao with Finance Minister Manmohan

Singh initiated the economic liberalization of 1991.

• Reforms did away with license Raj in investment, industrial and

import licensing-ended many public monopolies, introduced
automatic approvals of FDI in many sectors.

8
 Agriculture
• India ranks second world wide in farm output.
• In 2007, accounted for 16.6% in GDP employing
60% of the total workforce.
• After having growth rate of 2% for many years-
now the growth rate is about 4.5%.
• Two thirds of India’s workforce still earn their
livelihood directly or indirectly through
agriculture.
• High level of disguised unemployment.
• Despite improvements, average yield in India
ranges from 30-50% of the highest average yield
in the world.
9
 Industry
• India ranks 14th in the world in factory output.
• Industry accounts for 27.6% of the GDP and
employs 17% of the work force.
• Manufacturing growth rate 8.4%.
• One third of industrial labour force is engaged in
simple household manufacturing only.
• Economic reforms led to more private sector
participation, an expansion in the production of
consumer goods and both domestic and foreign
competition.
10
 Services
• India is fifteenth in services output.
• The growth rate which was 4.5% in 1951-80 increased to
7.5% in 1991-2000. Recent growth rate 10.7%.
• Its share in GDP was 15% in 1950 which is now about
55.6%.
• Fastest growing services are –business services,
information technology enabled services, business
process outsourcing contributing about one third of total
output of services in 2000.
• India’s IT industry an important contributor to BOP,
accounts for only about 1% of total GDP and 1/50th of the
total services

11
 Foreign Trade & FDI

• Almost stagnant export for the first 15 years after independence.

Dominated by products like tea, jute and cotton manufacturers
having generally inelastic demand.

• Imports mainly were machinery, equipment and raw material.

• Since liberalization ex-im have become much broad based.

• India’s exports are consistently rising, covering about 80% of its

imports.

• Merchandise trade of India about 28% of GDP. in 2004 (China 70%.)

• Exports of goods as % of GDP of India 12%. (China 36%). (2004)

12
• Though net importer, since 1996-7, overall BOP has been positive
largely on account of increased FDI and deposits from NRIs.

• Its major trading partners are the U.S.A., UK, China, Germany,
Japan and UAE.

• India’s major exports are textile goods, gems and jewellery,

engineering goods, chemicals and leather manufacturers.

• India’s major imports are crude oil, petroleum products, machinery,

gems, fertilizer and chemicals.

• The top five countries in FDI inflows (2000-2007) are Mauritius

(44%),United States(9.4%), UK( 8%), Netherlands(6%)and
Singapore(5%).

13
Trade Openness: India (% of GDP)
Year Export Import Exim
1990-91 6.08 7.86 15.62
1993-94 8.12 8.52 15.63
1995-96 9.00 10.38 18.50
1996-97 8.72 10.20 18.62
1997-98 8.58 10.17 17.63
1998-99 7.93 10.12 19.90
1999-00 9.09 12.25 21.35
2000-01 10.70 12.13 22.51
2001-02 10.1 11.89 21.66
2002-03 11.3 13.18 24.49
Source: Calculated from Govt.
2003-04 11.6 14.25 25.65 of India, Economic Survey
2004-05 12.7 17.25 29.97
14
Situating India in World Merchandise Exports and Imports

Year Exports (% share)

World Canada India China N.America Asia
(b$)
1948 58 5.5 2.2 0.9 28.1 14.0
2006 11783 3.3 1.0 8.2 14.2 27.8

Imports(% share)

1948 62 4.4 2.3 0.6 18.5 13.9

2006 12113 3.0 1.4 6.5 21.0 25.0

Source: WTO, World Trade Statistics, 2007

15
India-China Trade & FDI Partners

16
17
Source: Source: Reserve Bank of India

18
Source: CEIC Source: CEIC 19
20
21
Percentage Share(2006) and growth rate (1996-2006) : Trade in
Commercial Services of India and few selected countries and regions

Countries %Share Growth rate (%)

EX IM EX IM
World 100 100 7.2 7.4

North America 18.85 15.19 5.3 7.3

Canada 2.35 2.71 6.7 6.8

Asia 25.36 25.05 8.0 6.5

China 3.72 3.79 14.7 14.8
India 3.01 2.41 21.5 26.9

22
Is development
inclusive?

23
 Labour Market
 Growing employment is accompanied by poor
quality of labor with proportion of regular wage
earner employees only about 15%.
 Economic growth could be made more inclusive
by achieving faster growth in regular employment,
as opposed to casual and self-employment.
Although regular employment has risen, its growth
has been almost exclusively in the smaller, least
productive enterprises.
 About 87% of manufacturing employment taking
place in micro enterprises(<10 persons) producing
just a third of manufacturing output.
24
 Employment in firms with more than ten employees
accounts for only around 3.75 per cent of total employment
(one quarter of regular employment) and has been falling.
Indeed, India has a much smaller proportion of employment
in enterprises with ten or more employees than any OECD
country.

 In non-agriculture sector growth in employment is in informal

sector.

25
Sex Ratio in Population with Rural-Urban break up
Year Sex Ratio
Rural Urban Total
1901 979 910 972
Source : Office of the Registrar
1911 975 872 964 General, India
1921 970 846 955 Sex Ratio 1901-91 (Total, Rural and
Urban) from Brief Analysis of PCA
paper-2 of 1992
1931 966 838 950 1961 Population from PCA 1961
1971 Population from Social and
1941 965 831 945 Cultural Tables
1981 figures from Series Part-II A(I),
1951 965 860 946 General Population Tables –
Census of India 1981.
1961 963 845 941 Figures of 1991 (including interpolated
data for JK-1991 based on 2001
1971 949 858 930 census) and 2001 from PCA census
of India -2001
1981 951 879 934
1991 938 894 927
2001 946 901 933 26
Trends in Gender Disparity in Literacy Rate

Male Female Male/Female Slightly more

Literacy rate than half of total
Year disparity women are
1961 40.4 15.3 0.45 literate.

Male-Female
LR
disparity is on
decline.

1971 39.5 18.4 0.38

Source: Census of India various years

1981 56.3 29.7 0.35 27

 Labor Force Participation Rate by Age:
2000-2004

Age Male Female Rural female

L/F participation
15-29 rate higher to
their
Rural 75.10 30.9 urban
counterpart
Urban 67.30 17.9 mainly due to
Agriculture.
30-44
Rural 98.7 46.6

Urban 98.4 26.6: NSSO, 61ST Round

Source
28
Industrial Distribution of Workforce by Gender: 2004-2005
Rural Rural Urban Urban All
Industry division Male Female Male Female
Agriculture and allied activities 66.5 83.2 6.1 18.1 56.4
Mining & Quarrying 0.6 0.3 0.9 0.2 0.6
Manufacturing 7.9 8.4 23.5 28.2 12.2
Electricity,gas and water supply 0.2 0.0 0.8 0.2 0.3
Construction 6.8 1.5 9.2 3.8 5.7
Trade , hotels and restaurants 8.3 2.5 28.0 12.2 9.9
Transport, Storage &
communication 3.8 0.2 10.7 1.4 4.1
Finance, insurance, real estate and
business services 0.7 0.1 5.9 3.2 1.7
Social, community and personal
services 5.2 3.8 14.9 32.7 9.1
Source: National Sample Survey Organization : 61st Round (July 2004 – June 2005)
29
Share of women employment out of total employment in
organized sector in India (Figures in thousand)

Year % of women in % of women in % of women

Public sector Private sector in Total
1995 13.4 20.2 15.4
2000 14.8 23.9 17.6
2001 14.9 24.2 17.8
2002 15.4 24.3 18.1
2003 15.6 24.5 18.4
2004 15.9 24.8 18.7
Source : Quarterly Employment Review, Directorate General of Employment &
Training, Ministry of Labor
30
 Unemployment rate by Age and Sector for India
15-29 30-44 45-59 60 & above Total

Femal Male Femal Male Femal Male Femal Male F’male Male
RURAL e e e e

July 1999 – 3.7 5.1 0.4 0.6 0.2 0.1 0.0 0.2 1.5 2.1
June 2000

July 2004 – 7.0 5.2 1.8 0.6 0.5 0.3 0.5 0.2 3.1 2.1
June 2005

URBAN
July 1999 – 16.6 11.5 2.8 1.4 0.5 0.4 0.0 0.0 7.1 4.8
June 2000

July 2004 – 19.9 10.0 5.1 1.2 0.8 1.0 0.0 0.3 9.1 4.4
June 2005

Source : National Sample Survey Organization: 55th and 61st rounds 31

32
• women wage lower than men by 33-40 points.
Women-men wage differential is 0.75:1.

• The gender based wage differential though has

narrowed down with increase in education level. It
is still high.

• Urban wage differential persists but narrower than

in rural area.

33
The Working Poor by Gender and Activity Status:
1999-2005 (in%)
Pop. Seg. 1999-2000 2004-05

S.E RWS CL Total S.E RW CL Total

S
Male 43 8 49 66,441 47 8 45 66,943
20.1 11 37.7 24 18.7 9.7 35.3 21.6
Female 43 3.5 53 36,721 51 5 44 37,544
23.5 13.6 42.2 29.7 21.1 14.2 37 25.3
Total 43 6.5 50 103162 48 7 45 104487
Figures in italics are proportion of workers in that population segment and activity status.
Source: EPW, 28 July 2007
21.2 11.4 39.3 25.7 19.6 10.5 35.9 22.8
34
 HUMAN DEVELOPMENT INDICATORS
( India’s position among 177 countries)

Particulars Rank Value

HDI 128 0.62

Life expectancy at birth( yrs) 125 63.9

Adult literacy rate (%) 114 61.0

Combined(pri—ter)enrolment 122 63.8

ratio

GDI as % of HDI 138 97.0

Adult F.literacy rate 134 65.2

Combined(pri-ter) enrolment 159 87.7

Ratio( F. as % of male)
Source: Human Development Report-2007

35
 India-China Human Development Scenario-2003
Particulars India China

i) LF participation rate (%) 71 87

ii) Female LFP rate 45 79
iii)Average Life Expectancy (years) 63 71
iv)Infant mortality (per 1000 live births) 63 30
v)Adult Literacy (%ages 15 and above) 68 95
vi)Tertiary enrolment rate(%) 11 13
vii)Mobile phones per’000 people 25 215
viii)PC per’000 people 07 28
viii) Internet uses per’000 people 17 63
ix) Gini Coefficient 33 44.7
Source: World Development Indicators- 2004, 2005

36
37
 GLOBAL COMPETITIVENESS RANKING 2007-8: India and China
(Rank out of 131 countries)

Pillars Components India China

GCI Global Competitiveness Index 48 34
Basic requirements 74 44
1 Institutions 46 77
2 Infrastructure 67 52
3 Macroeconomic stability 108 07
4 Health and primary education 101 61
Efficiency Enhancer 31 45
5 Higher education and training 55 78
6 Goods market efficiency 36 58
7 Labour market efficiency 96 55
8 Financial market sophistication 37 118
9 Technological readiness 62 73
10 Market Size 3 2
Innovation and Sophistication factors 26 50
11 Business sophistication 26 57
12 Innovation 28 38
Source: Global Competitiveness Report 2007
38
 Major Areas of Reforms Needed
• Labour market: Stringent labour laws should be relaxed
• Business environment: Lowering the barriers to entrepreneurship
Ending reservation of products fro SSI
Need for Bankruptcy law
Dispersion of tariff rates
Easing of Service sector FDI restrictions
More privatization of public sector
enterprises.
• Financial sector: More liberalization
Privatization of public sector banks
• Infrastructure : Electricity reforms to be speeded up
transport: More private sector involvement
• Public Finances: Better targeting of subsidies, GST
• Education: Higher public expenditure on primary and
education, Addressing financing of higher
edu.
39
 In Conclusion
• India and China – non comparable:

India-- Democracy (messy)

Highly diverse social structure

Reforms reactionary in nature- a late starter

Less integrated to Global market (including East Asia)

Dissimilar trade pattern

Lagging behind in FDI and infrastructure

Weak link between economic development and social

welfare at regional level compared to China.

40
• Two divergent development Paths:

India China
i) Increasingly building ground up Top down approach

ii) Service sector led growth Manufacturing sector and foreign

trade
iii) Private sector led growth State led
(early nineties) modernization (late
1970’s)
iv) Consumption driven Investment driven.

iv) Knowledge based sector-labour Cheap- assembly line workers

vi) World’s back office Factory of the world

41
• Yet-- India can learn from China in:
– Social and Physical Infrastructure
– Improving manufacturing sector’s productivity

India- A country with Potentials for ‘sustaining’

development!!

42