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Indian Economy

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Indian Economy

After the pandemic Indian economy will bounce by 9% in 2022 and will settle down to 7.5% by 2023–24.

-World Bank

To understand this quote and its implications, we need to study the Indian economy in detail. How has the country achieved this growth and what makes its economy different from others? How has it become the first choice for investors across the globe?

An overview of the Indian economy

Economists categorise India as a newly industrialised country (NIC).

The developing countries whose economy is growing at a much higher pace than the other developing countries are called NIC. ¹

NICs are also identified as newly industrialised economies (NIE) or middle-income countries. These countries are not tagged as ‘developed countries’ but their economic growth is high over the short duration of time. Turkey, South Africa, Brazil, Malaysia, Philippines, Thailand, Brazil, and Mexico are some examples of NICs.

For the last 20 years, India’s GDP is growing annually by 6-7%. The Indian economy is forecasted to be a $4 trillion USD economy by 2026 according to a survey conducted by the International Monetary fund (IMF).

India as a mixed economy

Like all the modern economies, India is a mixed economy. Mixed economies have characteristics of both capitalist and socialist economies. In India, citizens are free to choose their profession and start a business of their liking in any sector. However, there are a few exceptions. Sectors like defence, power, and banking are highly regulated by the Indian government. This means that government-owned organisations exist along with privately-owned entities. Adopting the mixed economy proved to be advantageous to India in terms of economic freedom, citizen welfare, and resource allocation.

How much is the Indian economy worth?

Gross domestic product (GDP) is a widely used indicator for any country’s economy. As per the provisional estimates of GDP in the financial year (FY) 2021–22, the current GDP of India is $2.9 trillion USD.

Indian Economy Indias Gross domestic product GDP in current prices from 1986 to 2026 in billion US dollars StudySmarter OriginalsFigure 1: India’s Gross domestic product (GDP) in current prices from 1986 to 2026 (in billion U.S. dollars), StudySmarter Originals. Source: IMF, Statista

Looking at FIgure 1 we can see that the worth of the economy skyrocketed at the beginning of the twenty-first century when India left its protectionist economic policies and moved towards the liberalisation of the market.

Characteristics of the Indian economy

In India, most of the labour force is employed in the agriculture and industry sectors. The service sector contributes to more than 50% of GDP. The service sector is the fastest-growing sector in India. The IT service sector in India earns almost $191 billion in revenue.

India is also a leading manufacturer of pharmaceutical products like generic medicines and vaccines. Due to its natural beauty, the tourism sector has grown significantly in the past few decades. This industry contributes to 9.2% of the GDP.

Almost two-thirds of the Indian population is rural. Hence, the agriculture sector is considered the backbone of the Indian economy. Rural areas that mainly depend on agriculture and other agriculture-dependent industries contribute almost 46% of the GDP.

India has the highest number of mobile phone users and this has helped in the booming of the telecommunication sector. Other important sectors are automobile and mining which contribute 11% and 2.3% of the GDP respectively.

Indian Economy Sector wise GDP in India StudySmarter OriginalsFigure 2. Sector-wise GDP in India, StudySmarter Originals. Source: Ministry of Statistics and Programme Implementation, www.mospi.gov.in

Some other characteristics (and challenges) of the Indian economy

The Indian economy is a developing economy. This means that the economy still faces many challenges. Some of the challenges are unique to the Indian economy and it is necessary to further study the characteristics to understand these challenges.

1. High dependence on the primary sector. In developed countries, only 1–5 % of the population is active in the primary sector as compared to the 58% population in India which contributes to only one-fifth of GDP. Lack of advanced technology and proper planning has put the agriculture sector in India under tremendous pressure.

2. Low per capita income. Lower per capita income is one of the reasons why India is termed a developing country. The per capita income of India is $1927 USD (2020) according to the World Bank.

3. Unemployment. Indian industries do not have sufficient capital to expand the production facilities and absorb the exponentially increasing labour force. In rural areas, a lot of people depend on agriculture, and in urban areas, an educated workforce is facing a shortage of job opportunities.

4. Population. Due to a decrease in mortality rates after independence, the population grew exponentially. Thus, whatever development the country makes is absorbed by the demands of a growing population. Economists believe that even if India surpasses the US in GDP, it will not achieve the same level of economic stability due to the exorbitant population.

5. Unequal wealth distribution. In India, the top 4% of households hold 31% of total assets. This concentration of wealth causes maldistribution of income in rural areas.

6. Lack of infrastructure. India has yet to build proper infrastructure in transport, communication, banking, energy, health, and education. The lack of proper infrastructure is the reason that huge natural resources in the country are underutilised.

Forecast of the Indian economy

Even though some facts and challenges of the Indian economy are concerning, India is set to grow in the upcoming years. Even after the second infection wave of Covid-19, as the global economy is recovering, the Indian economy is projected to grow approximately 9% in the year 2022–23 and settle down to 7.5% in the years after. Some reasons to support those claims are:

  1. The accelerated rate of vaccination and reduction of mobility restrictions has sparked the confidence of consumers.
  2. Upper middle class and high-income class households with excess savings are waiting for things to go back to normal.
  3. Once the demand from one group of society hits the market, this will kick-start the business cycle. To fulfill excess demand, capital will be poured into the system. The lower working class will again be able to earn a living wage, which in turn increases the demand for consumables.
  4. The pandemic boosted digitization in India. Sectors such as e-commerce, telecommunications, and hybrid work cultures are likely to evolve business operations and reshape consumer expectations.

India in the global economy

India is the sixth-largest economy today (2021–22) by nominal GDP. India ranks ahead of developed nations like France, Italy, and Canada. It is the fastest-growing economy, and it's predicted to overcome Germany by 2030.

The main export partner of India is the US, which constitutes almost 17% of all India’s exports. Other major countries are China and the United Arab Emirates. India’s major exports include minerals, engineering goods, pharmaceuticals, and chemicals. China fulfills almost 15% of India’s import demand followed by the US and the United Arab Emirates. The main imports are crude oil, petroleum gas, coal, gold, and diamonds.

India’s consumer market size, goods production capacity, untapped natural resources, and policy reformations like foreign direct investment have made it the first choice of investors across the globe.

Indian Economy - Key takeaways

  • India is the sixth-largest economy (by nominal GDP) in the world.
  • Economists categorise India as a newly industrialised country (NIC).
  • India is a mixed economy.
  • In India, most of the labour force is employed in the agriculture and industry sectors.
  • The main characteristics of the Indian economy are high dependence on the primary sector, low per-capita income, big population, unemployment, unequal distribution of wealth, and lack of infrastructure.
  • The Indian economy is projected to grow approximately 9% in the year 2022–23 and settle down to 7.5% in the years after.
  • India’s major trade partners are the US, China, and the United Arab Emirates.

References

1. Patrick H. O’Neil, Essentials of Comparative Politics (6th ed.), 2018.

Frequently Asked Questions about Indian Economy

India has a mixed economy. Mixed economies have characteristics of both capitalist and socialist economies. 

India is the sixth-largest economy today (2021–22) by nominal GDP. India ranks ahead of developed nations like France, Italy, and Canada. 

The current GDP (2021-22) of India is $2.9 trillion USD. 

Some facts about the Indian economy are:

  • India is the sixth-largest economy (by nominal GDP) in the world. 
  • India is a newly industrialised country (NIC) according to economists. 
  • India is a mixed economy. 
  • In India, most of the labour force is employed in the agriculture and industry sectors. 
  • The main characteristics of the Indian economy are high dependence on the primary sector, low per-capita income, big population, unemployment, unequal distribution of wealth, and lack of infrastructure. 
  • The Indian economy is projected to grow at approximately 9% in the year 2022-23 and settle down to 7.5% in the years later. 
  • India’s major trade partners are the US, China, and United Arab Emirates.

For the last 20 years, India’s GDP is growing annually by 6-7%. After the second infection wave of Covid-19, the economy is correcting and GDP growth is projected to be 9% in FY 2021–22 before coming down to 8.1% in 2022–23, and later settling down to 7.5%. 

Final Indian Economy Quiz

Question

What type is the Indian economy?

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Answer

India’s economy is mixed.

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Question

Which sector in India employs most of the population?

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Answer

The agriculture sector.

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Question

Which sector is growing rapidly in India?

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Answer

The IT service sector.

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Question

Where do most of India’s population live?

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Answer

Almost two-thirds of the Indian population lives in villages.

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Question

India is a ____ country.

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Answer

developing

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Question

Which of the following is NOT a characteristic of the Indian economy?

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Answer

Equal wealth distribution

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Question

Which of the following is a characteristic of the Indian economy?

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Answer

Low per-capita income

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Question

Which of the following is a characteristic of the Indian economy?

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Answer

High dependence on the primary sector

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Question

Which country is the major export partner of India?

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Answer

The major export partner of India is the US.

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Question

Which country is the major import partner of India?

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Answer

The major import partner of India is China.

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Question

Which of the following is NOT one of the major imports of India?

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Answer

Pharmaceuticals

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Question

Which of the following is NOT one of the major exports of India?


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Answer

Coal

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Question

What is the projected growth rate of the Indian economy?

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Answer

Indian economy is expected to grow by on an average 6-7%.

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Question

Are citizens of India allowed to choose their profession?

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Answer

As the Indian economy is a mixed economy, everyone holds the right to choose their profession.

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Question

Can the Indian government control the market in India?

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Answer

As India is a mixed economy, the government can regulate the market via economic policies.

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