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India

India is the world's largest democracy and Asia's third largest economy. Following economic reforms in the 1990s, India experienced rapid economic growth but still faces social and economic challenges. In response to the global economic slowdown beginning in 2008, the Indian government implemented several fiscal stimulus packages while the central bank aggressively cut interest rates to stimulate the economy. However, India's economy has slowed significantly with falling industrial production and exports.

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Abhishek Sinha
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59 views3 pages

India

India is the world's largest democracy and Asia's third largest economy. Following economic reforms in the 1990s, India experienced rapid economic growth but still faces social and economic challenges. In response to the global economic slowdown beginning in 2008, the Indian government implemented several fiscal stimulus packages while the central bank aggressively cut interest rates to stimulate the economy. However, India's economy has slowed significantly with falling industrial production and exports.

Uploaded by

Abhishek Sinha
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© Attribution Non-Commercial (BY-NC)
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India

Economy and Trade


India is the world’s largest democracy, and its second-most-populous country. India is also Asia’s third-
largest economy, after Japan and China. Following several decades when the economy was virtually
closed to the outside world, India launched a program of reforms in the early 1990s, which have ignited
rapid economic growth. These reforms included liberalizing foreign trade and investment, and significantly
adjusting monetary and fiscal policy. Many analysts believe that the country has the potential to become
one of the 21st century’s economic superpowers. However, India still faces huge social, economic, and
environmental problems. The partition of the Indian subcontinent in 1947 sowed the seeds for future conflict
—there have been three wars between Hindu-majority India and Muslim-dominated Pakistan since 1947,
and relations remain tense. Communal, caste, and regional tensions also continue to affect India, while the
vast mass of the rural population remains illiterate and impoverished. Agriculture accounts for around one-
fifth of the economy, but supports two-thirds of the population. The United States is India’s largest trading
partner.

Economic Policy over 12 Months


Since the Indian economy began to slow in the final months of 2008, the Indian government has announced
a variety of fiscal measures to stimulate it, while the central bank has loosened monetary policy significantly.
In December 2008, the government unveiled a US$4 billion spending package, and said it was also planning
a substantial spending increase in the following year’s budget. The measures in December included cutting
various categories of value-added tax by up to 4 percentage points to encourage consumer spending, an
increase in infrastructure spending, and help for businesses and for labor-intensive export sectors, such as
textiles and handicrafts.
In January 2009, the government unveiled a fresh stimulus plan. Measures included allowing increased
foreign investment in both Indian bonds and companies. State governments would also be allowed to borrow
up to US$6 billion to fund additional infrastructure projects. In February 2009, the government announced
a third stimulus package, involving a cut in excise duty to 8% from 10%, and a reduction in service tax to
10% from 12%. The 4-percentage-point reduction in central value-added tax announced in December was
extended beyond March 31, 2009, when it was originally due to expire.
Also in February 2009, the government unveiled its 2009 budget, under which spending will rise by 6% to
INR9.53 trillion (US$196 billion) in the year starting April 1. That, according to the government, will result in a
budget gap of 5.5% of gross domestic product (GDP) by March 31, 2010. However, independent economists
believe the deficit could be even larger. Rajeev Malik, a Singapore-based economist at Macquarie, told
Bloomberg at the time of the budget that the shortfall could touch 8.1% of GDP by March 31, 2009, if the
government included bonds sold during the year to subsidize fuel and fertilizer in its books. India regards
these bonds as “off-budget” items, and doesn’t show them in state accounts.
The country’s rising budget deficit limited the scope for fiscal stimulus, and the authorities have focused on
using monetary policy to counter the effects of the global slowdown. The central bank began cutting rates
aggressively in the final quarter of 2008. By December 2008, the Reserve Bank of India’s key interest rate
stood at 6.5%, its lowest level since June 2006. Between mid-September and December, the central bank
also injected US$60.2bn into the financial system to boost liquidity.
In January 2009, the Reserve Bank of India cut its key lending rate by a further percentage point, to an eight-
year low of 5.5%, marking the fourth reduction in as many months. The central bank also cut the amount of
funds that commercial lenders have to keep in reserve from 5.5% cent to 5.0%. In March 2009, rates fell yet
again, this time by 50 basis points, to an all-time low of 5%.

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Economic Performance over 12 Months
India’s economy is largely driven by domestic demand but it has not been immune to the global financial
crisis that broke in the second half of 2008. India’s economy began to slow markedly in the final three
months of 2008, when GDP grew by 5.3%, compared with 7.6% in the previous three months, and 8.9% in
the same period of 2007. A slump in export demand was the main factor depressing growth.
Growth is likely to fall further in the first quarter of 2009. The country posted its first back-to-back decline in
industrial production in 16 years in January, when output fell by 0.5%, following a 0.6% drop in December.
In addition, India’s exports fell at their steepest rate in a decade in January 2009, amid the global economic
slump. Merchandise shipments dropped by 16% to US$12.38 billion, the fourth consecutive monthly decline.
The government expects growth to slacken to 7.1% in fiscal 2009, an outcome that would mark the weakest
growth in six years, and would follow three years when the economy expanded by more than 9% a year.
Some independent economists believe that growth will fall below 7%, and that it will slow further in 2010,
to 5.5% or lower. That would be a strong pace of growth by global standards, but it would not be enough to
raise the living standards of India’s poorest citizens.
Inflation reached a 13-year high of 12.91% in August 2008, but it had fallen to a near seven-year low
of 2.43% by the last week of February 2009, partly due to a sharp slide in global prices for oil and other
commodities. The slowing domestic economy is also affecting inflation, with price increases expected to
turn negative in 2009, according to many independent economists. Such a development would mark India’s
first bout of deflation since March 1976, according to central bank records. Indeed, Agence France Presse
reported, in March 2009, that Goldman Sachs had said, “we think deflation will be a much bigger risk for the
economy in the rest of 2009 . . . due to ongoing demand destruction and commodity price collapses.”
India has been chalking up large budget deficits for many years, and the poor state of the public finances
has limited the government’s ability to spend its way out of the slowdown (see Economic Policy). More
ominously, when the government announced the 2009 budget in February 2009, the ratings agency,
Standard & Poor’s, put the country on watch for the loss of its investment-grade status. Meanwhile, Fitch
Ratings in Hong Kong said a failure to cut the deficit “could undermine” India’s economic growth prospects,
and jeopardize its ability to continue to attract capital.

Support for Inward Investment and Imports


India encourages foreign investment, and has liberalized its investment regime significantly over the past
two decades. However, some areas of the economy remain off-limits to foreign investors, while bureaucracy,
poor infrastructure, and corruption represent considerable barriers. A government agency, the Investment
Commission, has been established to facilitate investment by foreign companies in India. The Commission
recommends projects and investment proposals that should be fast-tracked and/or mentored, and promotes
India as an investment destination.
India is a member of the World Trade Organization. The website of the Ministry of Commerce and Industry
has information on the country’s trade regime.

Tax Exemptions
Both central and state governments provide various investment incentives for domestic and foreign
investors. The central government’s incentives include:
• 100% tax exemption on profits related to infrastructure development and operation;
• 10-year tax exemption for exports.
Investors in the Special Economic Zones qualify for a tax exemption for the first five years, with a 50%
exemption for the following five years. State governments may offer exemptions on the payment of charges
for electricity, registration fees, and stamp duty.

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Statistics
GDP growth: 7.1% (2008–2009, official estimate)
GDP per capita: US$2,900 (2008, est.)
Inflation: 2.43% (February 2009, official statistics)
Key interest rate: 5.0% (March 2009, official statistics)
Exchange rate versus dollar: Indian rupees (INR) per US dollar—43.319 (2008, est.)
Unemployment: 6.8% (2008, est.)
FDI: US$142.9 billion (2008, est.)
Current-account deficit/surplus #US$38.39 billion (2008, est.)
Population: 1,147,995,904 (July 2008, est.)
Source: CIA World Factbook except where stated

More Info
Websites:
• Investment Commission: www.investmentcommission.in
• Ministry of Commerce and Industry: www.commerce.nic.in
• Doing Business In India, guide from the US Department of Commerce: www.buyusa.gov/india/en/
motm.html#_section7
• The Economic Times, covering economic and financial developments in India:
www.economictimes.indiatimes.com

See Also
Viewpoints
• Viewpoint: Hamish McRae
• Viewpoint: Rajiv Dogra
• Viewpoint: Ravi Nedungadi

To see this article on-line, please visit


http://www.qfinance.com/country-profiles/india

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