India Profile 2004: Business

Posted February 5th, 2008 by bigGuy

Business

Overview

From 1947 to the late 1970s, the economy was characterized by central government planning and import substitution industries, and economic production was transformed from primarily agriculture, forestry, fishing, and textile manufacturing to various heavy industries, transportation, and telecommunications. Agriculture still employs nearly 60 percent of the population, but accounts for only 22.6 percent of gross domestic product (GDP). By the 1980s and 1990s, private-sector initiatives noticeably increased, and information technology emerged in importance but has proven vulnerable to changes in foreign demand, out-migration of information technology labor, and a weak but growing domestic market for information technology goods and services.

In the 1980s, government liberalization measures—such as privatization of government industries and reduced tariffs on imported capital goods—have been credited for 1990s economic growth rates of around 4 to 7 percent annually, nearly double the 3 percent growth rates that characterized the previous 40 years. Furthermore, foreign direct investment has increased to an annual range of US$3 billion to US$5 billion, but is seen as hampered by corruption and bureaucratic inefficiency and remains well behind foreign direct investment in neighboring China. Furthermore, India accounts for less than 1 percent of world trade in spite of having 18 percent of the world’s population, and the informal economy accounts for 23.1 percent of gross national income (the new term for gross national product). A new union government was elected in May 2004 and is under significant pressure to provide greater economic development in rural areas.

Gross Domestic Product (GDP)/Power Purchasing Parity (PPP)

In 2002 GDP was US$496.8 billion (Rs24.2 trillion). Since the early 1990s, GDP has grown 4 to 7 percent annually, which is higher than GDP growth for the European Union, the United States, or the world as a whole. In 2003 PPP per capita was US$2,880.

Government Budget

Government revenues and expenditures have grown substantially since the early 1990s. According to India’s Ministry of Finance, in 2002–03 tax and non-tax revenues were US$49.7 billion (Rs2.3 trillion), total expenditures were US$88.9 billion (Rs4.1 trillion), and the fiscal deficit was US$31.1 billion (Rs1.5 trillion). Government expenditures generally have been highest in the energy, transportation, and social service sectors, which receive about two-thirds of total government expenditures. Tax revenues have grown annually around 10 percent or more since the early 1950s, and tax receipts have increased even more substantially since the mid-1990s with accelerated economic growth and improved government revenue collection capacities. For example, total tax revenues were US$20.8 billion for 1994–95 and US$35.2 billion for 2002–03. Fiscal deficits, however, have also increased from US$17.8 billion in 1994–95 to an estimated US$31.1 billion for 2002–03.

Agriculture, Forestry, and Fishing

Since independence, India has changed from a food importer to a food exporter, but agriculture has declined as a percentage of gross domestic product (GDP; from 32.8 percent in 1991 to 22.6 percent in 2001) and total exports (from 18.5 percent to 14.2 percent). Around 46 percent (141 million hectares) of total land is cultivated, and 16 percent is double cropped (49 million hectares), effectively giving India 190 million hectares of cultivated land. Another 4.8 percent (14.7 million hectares) is permanent pastureland or planted in tree crops or groves. Agriculture continues to employ the major, but declining, proportion of workers (from 69.4 percent in 1951 to 58.4 percent in 2001) and agricultural employment varies substantially among states (from 38.9 percent of workers in Punjab to 77.3 percent in Bihar). Most farmers cultivate plots of two hectares or less, and large landholders have only been divested in a few areas. Agricultural output—and the food security of millions—remains susceptible to often-tenuous access to arable land, credit, fertilizers, and irrigation as well as to natural conditions, particularly annual variations in rainfall.

The remarkable growth in agricultural output is largely due to Green Revolution inputs such as high-yield seed varieties and fertilizers. Rice, wheat, pulses, and oilseeds dominate production, but millet, corn, and sorghum are also important crops. The main commercial crops are sugar (India is the world’s second largest producer), rice (world’s second largest exporter), wheat, cotton, and jute. However, the rate of output for several crops may have peaked, and problems with soil degradation, rural infrastructure, and declining per capita agricultural holdings may prevent the rate of agricultural growth from keeping pace with increasing rates of population growth and per capita food consumption. In 1991, 2.1 percent of the population was employed in forestry, fishing, livestock, hunting, and related activities. As a percentage of GDP, forestry has declined from 1.5 percent in 1993–94 to 1.1 percent in 2000–01. In the same period, fishing changed little from 1.1 percent to 1.2 percent of GDP.

Mining and Minerals

Since the early 1990s, mining has accounted for around 2 to 3.5 percent of gross domestic product (GDP) and employed less than 1 percent of the labor force. The majority of minerals produced by India are bauxite, copper, iron, lead, mica, rare earths, uranium ore, and zinc.

Industry and Manufacturing

For decades, Indian industries were largely import substitution industries producing textiles, steel and aluminum, fertilizers and petrochemicals, and electronics and motor vehicles. From 1950 to 2000, industrial output increased from 15 to 27 percent of gross domestic product (GDP), but the sector continues to employ only about 10 percent of the workforce. Several industries face problems with power availability, high interest rates, customs delays, and regulatory obstacles. Domestic automobile manufacturing has increased substantially since the end of government licensing of automobile production in 1995, and car sales rose 50 percent by 2000. Import liberalization has also led to lowered sales for domestic industries, such as computer hardware and cement.

Energy

India is the world’s sixth largest energy consumer, and the nation faces substantial challenges in meeting both present and expected demands for energy, particularly electric power. India has a growing nuclear power industry and abundant hydroelectric power (particularly in North India), and it is the world’s third largest producer of coal (which provides more than half of domestic energy needs). But it is also a growing consumer and importer of petroleum and natural gas, and consumption of these products is expected to increase substantially. The government appears to be addressing petroleum demand by limiting imports and by expanding domestic exploration and production, but several factors provide little optimism that such measures will be sufficient for future demands. The government continues to pursue various reforms in the electricity sector, but it has abandoned full privatization of the state-owned petroleum industry, raising questions about its commitment to reforms in the petroleum sector. Finally, India faces economic competition from China over potential oil and gas resources in the Indian Ocean that both countries need for their economic development.

Services

From 1951 to 2000, business, information technology, banking, communications, hotels, and other services increased from 27 to 48 percent of gross domestic product (GDP), but most of this growth occurred in the 1990s. The percentage of the Indian workforce employed in services was 23.5 percent in 2000. Information technology services have emerged as an important element of the economy, but the information technology sector is believed to be vulnerable to out-migration of information technology professionals, particularly when the global economy is strong.

Banking and Finance

Under 1990s liberalization measures, restrictions on foreign direct investment have been relaxed, and foreign banks have been allowed to have greater shareholding in domestic banks (up to 49 percent), although foreign banks have faced some difficulties in acquiring such stakes. In 2002 government legislation enhanced banks’ capacity to act against debtors, a measure that should help banks in their attempts to address the high level of bad debt held by Indian companies.

Tourism

Tourism industry analysts estimate that India is one of the world’s fastest growing tourism markets with an annual growth rate of approximately 8.8 percent. Annual tourist inflows range between 2 and 2.5 million, but tourism has proven to be susceptible to issues such as communal conflict between Hindus and Muslims and occasional spikes in tensions between India and Pakistan.

Labor

The total number of persons in the labor force is unknown. According to official figures, from 1981 to 2001 the total number of workers grew more than 50 percent from approximately 245 million to 402 million persons. These figures count only those who are considered to have “engaged in economically productive activity for 183 days or more.” The actual number of persons in the labor force is likely to be much higher. From 1983 to 1994, the nation’s unemployment rate declined from 8.3 percent to 6 percent and then increased to 7.3 percent by 2000. Unemployment rates have historically been higher in urban areas, but rural and urban unemployment rates became nearly equal by 2000 (7.2 and 7.7 percent, respectively).

Foreign Economic Relations

India’s principal export and import trades are with the European Union, the United States, and Japan. Most aid is provided by the Aid-to-India Consortium, consisting of the World Bank Group, Austria, Belgium, Britain, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, and the United States. Japan is the largest aid granter and lender. India has its own aid programs with Bangladesh, Bhutan, Nepal, and Vietnam.

Imports

Principal imports are petroleum and petroleum products, capital goods, uncut gems, machinery, and fertilizer. Major imports are from the United States, the European Union (particularly Belgium), Singapore, the United Kingdom, and Saudi Arabia. In 2003 imports totaled US$64.5 billion, a substantial increase over 2002 imports of US$54.2 billion.

Exports

Principal exports are textile goods, finished gems and jewelry, engineered goods (including iron and steel), chemicals, and leather and leather goods. Main destinations of exports are the United States, the United Kingdom, China (particularly Hong Kong), Japan, and the European Union (particularly Germany). In 2003 total exports were valued at US$52.5 billion, a substantial increase over 2002 exports of US$47.7 billion.

Trade Balance

India’s negative trade balance has grown steadily since the late 1980s. In 2003 exports were US$52.5 billion and imports were US$65.4 billion, resulting in a negative trade balance of US$12.9 billion.

Balance of Payments

Before 2002 India’s surpluses in the capital account were offset by deficits in the current account, but since 2002 India has had surpluses in the current and capital accounts, leading to an accumulation of foreign reserves. The current account surplus is a small percentage of gross domestic product (0.5 percent in 2003) and has been the result of non-factor services and private transfers exceeding trade deficits. Growth in foreign direct investment is largely responsible for steady growth in the capital account, and external commercial borrowings and assistance make up most net outflows.

External Debt

India’s total external debt has increased from US$83.8 billion in 1991 to US$112.1 billion in 2003, but external debt declined as a percentage of gross domestic product (GDP) in the same time period (from 28.7 to 20.2 percent). Furthermore, in 1991 India was the world’s third highest debtor nation, but it had dropped to eighth by 2002.

Foreign Investment

Foreign direct investment in India has increased from about US$97 million in 1991 to US$3.6 billion for 2003, partly because of various liberalization measures, such as reduced tariffs and relaxed restrictions on foreign ownership of domestic industries.

Currency and Exchange Rate

The rupee (Rs) has depreciated steadily against the dollar since the 1970s. The average annual exchange rate for 2003 was US$1=Rs46.59 and US$1=Rs31.29 for 1993. In December 2004, the exchange rate was approximately US$1=Rs44. Since the late 1990s, the rupee has been stable against the euro as a result of the weakening of the U.S. dollar and worldwide shift away from U.S. dollar assets.