BRICs Series 1. The Indian Economy Issues, Impact & Potential

In 2001, Goldman Sachs famously came up with the term BRICs (representing Brazil, Russia, India & China), and estimated that by the year 2050, the combined economies of the BRIC countries could eclipse the combined economies of the current richest countries of the world. Since then, India has been mentioned as an upcoming emerging economic giant, and rightfully so. It has lived up to its hype the past 10 years. Its economy is booming with an annual growth of 8-9% in the past few years.and is expected to grow at an average of 8.7% in the next 5 years. The consumer optimism in high, the stock market is at an all-time high, the auto industry is having record salessounds like a paradise.right? WRONG. Not everything is rosyand there are various important issues that people dont see, or choose not to see..which could impact not only the future of India, but could shape the global economic landscape in the next 50 years.

Indian Economy at a glance:

The Indian economy is structured such that the Services Sector accounts for 63%, Agricultural sector 17.5%, and the Industrial sector 19.5% of the GDP. Its a two-tier economy cutting edge, globally competitive knowledge driven services sector that employs the brightest of the middle-class on one hand, largely rain-fed agricultural sector that employs majority of the vast and poorly educated labor force on the other. Inflation has been really high lately, averaging 10% in recent years, peaking at 16.2% in early 2010. The budget deficit is at 7%, expected to come down to around 5% in the next few years.

The Indian Labor Force Structure: The formal sector accounts for only 11% (38million) of the total Indian labor force. And 2/3rd of that works for the government. Whereas the informal sector is huge 89% (360 million). But most of the informal sector labor force is in the low-productivity agricultural sector. Only 30 million are employed in the small and micro-industry.

The services sector has been the main driver of the economic growth and is the largest and best performing component of the economy. Information Technology contribution to the GDP has gone up from 1.2% in 1998, to 5.2% in 2007and the computer software and services exports are poised to be worth $80 billion in 2011. The IT-enabled services and business process outsourcing (call centers, accounting support, administration and content development), has expanded at a rate of 50% since 1993. The boom of the service industry wasnt planned, but it was by luckdue to the global IT boom.especially in the United States. The IT sector was a completely new sector in India, hence it was unregulated by the government.a blessing. And to the governments credit, it did not suppress this sector, and on the contrary, it gave tax incentives, relaxed labor rules, created special zones of power supplies for this sector.

On the other hand, the performance of agricultural sector has been dismal. It employs 60% of the countrys workforce, but accounts for less than 1/5th of GDP. Since the year 2000, the average growth has been at 2%, half of what is required to sustain a GDP growth of 9% or higher. Spike in the food prices in 2008 highlighted the need for India to invest more in the sector to assure its food security.

The industrial sector accounts for 20% of the GDP. In the 1980s, this sector grew by 7.1% per year, and since 2003, due to strong consumer demands and exports, the production grew at 11.6%. Manufacturing production is 75% of the industrial output, but still a very small sector. The government target for manufacturing sector is to make it account for 25% of the GDP, and to achieve this, the sector must grow by 15-17% per year.

Lets list some of the strengths and weaknesses of India.before going into what India needs to do to be an economic superpower.

• Booming economy and IT sector average GDP growth rate 8.7% per year.
• Large internal market.
• Demographics large young English-speaking population.
• Growing middle-class.
• Democracy freedom of speech, press and religion, fair elections, smooth transition of governments.
• Strong entrepreneurial tendencies