Trade Guide: India

Do you know?

With a population of 1.2 billion people, India (official name: the Republic of India) is the second most populous country in the world, and thanks to its remarkable growth in recent decades, has become the world’s fourth largest economy, and the third largest in Asia, behind China and Japan.

Economic Overview

India commenced an ambitious program of economic reform in the early 1990s, beginning the process of shifting from an autarkic, quasi-socialist system with heavy government intervention and high trade barriers, towards a more free market economy, integrated into the global trade system.  This program included significant deregulation, privatization of state owned enterprises, and a reduction of barriers to international trade and foreign investment. 

These efforts have borne significant fruit.  From 1997 to 2011, India averaged a stellar annual growth rate of almost 7%.  Powered by this growth, India rapidly shot to the head of the emerging market class, and along with Brazil, China, and Russia, formed the original BRICs appellation.  While significant market opening reforms have been undertaken, there continues to be remnants from the country’s insular and state-centric policies of the past.  The role of the public sector in the economy, both as a producer and consumer, is declining but still significant.

India is a major trading nation, ranking within the global top twenty as both as exporter and importer.  India has transformed itself from chronic dependence on grain imports to a net food exporter and a global agricultural powerhouse, along with its increasing capability in services and high technology sectors.  Agriculture continues to be a major employer (almost 50%), although its contribution to total output (roughly one-sixth) is far less than that of the services sector (two-thirds). 

The process of liberalization and market-oriented reform has spurred the development of a rapidly expanding consumer class in India.  In fact, according to the consulting firm PwC, analysts estimate that at current growth rates India could become the world’s fifth largest consumer goods market by 2025, with the consumption patterns of the Indian middle-class potentially rivaling those of the American and European middle-classes.

India’s growth began to slow dramatically in 2011, due to rising inflation, high interest rates, and concerns over the government’s commitment to continuing the reform agenda.  For the past 2 years, growth has been mired below 5%, the lowest rates seen in more than 10 years.  The slow-down in growth has been compounded by mounting inflation, in the range of 8-9%.  The Indian Rupee has been one of the worst performers in Asia, suffering significant losses and sinking to a record low in August 2013.   

In many respects, the policies necessitated by the Global Financial Crisis have played a major role in the current slowdown.  The GFC forced the government to embark upon an aggressive fiscal and monetary stimulus program. While these measures did help to forestall a steeper contraction, they also led to a spurt in inflation.  The government responded with higher interest rates which stanched both investment and consumption. At the same time, subdued growth in major export markets slowed overseas shipments, exacerbating the slowdown and the current account deficit. 

As India seeks to recapture its previous growth rates, deficiencies in India’s infrastructure, excessive regulation, and a governing system are all in need of urgent redress. 

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