India - Economy

General description

India is rich in natural resources and manpower and has made considerable economic progress since attaining independence in 1947. A relatively sophisticated industrial base has been created, and a large pool of skilled manpower has emerged. Nevertheless, agriculture remains the crucial sector in the Indian economy, contributing 32 percent to the country's gross domestic product (GDP) and providing a livelihood for about 69 percent of the workforce. In the industrial sector, India now manufactures a variety of finished products for domestic use and export. However, despite industrial development, unemployment and underemployment problems continue to mount.

The pattern and growth of industrial development over the past four decades have been governed by the Industrial Policy Resolution (IPR) 1956. It envisaged an economy where the government had the overall responsibility for the planned development of industries and their regulation. The public (government-owned) sector has played a dominant role in developing the industrial profile of the country.

The Industrial Policy of 1991 provided for an increased role for the private sector, including foreign investment, with further investment in the public sector reduced to a small list of strategically important sectors. To facilitate the increasing role of the private sector, substantial deregulation has taken place.

Changes that have taken place include the following.

1. Dereservation of most of the mineral and energy resources sector.

2. Demand pull on agriculture through encouragement of food processing/other ago-based industries as well as agricultural and allied exports (while direct investment in agricultural and plantation activities is still restricted, foreign investors are encouraged to upgrade agriculture in other ways).

3. Rapid development of the financial services sector, with globalization of the Indian financial and capital markets.

4. Thrust for rapid development of infrastructure through changes enabling and encouraging private and foreign investments in all infrastructure areas, including transport and communications.

Public and private sectors

The public sector continues to play a major role in the country's growth and accounts for nearly 24 percent of the GDP. The public sector in industry comprises public utilities (railroads, airlines, postal and telecommunications services, ports power, and irrigation projects), departmental undertakings of the central and state governments, various defense production establishments, and various industrial undertakings producing or selling goods and rendering services. The public sector is also predominate in the production of minerals, steel, metals, coal, natural gas and petroleum, chemicals and pharmaceuticals, and heavy engineering products. In banking the public-sector banks occupy the dominant position, and the life insurance and general insurance businesses are entirely in the public sector.

The private sector covers not only the rest of organized industry but also several of the above areas. Small-scale industry, agriculture, trade, construction, and wholesale and retail distribution are predominately in the private sector.

Liberalization has resulted in the opening to the private sector of several of the areas previously reserved for the Public sector. Even in the short list reserved for the public sector, the private sector is allowed to participate selectively.

· Key economic indicators 

The population has increased by about 2 percent per year. Only modest gain in per capital GDP have been achieved for the last few years, the average growth rate being 5.6 percent during the seventh five-year plan ending in March 1990. The growth rates in 1994/95 and 1995/96 are estimated at 5 to 6 percent per annum.

Indian foreign currency reserves, which had reached a low of a little over US $1 billion in mid-1991, exceeded US $17 billion at the end of December 1995.

India's external debt currently stands at approximately US $93 billion. However, a large chunk of this is through multilateral development banks and is highly concessional. Debt-service payments account for about 27 percent of current account receipts.

Foreign direct investment is estimated to be more than US $1.5 billion in 1995/96. A large number of multinationals are seeking entry and being cleared to invest directly in the Indian economy. Portfolio investment by Foreign Institutional Investors (FIIs) and Global Depository Receipts are estimated at US $1.8 billion in 1995/96.

Inflation has been reduced from the peak of 17 percent in August 1991 to about 7 percent in December 1995. The average inflation rate during 1995/96 is estimated at about 9.5 percent.