State of Indian Economy 2007
2007-01-24 10:04 AM | Posted by Tejvan Pettinger | Permanent Link | economics
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India’s current economic growth is likely to soon push it into the position as the 5th biggest economy in the world. Already in terms of purchasing power the Indian economy is ranked as the third largest
Economic growth is currently averaging 5-6% and there are signs that this is likely to continue in the future.
Reasons for Success of Indian Economy
Reasons for economic growth include a raft of supply side policies that have helped to increase competitiveness and productivity. For example financial markets have become more deregulated, allowing more flexible loans. These have helped to increase investment which has led to increased capacity and competitiveness. There has also been increased focus put on training and education of at least part of the population. Despite the rapid economic growth so far the Indian economy has managed to maintain relatively stable prices, with inflationary pressures remaining subdued.
The success of the Indian economy shares several parallels with the Chinese economy. Like China the Indian economy has a plentiful supply of cheap labour. This has enabled low labour costs for firms which have made them particularly competitive in labour intensive industries. This has often been at the expense of Western manufacturing sectors. For example recently Dyson’s announced it would switch production of vacuum cleaners from the UK to Indian where labour costs are cheaper.
The Indian economy has also benefited from the process of globalisation and improved technology. A good example of this is in call centres, which benefit from the low labour costs. Due to the internet and cheap telephone calls many Western companies have found it profitable to switch their call centres to places in India where labour costs are significantly lower. India is at a particular advantage for this growing market because compared to other developing countries English is spoken to a reasonable standard by a high share of the population. The Indian economy has also been able to diversify from its primarily agricultural roots. Mumbai has emerged as one of the leading financial centres in Asia. India is also increasingly benefiting from foreign investment into a variety of industries.
Problems facing Indian Economy.
To maintain growth rates of 6% and prevent inflation and unemployment rising in the future there are various issues the Indian economy needs to address.
- Quality of infrastructure. Many areas of India are not well serviced with poor transport links and under developed communication channels. A lack of energy supplies have also led to power shortages in certain areas. These problems are likely to exacerbate with both a growing population and growing economy.
- Environmental costs of growth. The high economic growth has led to a burgeoning middle class who have benefited in terms of being able to buy more cars and consume more. However this has led to increased problems of pollution and congestion. This issue is magnified by the excessive crowding faced in many Indian cities. Some economists are of the opinion India needs to try and control its growing population levels to provide a more stable economic and social environment
- Remove more barriers to entry. The Indian economy is still highly regulated with costs and restrictions faced to business’ wishing to enter certain markets. This continues to limit entrepreneurship and their removal is important to continue the flows of inward investment.
- Unemployment could be a problem despite the fast growth of the economy. There is an increase in the number of people entering the Indian labour market, particularly young women.It may be difficult to provide sufficient jobs unless investment continues in manufacturing and the service sector
- Skills shortage. Although the Indian economy has relatively good levels of education, there still exist severe skills shortages in certain areas such as IT. There is also a growing gap between rich and poor in different areas of the country. There is need for a concerted effort to increase both academic and vocational skills to a broader section of the population
- A large % of the India’s agriculture is still dependent on the monsoon season. E.g. in 2003-2004 agricultural growth fell from 9% to 1%. To overcome these fluctuations the agricultural sector needs increased investment in irrigation and water supplies.
Overall Prospects for Indian Economy
Overall the prospects of the Indian economy are positive. It is growing at the fastest rate since independence. This growth provides a much needed opportunity to deal with the widespread poverty and destitution experienced in many areas of India. However the economy needs to be carefully managed to avoid supply bottlenecks, and prevent excessive environmental damage. There is also no guarantee that economic growth will inevitably solve the problem of poverty
