India economy, the third largest economy in the world

India economy, the third largest economy in the world, in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy. This booming economy of today has to pass through many phases before it can achieve the current milestone of 9% GDP.

The history of Indian economy can be broadly divided into three phases: Pre- Colonial, Colonial and Post Colonial.Pre Colonial: The economic history of India since Indus Valley Civilization to 1700 AD can be categorized under this phase. During Indus Valley Civilization Indian economy was very well developed. It had very good trade relations with other parts of world, which is evident from the coins of various civilizations found at the site of Indus valley.

Before the advent of East India Company, each village in India was a self sufficient entity. Each village was economically independent as all the economic needs were fulfilled with in the village.Then came the phase of Colonization. The arrival of East India Company in India ruined the Indian economy. There was a two-way depletion of resources. British used to buy raw materials from India at cheaper rates and finished goods were sold at higher than normal price in Indian markets. During this phase India's share of world income declined from 22.3% in 1700 AD to 3.8% in 1952.After India got independence from this colonial rule in 1947, the process of rebuilding the economy started. For this various policies and schemes were formulated. First five year plan for the development of Indian economy came into implementation in 1952. These Five Year Plans, started by Indian government, focused on the needs of Indian economy.
If on one hand agriculture received the immediate attention on the other side industrial sector was developed at a fast pace to provide employment opportunities to the growing population and to keep pace with the developments in the world. Since then Indian economy has come a long way. The Gross Domestic Product (GDP) at factor cost, which was 2.3 % in 1951-52 reached 9% in financial year 2005-06.Trade liberalization, financial liberalization, tax reforms and opening up to foreign investments were some of the important steps, which helped Indian economy to gain momentum. The Economic Liberalization introduced by Man Mohan Singh in 1991, then Finance Minister in the government of P V Narsimha Rao, proved to be the stepping-stone for Indian economic reform movements.To maintain its current status and to achieve the target GDP of 10% for financial year 2006-07, Indian economy has to overcome many challenges.

India’s emergence as a major voice at the Group of G-20, forum heralded india's new status in the world economy in 2010

The Indian economy roared back in 2010, with the Gross Domestic Product, or GDP, growing at 8.6 per cent in the first quarter (January-March) and then going up a notch closer to nine per cent in the next two quarters of April-June and July-September. Industrial output indicators remained erratic as some months clocked double-digit growth rates, while others recorded lows of around four to five per cent. Yet, the overall outlook remained bright, with industrial growth set to be in double digits and good a monsoon brightening the prospects of agricultural production.

Emboldened by expectations of such revival, Finance Minister Pranab Mukherjee used the Budget for 2010-11 to roll back some of the fiscal stimulus measures introduced in the wake of the global financial meltdown in late 2008. In subsequent months, the Reserve Bank of India (RBI) followed suit by taking many “tiny steps” to gradually tighten the money market and gently nudge the interest rates upwards.

Export growth in the first quarter was robust, at 36 per cent. It slowed down to 27 per cent in the subsequent two quarters, but the outlook appeared much better than in 2009, though the world’s key export markets were yet to recover from their post-2008 recessionary blues. What kept the domestic manufacturing sector’s hopes alive was the continuing rise in non-oil imports. However, higher crude oil prices and non-oil imports widened the trade deficit to record levels.

The balance of payments came under mild pressure, with the current account deficit threatening to touch three per cent of GDP, in spite of remittances from abroad continuing to post respectable growth. What helped was the surplus on the capital account, propped up by a record surge in flows from foreign institutional investors into the stock market. This more than made up the sharp fall in inflows from a lower level of foreign direct investment.

The biggest concern arose from inflation, which the government failed to tame for almost all of 2010. The wholesale price index-based inflation ruled at well above 10 per cent for the first three quarters and declined to around 9 per cent only in the last quarter. The food inflation rate was higher, touching 17-18 per cent. It has now declined, but continues to be in double digits. Government economists, and even Prime Minister Manmohan Singh, hope that the inflation rate would decline to 5.5 per cent by the end of March 2011.If India’s emergence as a major voice at the Group of Twenty, or G-20, forum heralded its new status in the world economy, its handling of Naxal violence spreading to many more districts at home exposed chinks in the government’s ability to tackle such a movement. Disturbances in Jammu & Kashmir for several weeks also raised doubts about the government’s efficacy in administration of such sensitive domestic issues.

Indian Economy Getting its Right Path

Indian policy makers pride themselves on the fact that the Indian economy was able to pull out of the Global Financial Crisis (GFC) relatively unscathed, with real GDP growth rate falling to 6.7 per cent in 2008-09 as compared to the 9 per cent in 2007-08 and expected to rise above 7 per cent in 2009-10. At the onset of the GFC, many commentators had expected a collapse of growth, with some even predicting a return to the sluggish growth of the mid to late 1990s.

Thankfully,the Indian economy proved the predictors of doom wrong. A number of factors have been ascribed to explain this performance: high consumption in India, as compared with China, and lower exposure to the global economy, again as compared with China. High home consumption is desirable as it gives support to the domestic economy in the face of a collapse of international trade, as happened during the GFC. Additionally, lower exposure to international trade reduces the impact of external shocks. The existence of substantial controls on the banking sector is said to explain the fact that no Indian bank had to be ‘rescued’. In addition, credit also is sometimes given to ‘good policy design’ by the government.