Within just a decade, India has gone from having the eleventh largest GDP in the world to having the fastest growing major economy worldwide, and, in the next 10-15 years, it is expected to rise to become one of the world’s top three economies.
While the world economy was hit hard by the repeated waves of Covid-19, the Russia-Ukraine war, and its effects on supply chains, as well as high inflation, the Indian economy was still able to expand. This could possibly be attributed to the country’s strategy, which is based on increasing infrastructure spending to boost demand in the medium term and implementing supply-side policies to position the economy for sustainable long-term growth, which made it possible for India to experience growth in crucial economic sectors like services, industry, agriculture, and agriculture-related industries.
In this piece, we examine how far ahead of the curve India is when it comes to achieving economic growth and competing with advanced economies.
I- India’s Economic Potential
India has a populace with a strong desire to participate in the labor force as well as a sizable and aspirational consumer class, or market, which has allowed it to draw in sizable foreign investments. The volatility of international markets, the rising prices in many countries, and the liquidity withdrawal cycle being implemented by the world’s largest central banks all pose potential risks for the Indian economy. However, with the rollout of Covid-19 vaccinations now reaching the largest possible population, the outlook for the Indian economy has turned optimistic.
In the third quarter of 2022, the Indian economy grew by 6.3 percent year-on-year, which was slightly above the 6.2 percent growth forecast but significantly lower than the 13.5 percent growth in the second quarter, due to rising global prices and interest rates and slowing global demand due to the start of the Russia-Ukraine war, which had an impact on exports. India’s (GDP) growth over the past decade is depicted in Figure 1.
India’s balance of payments has been in the black for the past two years despite the disruptions brought on by the Covid-19 pandemic. Due to this, the Reserve Bank of India (RBI) has been able to keep building up its foreign exchange reserves, which as of 31 December 2021, stood at $634 billion and could cover 13.2 months’ worth of commodity imports. This amount is higher than the country’s external debt.
High export earnings, stable foreign direct investment, and foreign exchange reserves will act as a suitable barrier against any potential decline in global liquidity in 2022-2023. Figure 2 shows the increase in inflows of FDI into India.
Fiscal deficits and government debt increased in 2020-2021 as a result of the economic stimulus package given to the economy and the health response to Covid-19. A strong recovery in government revenues in 2021-2022, however, means that the government will easily achieve its targets for this year while keeping support and increasing capital spending.
II- Growth Factors
India has prioritized the development of several industries in recent years, especially the agricultural, industrial, and service industries. The government’s strategy places a focus on increasing spending on infrastructure, including roads and railroads. Despite the pandemic and the conflict between Russia and Ukraine, India has managed to construct a comparatively strong barrier to the effects of outside threats on its economy. The reforms India implemented this year to boost the value added by those industries contributed significantly to its remarkable growth this year.
- The Agricultural Sector: The turmoil brought on by Covid-19 had the least impact on the agricultural industry. According to statistics, agricultural growth slowed to 3.6 percent in 2020-2021, down from 4.3 percent in the year of the pandemic. With an increase in cultivated area and a rise in the state’s wheat and rice production, the agricultural sector was predicted to grow by 3.9 percent in 2021-2022, contributing 18.8 percent of the total value added to the economy. The production of food grains is anticipated to reach a record high of 150.5 million tons. Figure 3 depicts the evolution of the real total value of agriculture and its related industries.
The previous figure illustrates the sector’s strong performance, which can be attributed to government policies that supported timely seed and fertilizer supplies despite pandemic-related disruptions, as well as good monsoon rains and high reservoir levels above the 10-year average.
- The Industrial Sector: The industrial sector and its subsectors experienced significant fluctuations as a result of the pandemic. However, it is predicted that, after experiencing negative growth of -7 percent in 2020-2021, the gross value added of the industrial sector (including mining and construction) will surge by a sizable percentage, reaching 11.8 percent in 2021-2022. The sector’s share of the total value added rose to 26.7 percent, fell to 25.9 percent, and then rose again to 28.2 percent.
Additionally, India’s industrial production increased by 3.1 percent in September 2022, recovering by 1.8 percent from a -0.7 percent decline in August 2022, thanks to increases in base metals production of 5.8 percent, coal and refined petroleum products of 9.8 percent, food products of 5.3 percent, machinery and equipment of 5.3 percent, cars, trailers and semi-trailers of 29.9 percent, and metal and non-metallic products of 9.3 percent. Furthermore, mining production increased by 4.6 percent, up from 3.9 percent in August, and electricity production increased by 11.6 percent, up from 1.4 percent.
According to data from the Indian Ministry of Statistics and Programme Implementation, primary goods production increased by 9.3 percent in September, while capital goods production increased by 10.3 percent, intermediate goods production increased by 2.0 percent, and infrastructure and construction goods production increased by 7.4 percent. Figure 4 illustrates the growth of industrial production in India.
Government initiatives like the national industrial policy, which aims to increase the share of manufacturing in the GDP to 25 percent by 2025, and the launch of a scheme called the Production Linked Incentive Scheme to develop the industrial sector to keep pace with global manufacturing standards have contributed to the uptick in the industry and will hopefully continue to do so, helping to promote local manufacturing, investments, export, and establishing India as a global center of industrious activity.
Despite this, the Indian industrial sector still faces a number of challenges, the most pressing of which is the inefficiency of infrastructure, which has recently prompted it to attract investments and increase spending on infrastructure projects, and a bias toward medium- and large-sized industrial and service sectors at the expense of micro- and small- and medium-sized enterprises. India continues to rely on imports from abroad for (electric and non-electric) transportation machinery, iron and steel, paper, chemicals, fertilizers, plastics, etc.
- Construction Sector: The construction sector has seen a resurgence thanks to the government’s increased capital spending on infrastructure and housing. This made it possible to increase both the production and consumption of cement and iron. According to data from the RBI and major real estate firms, the residential real estate market in India saw significant growth in sales, price increases, and new launches in 2021. Figures are expected to show that the sector grew by 10.7 percent in 2022 and contributed eight percent to the gross value added, up from 7.2 percent in 2021.
- Services Sector: The services sector, which makes up more than half of the Indian economy and is expected to have contributed 53 percent of India’s gross value added in 2021-2022, reaching a value of $1439.5 billion in 2020 from $1005.3 billion in 2016, is a key contributor to the country’s economic growth. Real estate and professional services saw an increase between 2016 and 2020, with a compound annual growth rate (CAGR) of about 11.7 percent.
The restrictions imposed by Covid-19 had a profound impact on the service industry. While the industry saw its first annual decline of 8.4 percent in 2020-2021, expansion of 8.2 percent is predicted for the following two years. The growth in professional consulting, administrative, audio-visual, as well as goods transportation, telecommunications, computer, and information services, was a major factor in the sharp increase in net exports of services. India’s exports as a whole are projected to increase by 16.5 percent in 2022.
India’s economy relies heavily on the services sector, which accounts for 66 percent of GDP and provides about 28 percent of the country’s total employment. It also has the fastest growing services sector in the world (9.2 percent).
India, with its focus on sectors with higher growth, luring foreign direct investment, and spending on infrastructure projects, is expected to become the second fastest growing economy in the G20 in the fiscal year 2022-2023, especially after it passed the United Kingdom to become the fifth largest economy in the world. This is despite the slowdown in global demand and the tightening of monetary policy by central banks to manage inflationary pressures. The International Monetary Fund predicts that by 2027, India’s economy will overtake the sixth-ranked British economy, moving up to fourth place.