Basic Characteristics of the Indian Economy

India is regarded as one of the fastest growing major economy in the world. Since 2010, while most emerging economies witnessed a declining trend in growth rate, India’s growth rate showed improvement. This led to global policy-makers trying to understand the Indian economy better. In this article, we will discuss the features and basic characteristics of the Indian Economy.

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Basic Characteristics of the Indian Economy

The key macro-indicators or the basic characteristics of the Indian Economy are as follows:

                                                                                                                                                    Source: Pixabay

National Income

Usually, income level is used in the determination of the overall well-being and happiness of a country and its citizens.

Therefore, it is one of the important basic characteristics of the Indian Economy. Income of an economy is generally measured through the Gross Domestic Product or GDP.

Here is a quick look at the share of GDP according to the industry of origin:

 

From the above table, you can see that:

• There is a decline in the share of agriculture and allied services from 55.4% (in 1950-51) to 13.9% (in 2013-14). However, in recent years, there is a marginal improvement in the same.
• The share of industries including mining, manufacturing, electricity, gas & water supply, and construction has shown a steady increase in share from 15% (in 1950-51) to 31.4% (in 2014-15).
• The share of the services sector including (i) trade, transport, and communications (ii) finance, insurance, real estate, etc. and (iii) community, social and personal services has shown an increase from 29.6% (in 1950-51) to 59.9% (in 2013-14). Post that period, it has relatively stabilized.

This change in the composition of national income by industrial origin is the consequence of the process of economic growth. The table below indicates the Compound Annual Growth Rate (CAGR) of various economic activities:

Here are some observations:

• The agriculture sector experienced a decline until 1980-81. Post this period it started picking up again.
• The services sector grew from around 4.5% during 1950-10 to 1980-81, to around 9% during 2004-05 to 2013-14.
• There was an increase-decrease cycle in the manufacturing sector.
• The GDP of the economy grew from 3.9% (during 1950-51 to 1980-81) to 7.6% (during 2004-05 to 2013-14).
• Both the manufacturing and agricultural sectors were roadblocks in the overall growth.
• The fast-growing service sector was the principal driver of the economy.

Sectoral Employment in India

So, did the shift in GDP share have any impact on the employment pattern in India?

Here is some data collated from various rounds of the National Sample Surveys:

The share of the workforce in agriculture declined from 68.1% in 1983 to 53.2% in 2009-10. During the same time, employment in the industrial sector increased from 13.9% to 21.5% and the services sector increased from 18.2% to 25.4%.

Therefore, the sector which had the sharpest decline in its GDP contribution (the agricultural sector) did not have a proportionate decline in its contribution to employment.

On the other hand, the services sector, which had the sharpest increase in its share of GDP, did not register a sharp increase in its contribution to employment.

Capital Formation

Capital formation plays a crucial role in the economic development of a country. Usually, insufficient capital is the primary culprit in underdeveloped or developing economies.

Therefore, both production and consumption are dependent on the amount of capital available in the country.

Capital Formation includes physical resources like tools, machines, etc. as well as human resources like the knowledge, skill, health, etc. of the workforce.

The most important process of accumulating physical capital is increasing the volume of real domestic savings. According to the World Bank, in 2015, the household sector was the biggest contributor to Gross Domestic Savings in India.

GDS accounted for nearly 29.8% of the GDP in our country. The following table shows the gap between the Gross Domestic Capital Formation (GDCF) and Gross Domestic Savings (GDS):

During the 1960s, the gap was around 2 percent of the GDP and zero during 1997-98 to 2003-04.

Inflation

Managing inflation is the toughest tasks of an economic policy-maker. Inflation is the sustained rise in the general level of prices. There are many factors which influence the rate of inflation in an economy.

In India, fluctuations in prices are a common occurrence due to several natural and economic factors. These fluctuations create an atmosphere of uncertainty which goes against the spirit of the economic development of the country.

Two price indices help in the measurement of Inflation – the Wholesale Price Index (WPI) and the Consumer Price Index (CPI).

The table below offers a comparative picture of inflation based on the major series of price indices for the last five years:

Foreign Capital/Investment

In countries like India, the domestic capital is not sufficient for economic growth. Therefore, foreign capital is a way of filling the gap between domestic savings, foreign exchange, government revenue and the investment necessary to achieve the developmental targets.

Apart from being capital-poor, India is also backward in technology required for rapid economic development for many reasons. Foreign capital can provide the required resources to solve the technological backwardness of the country.

In 1991, the Government announced a New Industrial Policy to increase the flow of foreign capital in India. Here is a quick look at the foreign investment flows in India:

Foreign Trade

Traditionally, India was famous for textile and handicrafts exports. During the British era, India became an exporter of raw materials and the British machine-made goods.

However, in the post-independence period, India went through a huge change in its foreign trade policy. Since the introduction of the five-year plans, India started depending heavily on imported machinery and equipment to develop different types of industries.

That was a time when India needed to import capital goods to set up industries. These were developmental imports. Subsequently, India needed to import huge quantities of intermediate goods and raw material to utilize the productive capacity created in the earlier stage. These were maintenance imports.

Therefore, foreign trade has helped India in different stages of its economic development. Here is a quick look at India’s imports and exports for a decade:

The top 10 destinations for Indian exports are UAE, USA, Singapore, China, Hong Kong, Netherlands, Saudi Arabia, UK, Germany, and Japan.

These countries accounted for around 50% of India’s exports. Further, India primarily exports petroleum products, engineering goods, gems, and jewelry.

The top 5 countries from whom we import goods are China, UAE, Saudi Arabia, Switzerland, and the USA. On the product front, we mainly import petroleum and crude oil products and pharmaceutical products from these countries.

Solved Question for You

What are the key macro-indicators or the basic characteristics of the Indian Economy?

Answer:

The key macro indicators are:

• National Income
• Sectoral Employment
• Capital Formation
• Inflation
• Foreign capital/investment
• Foreign trade