India - Economy
India stands out as a poor and very unequal country, with the top 1 per cent of the population holding more than one-fifth of the total national income in 2021 and the bottom half just 13 per cent, according to a report. The December 2021 report, titled ‘World Inequality Report 2022’, said India is now among the most unequal countries in the world. The report pointed out that the average national income of the Indian adult population is Rupees 2,04,200. While the bottom 50% earns Rupees 53,610, the top 10 per cent earns more than 20 times (Rupees 1,166,520). It observed that the deregulation and liberalisation policies implemented since the mid-1980s have led to “one of the most extreme increases in income and wealth inequality observed in the world”.The Indian economy never recovered after the sudden midnight ban on currency notes announced by Modi in 2016. Wholesale inflation was at a three-decade high by mid-2022, the Indian rupee was at an all-time low against the US dollar, private investment was in decline, and foreign institutional investors have withdrawn billions from the share market. India’s unemployment rate reached an all-time high in double digits and has only recently recovered, disguised as underemployment as urban residents moved back to villages and were shown to be working in agriculture or as self-employed. The employment situation is so bad that more than half of the 900 million Indians of legal working age – roughly the population of the US and Russia combined – have even stopped looking for jobs altogether. India had a problem when the government imposed a lockdown in response to COVID, because this presented people with an impossible choice of either living and making a living, In the second quarter of 2020, India’s economic output fell by almost 25%. Once the world's fastest-growing economy, India has emerged as the biggest laggard among major economies. With coronavirus cases surging and the government's finances stretched, it was on a bumpy road to recovery. The economic pain was felt across industries and services, with agriculture being the only sector to grow, albeit at a slower pace. Private consumption — the main driver of the economy — fell nearly 27% on the year, while investment collapsed by 47%. Economists say the figures do not capture the full extent of the havoc wreaked by the lockdown, especially on smaller companies and on India's "informal" sector, which accounts for 50% of the total output and employs more than 80% of the workforce. It's the part of the economy that includes jobs such as vegetable and fruit vendors, rickshaw pullers, and daily laborers — jobs that are not covered by legal contracts. By 2020 the economic scenario continued to disappoint; the Central Statistics Office has projected a growth rate for 2019-20 at 5 per cent, an 11-year low. This estimate is much lower than the 7 per cent growth rate projected in the Economic Survey as also the average forecast of 5.5 per cent by major agencies. All the three sectors of the economy - agriculture, industry and services - are projected to grow at a lower rate than the previous year. The worst hit, however, is the industries sector with the growth rate at just a third of the previous year. Clearly, the after-effects of demonetization and a hastily-applied GST are still to end. Indian Union Finance Minister Arun Jaitley on 30 August 2018 said India was expected to surpass Britain next year to become world’s fifth largest economy. “This year, in terms of size, we have overtaken France. Next year we are likely to overtake Britain. Therefore, we will be the fifth largest [economy],” he said in New Delhi. India became the globe's sixth-biggest economy in 2017, pushing France into seventh place, according to figures released by the World Bank in July 2018. India's gross domestic product (GDP) was $2.597 trillion at the end of 2017, against $2.582 trillion for France. The United States is the world's top economy, followed by China, Japan and Germany. Britain was the world's fifth-biggest economy with a GDP of $2.622 trillion in 2018. India would overtake Britain in the 2017-18 timeframe to become world's fifth largest economy, "Forbes" magazine reported in December 2016. In 2016 the Indian economy was forecast to grow at 6.9 percent while the UK economy was estimated to grow at 2.1 percent. India's average per capita GDP in 2017 was projected to be $1,766 (1,691 euros) - comparable to the per capita GDP levels of Kenya or Ghana - while the UK's per capita GDP was estimated to reach $36,000. India's per capita GDP compared poorly with other large Asian economies, at about half the GDP per person in Indonesia and one-fifth the per capita GDP of China. An estimated 270 million people, or 22 percent of the total Indian population, still live in poverty.
Swadeshi means self-sufficiency and was the rallying cry of Mahatma Gandhi. In the face machine-dominated western imperialism which destroyed India's handmade textile industry and made Indians dependent both economically and politically on the West, Gandhi exhorted Indians to use only those products that they could produce for themselves by hand. He donned homespun and adopted the spinning wheel as his symbol. He and others like him equated western technology with political control. Many Indians still do and the philosophy of self-sufficiency colors many of India's economic decisions.
Indian Nobel laureate, Amartyya Sen, in his critique of the Indian economy alluded to the enormous gap between impressive growth rates and less impressive social progress and came to the conclusion that it makes India look more and more 'like islands of California in a sea of sub Saharan Africa'. He went on to note 'but what is remarkable is not the media's interest in growth rates but near silence about the fact that the growth process is so biased'. In fact, he points out, while India's growth rate has been sizeable yet in terms of many typical indicators of living standards Bangladesh not only does better but has a considerable lead over India.
The Goods and Services Tax (GST) will replace a patchwork of central and state levies on goods and services and it is one of Prime Minister Narendra Modi's biggest reforms since taking power in May 2014. Businesses have lobbied hard for this VAT (Value Added Tax), with business lobby the Confederation of Indian Industry (CII) estimating the GST will add 1.5 to 2 percentage points to the annual economic growth rate. Dubbed as the biggest tax reform after independence, Goods and Services Tax will remove several tax barriers for transfer of goods and services between states. A GST will tax consumers rather than producers and effectively create a customs union between 29 states. After Parliament, the bill will then go to the states for approval.
For manufactured consumer goods, the current tax regime means the consumer pays approximately 25-26% more than the cost of production due to excise duty and value added tax. With the GST rate expected at 18%, most goods are expected to become cheaper. The effective service tax rate at present is 15% and it applies to almost all services other than essential ones such as ambulance services, cultural activities, certain pilgrimages and sports events. If GST is implemented, this rate will increase to 18% making services more expensive.
In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle. The Cabinet on 17.12.2014 approved the proposal for introduction of a Bill in the Parliament for amending the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The Bill was introduced in the Lok Sabha on 19.12.2014, and was passed by the Lok Sabha on 06.05.2015. It was then referred to the Select Committee of Rajya Sabha, which submitted its report on 22.07.2015.
Keeping in mind the federal structure of India, there will be two components of GST – Central GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.
The Goods and Services Tax (GST) is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. GST will ensure that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
Certain states argued that the implementation of GST would be beneficial for consuming states, while for their manufacturing counterparts like Maharashtra and Gujarat it could be a challenge. Union finance minister Arun Jaitley said 03 August 2016 the GST, would convert India into one uniform economic market. "A uniform tax rate will bring about seamless transfer of goods and services across country and it will enable us to check evasion."
India was on the “golden turnpike of growth” from 2002–2007 when the economy grew at 8.5 percent. Since the end of the global economic crisis, growth has steadily resumed - but with declining ccompetitiveness, persistently high inflation, and uncertainty in taxes and regulations, investment declined and growth fell to under 5 percent in 2012-13 and stayed low the following year.
International Monetary Fund chief Christine Lagarde said 19 March 2015 India was poised to become the world’s fastest growing major economy overtaking China as early as 2015. “The recent policy of reforms, improved business confidence has provided a booster shot to economic activity. Using India’s new GDP series, the IMF expects growth in India this year in the range of at 7.2, and we see that at 7.5 per cent next year, making India one of the fastest growing economies in the world,” Lagarde explained. “Of all the large economies, India is the fastest. And indeed a brighter future is being forged. By 2019, the economy will have more than doubled in size compared to 2009. And when adjusting for differences in purchase prices between economies, India’s GDP will exceed that of Japan and Germany combined.”
India hoped for a financial revival in 2014 after economic growth slipped to decade-low levels in the previous two years. But there were few signs of a return of the robust growth that catapulted India into the ranks of the world's fastest growing economies. Finance Minister P. Chidambaram has said growth will accelerate to more than six per cent in 2014, and return “step-by-step” to its potential of eight percent. The key to boosting India’s economy is to revive confidence among investors, both domestic and foreign. Worried by lack of reforms and bureaucratic roadblocks, private investment had slowed to a trickle.
The Indian economy was expected to clock growth of less than five per cent when the 2013 fiscal year ends in March 2014. India’s economy grew by only 5 percent in the financial year which ended in March 2013. India’s economic growth plunged to its slowest pace in a decade. While the government was struggling to revive growth, economists said any improvement would come very slowly. The slide was not unexpected -- the economy had been losing steam steadily in the previous year. But it was a huge disappointment an economy which had averaged 8 percent growth over the last decade and won recognition as an engine of global growth.
The decade-long spell of high growth which India experienced until 2011 catapulted millions of people into the middle class and created new jobs which the country needs for its huge, young population. But economists were not so sure that India can achieve that again. The economy had been hit by several factors, including an industrial slowdown. There are many areas where the weakness had emerged. The key area was the manufacturing sector, which had not done well for the past four years, and in 2012 it recorded growth of 1 percent which is very, very low. It is a 20-year low. And private consumption continued to remain weak and investments had yet to pick up. ?The government introduced a number of reforms in September 2012 to kickstart the economy. These included opening up India’s retail and aviation sector to foreign investors.
But other reforms have been stalled by angry opposition parties as the weak coalition government remains mired in corruption scandals. These include bills to reduce restrictions on foreign investors in the pension and insurance industries, a bill which could make it easier to acquire land for industrial and mining projects, and tax reforms. As a result investors, both domestic and foreign, had postponed any substantial investments. And economists warned the government may be unable to push through any more pro business reforms before in May 2014.
The government reported 26 July 2013 the percentage of poor people has dropped sharply following strong economic growth during the previous seven years. While critics acknowledge that the poverty rate has declined at a rapid pace, they say the Indian government's definition of poverty results in the undercounting of the number of poor. The government announced that the number of poor people dropped from more than 400 million in 2005 to 270 million by 2012. That’s a drop from 37 percent to 22 percent of the population - or roughly two percent every year. Economists say the actual number of poor people is debatable because the government counts only those who spend less than 55 cents a day in urban areas and about 45 cents in rural areas as poor. The international poverty standard is less than $1.25 per day. By that mark, in 2010, the World Bank estimated nearly 33 percent of Indians were living in poverty.
India had fared the global financial crisis remarkabley well. Despite the 2008-2009 downturn, the government had expected the annual GDP growth to return to around 9%. India's population is estimated at more than 1.1 billion and is growing at 1.55% a year. It has the world's 12th largest economy--and the third largest in Asia behind Japan and China--with total GDP in 2008 of around $1.21 trillion ($1,210 billion). Services, industry, and agriculture account for 54%, 29%, and 18% of GDP respectively. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers, but more than half of the population depends on agriculture for its livelihood. 700 million Indians live on $2 per day or less, but there is a large and growing middle class of more than 50 million Indians with disposable income ranging from 200,000 to 1,000,000 rupees per year ($4,166-$20,833). Estimates are that the middle class will grow ten-fold by 2025.
India continued to move forward, albeit haltingly, with market-oriented economic reforms that began in 1991. Reforms include increasingly liberal foreign investment and exchange regimes, industrial decontrol, reductions in tariffs and other trade barriers, opening and modernization of the financial sector, significant adjustments in government monetary and fiscal policies, and more safeguards for intellectual property rights.
The economy posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India achieved 9.6% GDP growth in 2006, 9.0% in 2007, and 6.6% in 2008, significantly expanding manufactures through late 2008. Growth for the fiscal year ending March 31, 2009 was initially expected to be between 8.5-9.0%, but has been revised downward by a number of economists to 7.0% or less because of the financial crisis and resulting global economic slowdown. Foreign portfolio and direct investment inflows have risen significantly in recent years. They contributed to the $283.5 billion in foreign exchange reserves by December 2009. Government receipts from the 34-day 3G auction were $14.6 billion.
Economic growth is constrained by inadequate infrastructure, a cumbersome bureaucracy, corruption, labor market rigidities, regulatory and foreign investment controls, the "reservation" of key products for small-scale industries, and high fiscal deficits. The outlook for further trade liberalization is mixed, and a key World Trade Organization (WTO) Doha Ministerial in July 2008 was unsuccessful due to differences between the U.S. and India (as well as China) over market access. India eliminated quotas on 1,420 consumer imports in 2002 and has incrementally lowered non-agricultural customs duties in recent successive budgets. However, the tax structure is complex, with compounding effects of various taxes.
U.S.-India bilateral merchandise trade in 2008 topped nearly $50 billion. Principal U.S. exports are diagnostic or lab reagents, aircraft and parts, advanced machinery, cotton, fertilizers, ferrous waste/scrap metal, and computer hardware. Major U.S. imports from India include textiles and ready-made garments, Internet-enabled services, agricultural and related products, gems and jewelry, leather products, and chemicals.
The rapidly growing software sector is boosting service exports and modernizing India's economy. Software exports crossed $35 billion in FY 2009, while business process outsourcing (BPO) revenues hit $14.8 billion in 2009. Personal computer penetration is 14 per 1,000 persons. The number of cell phone users is expected to rise to nearly 300 million by 2010.
The United States is India's largest investment partner, with a 13% share. India's total inflow of U.S. direct investment was estimated at more than $16 billion through 2008. Proposals for direct foreign investment are considered by the Foreign Investment Promotion Board and generally receive government approval. Automatic approvals are available for investments involving up to 100% foreign equity, depending on the kind of industry. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration/processing, and mining.
India's external debt was nearly $230 billion by the end of 2008, up from $126 billion in 2005-2006. Foreign assistance was approximately $3 billion in 2006-2007, with the United States providing about $126 million in development assistance. The World Bank plans to double aid to India to almost $3 billion a year, with focus on infrastructure, education, health, and rural livelihoods.
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