India's role in working for global economic growth and stability

World of Finance by M.Vijaya Sai

India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and the complexities of running the world’s biggest democracy are proving challenging. Indian economy opened its doors to the global market since 1991, after the introduction of liberalization. Before 1991, the Indian economy was characterized by extensive regulation, protectionism and public owner ship, leading to pervasive corruption and slow growth. The reforms that were initiated by Prime Minister P V Narsimha Rao with his Finance Minister Manmohan Singh, did away the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of Foreign Direct Investment in many sectors. Since then India has emerged as the fastest growing economies in the world.

Recent growth Trends

Indian economy has grown by more than 9% for the three years running and has witnessed a decade of 7% positive growth which has led to the reduction of poverty by 10 % alongwith increase in life expectancy, literacy rate and food security. With the advent of 21st century, the performance of service sector has been particularly significant. The growth rate of service sector was 11.18% in 2007 and now it accounts 53% to GDP by employing 23% of the total workforce. The main reason for this tremendous achievement is India’s large number of English Speaking skilled manpower which has made India a major exporter of software services and software workers. The industrial sector has also grown by 10.63 % in this century and is now 29% of GDP by providing job opportunities to 17 % of the total population. Also, agriculture sector which is a hub of employment to 58% of Indian population contributes 22% to GDP. In manufacturing sector, the growth rate has shown a steady rise from 8.98% in 2005 to 12% in 2006 which has complemented the country’s excellent growth momentum. Also 16.64% growth rate has been registered in storage and communication sector.

Additional factors that have contributed to this robust environment are sustained in investment and high saving rates. As far as the %age of gross capital formation in GDP is concerned there has been a significant rise from 22.8% in the fiscal year 2001 to 35.9% in the fiscal year 2006. Further the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.

• Global Trade Relationships
  
  
  India’s economy is mostly dependent on its large internal market with external trade accounting for just 20% of the country’s GDP. The size of the middle class population stands at 50 million and represents a growing consumer market not only for Indian goods but also for international goods. In 2008, India’s share of global merchandise trade was 1.45% and of global commercial services export was 2.8%. Until liberalization of 1991, India was largely and intentionally isolated from the world market to protect its economy and to achieve self reliance. Foreign Direct Investment averaged only around US $200 million annually between 1985 to 1991, a large percentage of capital flows consisted of foreign aid, commercial borrowing and deposits of non resident Indians.
  
  Since liberalization, the value of India’s international trade has become more broad based and has risen to Rs 63,080,109 crores in 2003-04 from Rs 1250 crores in 1950-51. India’s trading partners are China, the US, the UK, the UAE, Japan and the EU. The exports during Apr’07 were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06% over the previous year. In 2006-07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewelry, textile and garments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver.
  
  
  
  
• Balance of payments
  
  
  India’s balance of payments on its current account has been negative since independence, the main reason is India’s growing oil import bill that has led to current account deficit. Due to the global late 2000s recession, both India’s export and import declined by 29.2% and 39.2% respectively in June 2009. however, since the decline of import was much sharper compared to the decline of exports. India’s trade deficit reduced to $252.5 billion.
  
  India’s reliance on external assistance and commercial borrowing has decreased since 1991-92 and since 2002-03, it has gradually been repaying these debts. Also declining interest rates and reduced borrowing has further decreased India’s debt service ratio to 4.5% in 2007.
  
  
  
  
• Currency
  
  
  The Indian Rupee is the only legal tender accepted in India and the exchange rate as on 1st September 2009 is 49.003 rupee to US dollars, 66.65 to a Euro and 77.60 to a UK Pound. There has been a recent fall in the value of Rupee as a result of the global financial crisis of 2008, as foreign institutional investors sold $14 billion worth of Indian stocks in 2008 and invested in US treasury bond.
  
  
  
  

Conclusion

Since 1991, after liberalization Indian economy has grown tremendously. It was only in late 2000 due to global economic meltdown that the Indian economic growth saw a decline. But in today’s’ scenario by proper implementation of government policies the economy of India is on the recovering trend and is exploring new horizons in various sectors. Like in agricultural sector priority must be given to livestock’s & fisheries, horticulture, organic farming, commercial crops and agro processing as theses are the potential areas of high growth. Further, rationalization of minimum support price regime and introduction of other risk mitigation measures, improvement in rural infrastructure are essential for sustaining high agricultural growth. It is conceived that reforms in legislation’s, strengthening R&D and improvement in post harvest management technologies will give further boost to Indian agriculture. Also in industrial sector apart from infrastructure, particularly adequate and reliable power supply at reasonable cost and transportation facilities, there is need for stepped up investment in manufacturing. Industry needs to grow rapidly not only to boost the overall growth rate in economy but to generate gainful employment for the existing unemployed as well as new entrants.

Despite robust economic growth, India still faces many major problems. The recent economic developments has widened the economic inequality across the country. Despite sustained high economic growth rate, approximately 80% of its population lives on less than $2 a day (nominal), more than double the same poverty rate in China. Even though the arrival of Green Revolution brought ends to famine in India, 40% of the children under the age of three are underweight and a third of all men and women suffer from chronic energy deficiency.So in order to achieve desired economic growth by overcoming all kind of social and economic problems, the following ten measures need to be followed by the Indian government:-

• Improve governance
• Raise educational achievement
• Increase quality and quantity of universities
• Control inflation
• Introduce a credible fiscal policy
• Liberalize financial markets
• Increase trade with neighbors
• Increase agricultural productivity
• Increase infrastructure, and
• Improve environmental quality

It is only after introducing the above measures India will emerge as world’s biggest economy in addition to the world’s biggest democracy.