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India's Economy

Challenges and Opportunities

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BJP leader Narendra Modi (L) is blessed by his mother Heeraben Modi on her front porch after seeking her blessing on May 16, 2014 in Ahmedabad, India. Mr Modi became India's newest Prime Minister in the largest election in history -- over 550 million votes were cast.

Photo by Kevin Frayer/Getty Images
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Shahrukh Khan Live In Sydney. Bollywood star Shahrukh Khan is the most famous actor in the world.

By: Lisa Maree Williams/Getty Images
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India's Central Banker Rajan (on the left) must skillfully guide India's monetary policy.

Photo: Getty Images

India's Historic Election:

On May 16, 2014, India rejected 60 years of leadership by the party of independence leader Mahatma Gandhi's family and allies by electing Narendra Modi as Prime Minister. Mr. Modi, a successful businessman, promised to reduce bureaucracy and regulation, greenlight infrastructure projects, and simplify the tax code. Mr. Modi is also a Hindu nationalist leader who was blamed for violence against Muslims while he was governor of India's western region of Gujarat.

If successful, Prime MInister Modi policies will boost trade with the U.S. Modi may level the playing field for U.S. companies by reducing policies that favor Indian manufacturing and intellectual property. This could help pharmaceutical companies, Hollywood, and consumer electronics. (Source: WSJ, India Election: What Narendra Modi’s Victory Means for the U.S. Economy, May 19, 2014)

See more in How India and U.S. Relations Affect Their Economies 

India's Challenges:

India has been hampered by a bloated government bureaucracy, which makes execution of any fiscal or monetary policy difficult. Recently, India fell victim to a form of stagflation -- inflation at 9.6%, with 0% GDP growth in the second quarter of 2013. Inflation was caused by a declining rupee, while slow growth resulted from contractionary monetary policy to stem inflation. In addition, India's combined current account and budget deficit is at 12% of GDP.

Investors backed off from India and other emerging markets when the U.S. Federal Reserve began tapering its quantitative easing program. For more see, What You Need to Know About the Emerging Market Crisis.

Raghuram Rajan is  the Governor of the Reserve Bank of India, the nation's central bank. He is poised to raise interest rates if needed to keep the currency strong and head off inflation.  He is satisfied that inflation is "only" 8%. However, if Modi stimulates growth beyond the capacity of the country's infrastructure to produce it, that would stimulate inflation -- puting Modi and Rajan at odds. (Source: WSJ, India's Rajan May Have to Increase Rates to Head Off Modi, June 4, 2014; Guardian, India calls on Raghuram Rajan to run its central bank, August 6, 2013)

India's Economy Is Fast-Growing:

India is the world's fourth largest economy, producing $4.962 trillion in goods and services in 2013. However, it has a long way to go to beat the top 3: China ($14.4 trillion), the EU ($15.8 trillion) and the U.S ($16.7 trillion).

India grew quickly, despite the recession: 4.7% in 2013, 5.1% in 2012, 7.5% in 2011, 11.2% in 2010, 8.5% in 2006, 9.0% in 2007, and 7.3% in 2008. India's economic growth has reduced poverty by 10% in the last decade. (Source: CIA World Factbook, India's Economy)

What Type of Economy Is India?:

India has a mixed economy. Half of India's workers rely on agriculture, the signature of a traditional economy. One third of its workers are employed by the services industry, which contributes two-thirds of India's output. The productivity of this segment is made possible by India's increasing move toward a market economy. Since the 1990s, India has deregulated several industries, privatized many state-owned enterprises, and opened doors to foreign direct investment.

Bollywood:

The Indian film industry is known as "Bollywood," a combination of Bombay (now Mumbai) and America's Hollywood. However, Bollywood make twice as many movies per year (1,000) as Hollywood, and the most well-known actor in the world is India's Sharukh Khan. Bollywood contributed $3 billion to India's GDP in 2011, and is expected to reach $4.5 billion by 2016. Bollywood generates less revenue than Hollywood ($51 billion) only because its ticket prices are much lower. On the plus side, it Bollywood films costs less to make: $1.5 million on average versus $47.7 million in Hollywood. (Source: International Business Times, How Big Is Bollywood?, May 3, 2013: LA Times, Shah Rukh Khan, November 4, 2011)

India's Tata Motors Built World's Cheapest Car:

In 2009 India’s Tata Motor Corp. launched the Nano, priced to sell at $2,500. The market for an ultra low-priced car is huge...90% of China's and India’s adult population do not own a car. Many experts were skeptical that Tata, which has only been making cars for the last 10 years, could manufacture a $3,000 car that met emission and safety standards. In fact, the Nano had many issues: slow sales, lack of amenities and faulty electrical switch that caused one car to burst into flames. However, Tata is fixing these problems and is planning to launch a Nano in the U.S. in the near future. (Source: HuffPo, Nano Coming to U.S., October 15, 2012)

Chindia:

Chindia is the term used to describe a tight partnership between China and India -- two of the world’s largest and fastest growing economies. With one-third of the world’s people, Chindia could be a tremendous economic powerhouse in the global economy.

Former Chinese President Hu Jintao first met with Indian Prime Minister Manmohan Singh, and other high ranking Indian officials including Sonia Gandhi, in 2006. This was the first visit to India by a Chinese head-of-state in ten years. They signed a trade agreement that strengthened cooperation in the areas of information technology, energy, and agriculture. In addition, they reopened border trade across the Nathu La pass, which links China's Tibet and India's Sikkim areas, and had been closed for 44 years.

China and India have complementary economies:

  • India has raw materials, China has manufacturing.
  • India has high tech, China has the businesses and consumers to use them.

However, they also have long-standing trade disputes stemming from their common borders, and China’s friendliness with India’s enemy, Pakistan. There are few airline routes and visa delay. These disputes will not be solved by one friendly trade agreement. Fortunately, both realize the potential advantages of a partnership, and the trade agreement is a good first step towards a “Chindia” of some sort. Article updated June 5, 2014

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