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India's Economy

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india economy

The Governor of the Reserve Bank of India, Raghuram Rajan, must combat India's stagflation.

India's Economy Is Fast-Growing:

At $4.761 trillion, India is the world's fourth largest economy, after the EU, U.S., and China. It recently surpassed Japan, whose Gross Domestic Product (GDP) is $4.704 trillion. India grew quickly, despite the recession: 6.5% in 2012, 7.7% 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.

India's Challenges:

However, India is still 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 nearly 10%, with 0% GDP growth in the second quarter of 2013. Inflation has been 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 are backing off from India and other emerging markets, now that the U.S. Federal Reserve plans to taper its quantitative easing program. India's Prime Minister Manmohan Singh appointed former IMF economist Raghuram Rajan to head the nation's central bank to address these challenges. (Source: Guardian, India calls on Raghuram Rajan to run its central bank, August 6, 2013)

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 Buildt 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)

How India's Economy Affects the U.S.:

India has three comparative advantages. First, its cost of living is lower than the U.S. Its GDP per capita is only $3,900, giving India half the standard of living as Iraq or Ukraine. This is an advantage because Indian workers don't need as much in wages, since everything costs less. India's second advantage is its well-educated technology workers, while its third advantage is its English-speaking population. This combination attracts U.S. technology and call centers to India, resulting in job outsourcing. For example, an Indian call center employee only costs $12 per hour, almost half the American counterpart of $20 an hour (including all costs, not just salary). As a result, more than 250,000 call center jobs were outsourced to India and the Philippines between 2001-2003. (Source: Technology Manufacturing Corp.)

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.

India as a Nuclear Ally:

In 2006, the U.S. agreed to overturn decades of American law and defy the Nuclear Non-Proliferation Treaty by allowing full civil nuclear cooperation with India. This is despite the fact that India had violated the treaty by exploding nuclear devices and not putting their program under the IAEA’s safeguards.

India wants to be treated like the official five nuclear powers: U.S., Russia, Britain, France and China. The U.S. wants India to cap its production of fissile material (highly-enriched uranium and plutonium), but India refused. India plans to increase its warheads from 50 to 300 by 2010.

This winking at the rules for India looks bad to ally countries that the U.S. has convinced to refrain from building nuclear capacity: South Korea, Taiwan, Brazil, Argentina, South Africa, Ukraine, Kazakhstan and Japan. The agreement was part of an overall increase in the business relationship between American companies and India. Article updated June 22, 2013

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