India’s economy: growing rapidly and unequally

Author: Raghbendra Jha, ANU

In 2010, India’s GDP in PPP terms was $3.92 trillion. By this reckoning, India was the fourth-largest economy in the world after the US, China and Japan.

Citi Investment Research and Analysis estimates that in a decade India will be the third-largest economy. Between 2000–01 and 2007–08, India’s real GDP growth averaged 7.3 per cent per annum. Growth rates have recently been around 9 per cent and sometimes in excess of 9 per cent, except for the period since 2008–09. In that year, GDP growth fell to 6.7 per cent in the face of the global financial crisis. GDP growth rate picked up the following year to 8 per cent.

In 2010–11, real GDP growth is estimated to be 8.6 per cent and in 2011–12, to return to 9 per cent. With a population growth rate of about 1.7 per cent per annum (according to the latest Census of India), real GDP growth per capita has been in excess of 7 per cent per annum for several years. At this rate, real GDP per capita will double in about 10 years. Since the 1970s, average decadal growth rates of real GPD have gone up, even as the standard deviation of year-to-year growth has gone down (Table 1).

Decade Average growth rate (% per annum) YtoY SD of   growth rate
1960-61 to 1969-70 4.0 3.674007803
1970-71 to 1979-80 3.0 4.185225336
1980-81 to 1989-90 5.6 2.289323044
1990-91 to 1999-2000 5.7 1.841768474
2000-01 to 2009-10 7.3 2.08019764

Source: Computed from Reserve Bank of India: Handbook of Statistics on the Indian Economy.

Structure of economic growth in India

The structure of India’s GDP has undergone immense transformation in the face of such rapid economic growth and has, in turn, contributed to it. During the 1960s, agricultural value added, as a percentage of GDP, was 42.5 per cent. Corresponding magnitudes for industry, manufacturing and services were, respectively, 20.3 per cent, 14.3 per cent and 37.2 per cent. In 2008, agriculture contributed 17.6 per cent of GDP, whereas the contributions of industry, manufacturing, and services were 29 per cent, 16 per cent and 53.4 per cent, respectively.

This is an indicator both of India’s potential for further economic growth as well as that of a fundamental problem facing the economy — how does one sector (agriculture), which contributes less than 18 per cent of GDP, support more than 60 per cent of India’s population? Within manufacturing, India has increasingly specialised in higher value added manufacturing.

Contributors to India’s higher economic growth

In a growth accounting sense, capital, labour and productivity growth have all contributed to enhanced rates of economic growth in India. Savings rates have gone up to about 34 per cent and investment to about 36 per cent, particularly since the 1990s. There is a very strong ‘demographic dividend’ as the median age of the Indian population is around 25, indicating that the country is home to more than 600 million people below the age of 25. Further, this labour force is getting better trained (literacy rates are up to 74 per cent in the 2011 census).

There is evidence that Total Factor Productivity in the production of aggregate GDP and in the manufacturing and services sectors has gone up, particularly since 1994. Agricultural productivity has not grown very quickly. Openness to trade and investment went up sharply, particularly during the period 2002–07. Even after the global financial crisis, India continued its policy of trade liberalisation, with average manufacturing sector tariffs now down to 12 per cent or less.

All these factors imply that economic growth rates in India will stay high and, given the increasing demographic dividend, may even accelerate.

Short-term issues with economic growth

Drought in 2008–09, following the sharp global rise in food prices in 2007, led to high food inflation, which has now been passed on to the general price level, particularly in light of recurrent commodity price shocks. Anti-inflation policy in the form of higher lending rates has tended to dampen investor sentiments.

Economic growth and poverty alleviation in India

High rates of economic growth in India imply that there has been a substantial reduction in levels of poverty. But the elasticity of poverty reduction with respect to economic growth is lower in India than in many Asian countries, essentially because of the structure of economic growth. This implies that inequality (both personal as well as spatial) has increased, particularly of incomes (as opposed to consumption where inequality is lower), but is still well below that of many emerging economies.

Prospects for Australia

Australia-India trade and investment relations are strong but fall well below their potential. Bi-directional trade is heavily in favour of Australia. Australian exports to India are mainly in the resource area and there are some service exports. Indian exports to Australia are largely in the areas of Information Technology, pearls and gems, some electronic equipment and some service imports.

There is substantial room for expansion of both trade and investment. India is expected to invest more than US$1 trillion in infrastructure in the near future. There is substantial room for Australian investment and expertise in this area. Other areas of possible economic collaboration include food processing, educational institutions in India and the use of service sector expertise to enhance manufacturing sector growth, an area in which India has done very well. Australia could benefit from India’s expertise in this area.

The Indian economy is likely to be a very strong engine for economic growth, not just in the region, but globally as well. Greater Australia-India collaboration can only enhance favourable economic outcomes for both countries.

Raghbendra Jha is Professor of Economics and Executive Director of the Australia South Asia Research Centre at The Australian National University.

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  • Deng Changchun

    Thanks for your wonderful article. Economic prosperity is a magnificent robe in which people will always find some fleas. In my opinion India has conducted balance between growth and equity much better than China. One of the real challenges to India’s long-term economic growth lies in the fragmentation of society. Diversified social groups along the line of language,religion ,caste and ethnic have adverse affects on the enforcement of proper policy and the improvement of public governance.