India, a former British colony that has been independent for over聽70 years, is currently one of the fastest-growing economies in the world. However, in 2019, the country lost its place as the world's fastest-growing economy after it grew more slowly than expected in the first half of the year. For the first time in nearly two years, India's growth rate fell behind China's.锘 It is the world鈥檚 third-largest economy in purchasing parity terms.

Overall, in 2019, the economy of India grew at a rate of 5%.锘 This growth was primarily due to strong demand for聽the country's goods聽and services, in addition to a high level of industrial activity. The country, once a supplier of British tea and cotton, now has a diversified economy with the majority of activity and growth coming from the service industry. India is expected to become a high-middle income country by 2030.

Key Takeaways

  • India, a former British colony that has been independent for over聽70 years, is currently one of the fastest-growing economies in the world.
  • Agriculture, once India鈥檚 main source of revenue and income, has since fallen to approximately 15.87% of the country鈥檚 GDP, as of 2019.
  • Over the past 60 years, the service industry in India has increased from a fraction of the GDP to approximately 54.4% between 2018 and 2019.
  • In 2019, almost聽10 million聽foreign tourists visited India; the World Travel and Tourism Council calculated that tourism generated 9.2% of India's GDP in 2018.

Historical Development of India's Economy

In 1947, after gaining independence from Britain, India formed a centrally-planned economy (also known as a command economy). With a centrally-planned economy, the government makes the majority of economic聽decisions regarding the manufacturing and the distribution of products.

The government focused on developing its heavy industry sector, but this emphasis was eventually deemed unsustainable. In 1991, India began to loosen its economic restrictions and an increased level of liberalization led to growth in the country's private sector. Today, India is considered a mixed economy: the private and public-sectors co-exist and the country leverages聽international trade.

Citizens can choose their own occupations and start their own private enterprises. However, in certain areas of the economy, such as defense, power, banking, and other industries, the government maintains a monopoly. The country鈥檚 economy has grown exponentially鈥揻rom $288 billion in 1992 to $2.9 trillion聽in 2019.

Agricultural Sector

Agriculture, once India鈥檚 main source of revenue and income, has since fallen to approximately 15.96% of the country鈥檚 GDP, as of 2019.锘 However, analysts have pointed out that this fall should not be equated with a decrease聽in production. Rather, it is a relative fall when compared with the large increases in India鈥檚 industrial and service outputs.

The agricultural industry in India currently faces some聽problems. First, the industry is not as efficient as it could be: millions of small farmers rely on monsoons for the water necessary for their crop production.锘 Agricultural infrastructure is not well developed, so irrigation is sparse and agricultural product is at risk of spoilage because of a lack of adequate storage facilities and distribution channels.

Despite this, production is increasing. Today, India is a聽leading producer of lemons, oilseeds, bananas, mangoes聽and papayas, wheat, rice, sugar cane, many vegetables, tea, cotton, and silkworms (among others).

While forestry is a relatively small contributor to the country's GDP, it is a growing sector and is responsible for producing fuel, wood, gums, hardwood, and furniture. An additional small percentage of India鈥檚 economy聽comes from fishing and aquaculture, with shrimp, sardines, mackerel, and carp being bred and caught.

Industrial Production

Chemicals are big business in India; The petrochemical industry, which first entered the Indian industrial scene in the 1970s, experienced rapid growth in the 1980s and 1990s.

Demand for plastics in India grew at an average rate of 8.9% between 2013 and 2018. The annual consumption of virgin grade polymers for the years 2017 to 2018 was 15.9 million tons.聽Consumption is expected to reach 24 million tons by 2022 to 2023 and 35 million tons from 2027 to 2028.

In addition to chemicals, India produces a large supply of the world鈥檚 pharmaceuticals as well as billions of dollars worth of cars, motorcycles, tools, tractors, machinery, and forged steel.

India also mines a large number of minerals and gems. In 2019 to 2020, for example, India mined 729聽million tons of coal (which, surprisingly, was not enough to meet the country鈥檚 coal needs).锘 The country produced聽210聽million tons of iron ore, 21聽million tons of bauxite, and close to聽1.59聽tons of gold聽along with asbestos, uranium, limestone, and marble. Oil and gas were extracted at a rate of 32.6聽million metric tons聽and 29.9聽billion cubic meters, respectively, in the 2017 to 2018聽year.

India鈥檚 industrial boom seems to have come at the cost of the preservation of some human rights. In addition, the rapid economic expansion has also led to a rise in illegal operations, particularly in its mining industry. Not only are resources being illegally extracted, but people who live near mines are suffering from health problems associated with the under-regulated industry. In addition, there are reports of the mining areas not being fully-assessed and the mines themselves being accident-prone.

Information Technology (IT) and Business Services Outsourcing

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to approximately 55.9% between 2019 and 2020.锘 India鈥搘ith its high population of skilled, English-speaking, and educated people鈥搃s a great place for doing business.

Among the leading services industries in the country are telecommunications, IT, and software, and the workers are employed by both domestic and international companies including聽Intel (INTC), Texas Instruments (TXN), Yahoo (YHOO), Facebook (FB), Google聽(GOOG), and Microsoft (MSFT).

Business process outsourcing (BPO) is a less significant but more well-known industry in India聽and is led by companies like American Express (AXP), IBM (IBM), Hewlett-Packard, (HPQ), and Dell. BPO聽is the fastest-growing segment of the ITES (Information Technology Enabled Services) industry in India thanks to聽economies聽of scale, cost advantages, risk mitigation, and competency. BPO聽in India, which started around the mid-90s, has grown by leaps and bounds.

However, Bangalore, called the Silicon Valley of India, is a prime example of the problems that India faces with its international business service sector. Companies and local administration clash over government policy. Companies want better infrastructure and the governments wanting to serve their electorate. Additionally, employees at companies that provide outsourcing services throughout India聽struggle to adopt more Western mannerisms and language to appear more like their parent companies, a practice that is considered detrimental to the traditional Indian identity.

Retail Services

The retail sector in India is huge.聽But it's not just apparel, electronics, or traditional consumer retail that is booming; agricultural retail, which is important in an inflation-conscious country like India, is also significant.

However, in recent years, the issue of agricultural wastage has come to the forefront. In 2019, it was estimated that every year. Reports suggest there is little storage for Indian agricultural products, and聽experts believe that the solution to the massive waste issue is a combination of government policy, technology, and infrastructure. The Indian government is purported to be exploring a range of options.

Retail reform is also happening. India is relaxing some barriers to foreign entry and hoping to spur an increase in the number of foreign retailers in the country. However, there is opposition and debate about whether or not to let large foreign companies open stores in India.

Other Services

Other parts of India鈥檚 service industry include electricity production and tourism. The country is largely dependent on fossil fuels聽oil, gas, and coal but it is increasingly adding capacity to produce聽hydroelectricity, wind, solar, and聽nuclear power.

In 2018, over聽10 million聽foreign tourists visited India.锘 In 2018, the estimated foreign exchange earnings from tourism in India was $28.585 billion.锘 The World Travel and Tourism Council calculated that tourism generated 10.3% of India's GDP in 2019.

Medical tourism to India is also a growing sector. India's market for medical tourism is expected to touch the $9 billion mark by 2020, according to a report released by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young.

Medical tourism is popular in India because of its low-cost healthcare and international standards compliance. Customers come from all over the world for heart, hip, and plastic surgery procedures, and a small number of people take advantage of India鈥檚 commercial surrogate facilities.

The Bottom Line

According to the World Bank, growth in India is projected to be 6% this fiscal year; it is expected to rise to 6.9% between 2020 and 2021 and to 7.2% in the following year. 锘 Among the major emerging economies, India is one of the fastest-growing. It has also become a focus of聽investors across the globe.

Between the years 2011 and 2015, more than 90 million people in India rose out of extreme poverty, thanks in part to robust economic growth that has improved the overall standards of living in the country.聽

However, the country still faces significant challenges in its quest for sustainable and equitable growth. While the economic performance of the country has been strong, development across the country has been uneven. There are vast differences in levels of opportunities between different population groups and different geographic regions of the country.

Issues of implementation related to indirect tax reforms, a weak rural economy, and a high youth unemployment rate in urban areas have contributed to malnutrition, lack of infrastructure and education, poverty,聽and corruption.