You are using an older browser version. Please use a supported version for the best MSN experience.

Is India the Next Emerging Markets Superstar?

Investopedia logoInvestopedia 01-09-2015 Prableen Bajpai, CFA (ICFAI)
India was among the wealthiest nations in ancient times. © Provided by Investopedia India was among the wealthiest nations in ancient times.

India was among the wealthiest nations in the ancient times, aptly nicknamed the golden bird. Throughout history, India has been subject to multiple invasions, the most damaging one being the two-century long British colonial rule that shattered India’s social and economic fabric. When India finally achieved a hard-won independence in 1947, it was a divided nation with a destitute economy, poor infrastructure, over dependence on imports and a legacy of poverty and illiteracy.

India has come a long way since 1947. It’s nearly seven-decade journey since independence has brought about many changes in the nation’s socio-economic landscape. After gaining freedom, India set about rebuilding its economy by rolling out a series of five-year plans, the first of which was introduced in 1951. The first of these five-year plans focused on rebuilding the economy by becoming self-reliant for food supply and by raising domestic savings for growth. Successive five-year plans encouraged industrial development and services. An economic turning point came during the 1991 reforms which introduced the policies of liberalization and privatization, and encouraged flexibility in industrial licensing and foreign investment.

India hasn't looked back since. According to World Bank data, the nation experienced an average growth rate of 5.8% during the 1990s, 6.9% during the 2000s and 7.3% from 2010-2014. The size of India’s economy currently stands at $2 trillion. It is the world’s tenth largest economy in terms of nominal gross domestic product and the third largest economy in the world in terms of purchasing power parity. (For related reading see The World's Top 10 Economies.)

GDP Composition

India’s gross domestic product (GDP) consists primarily of the agricultural sector, the industrial sector, and tertiary industries (the service sector). According to 2014 data by the World Bank, agriculture accounted for 17% of India's GDP, while industry and services accounted for 30% and 53%, respectively.

Declining Agriculture

India’s economy is rooted in a strong agricultural sector which constituted about 52% of its GDP in 1951. It truly was an agrarian economy. Over the years, agriculture has slowly declined as a percentage of the GDP. In the late 1980s, agriculture fell to just below 30% of the GDP and after 2004, agriculture fell further to under 20% of GDP. However, agricultural (which includes forestry, fishing, livestock production and cultivation of crops) still holds huge importance for the Indian economy. The sector employs about 50% of the labor force, contributes a declining yet significant share of 17-18% to the GDP and constitutes about 10% of India’s exports. 

In terms of produce, India’s is the among the world's largest producers of tea, milk, pulses, cashew, spices, jute, rice, wheat, fruits and vegetables, sugarcane, oilseeds and cotton. The country accounts for 2.07% of the global agricultural trade. There is immense potential for improvement and growth in the agricultural sector and initiatives by the government to boost long-term investment should help realize those in the coming years. (For related reading see Who Produces The World’s Food.)

Industry

The share of the industrial sector (which includes construction, mining, manufacturing, electricity, gas and water) has hovered between 24%-29% of the GDP for the last three decades (from 1980 onwards). The sector employs just about 20% of the labor force In India. The industrial sector has lagged behind in India’s transformation from an agrarian economy to one being dominated by the services sector. 

The Index of Industrial Production (IIP) is a monthly assessment by India's Ministry of Statistics and Programme Implementation (MOSPI) that measures the pulse of short-term industrial activity in India. The IIP is composed of different sectors--manufacturing, mining and electricity--and each sector has a different allocation in the index. Manufacturing contributes 75.52% while mining and electricity contribute 14.16% and 10.32%, respectively. The 75% allocation speaks about the importance of manufacturing in the economy and the dominance of the industrial sector. However, despite huge potential, the manufacturing sector is still largely untapped, contributing only about 17% to the GDP. The graph below shows the trend in the IIP over the years. It’s been a journey of highs and lows. 

The government is making efforts to push the industrial sector by boosting manufacturing. Under Indian Prime Minister Narendra Modi’s government, the “Make in India” initiative aims to position India as a global manufacturing hub. The initiative hopes to increase manufacturing by 25% (as measured in percentage of GDP) over the next 10 years, a task easier said than done. If an industrial sector, led by manufacturing, gains steam, it would create millions of jobs, reduce dependence on imports, increase exports and complement the services sector. (For related reading see How Is The GDP Of India Calculated?)

The Rise of the Services Sector

Growth in the services sector in India started during the mid-1980s, but it was the reforms of the 1990s that accelerated this growth. The services sector is now the largest and fastest growing sector of the economy, contributing more than 50% to the GDP. India’s Central Statistics Office classifies the services sector into four main industries: 1) restaurants, hotels and trade; 2) storage, communication and transportation; 3) finance, insurance, business services and real estate; and 4) social, personal and community services. 

The average share of the services sector in India’s GDP was below 30% during the 1950s. During the 1960s and 70s, services gradually crossed the 30% mark. The sector then hovered around 40% and 45% in the 1980s and 1990s. After 2000, the contribution of the services sector to the GDP crossed 50%. From 2000 to 2014, the services sector has grown at a compound annual growth rate of 8.5%. (For related reading see Should India Be On Investors' Radars?)

According to India’s Department of Industrial Policy and Promotion, the services sector received the maximum foreign direct investment, amounting to $41,755 million (or 18%) of the total foreign inflows from April 2000 to December 2014. While the services sector has contributed to the country’s growth, critics point out that the sector has generated relatively few jobs when compared to its rising importance to the nation’s GDP. It employs a little more than 30% of the country’s labor force. (For related reading see Top 3 India ETFs.)

The Bottom Line

According to the World Bank, “India carries great promise of an acceleration in economic growth that is also inclusive and sustainable.” The fundamentals of the Indian economy are strong. It has reduced dependence on exports, boasts a high domestic savings rate and claims a rising middle class and consumer base. It also possesses enviable demographics: by 2020 India will be home to the largest working-age population in the world. Nevertheless, the real demographic-dividend can only be reaped if the government adequately invests in the skill development and education of its youth. To complement these basics, the government in power is pushing an ambitious economic development target and seeks to improve the macroeconomic environment and boost growth through manufacturing. However, India is still challenged by vast unorganized sector of businesses who operate outside of legal and tax provisions and dodge data collection. Tax evasion, poverty, structural bottlenecks, corruption, delays in reforms and inadequate infrastructure are all challenges to India's economy. (For related reading see Understanding the Trends Driving India's Rise.)

More from Investopedia

image beaconimage beaconimage beacon