The economy of India is characterised as a developing market economy. It is the world’s fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). According to the IMF, on a per capita income basis, India ranked 139th by GDP (nominal) and 118th by GDP (PPP) in 2018. From independence in 1947 until 1991, successive governments promoted protectionist economic policies with extensive state intervention and regulation which is characterised as Dirigism. The end of the Cold War and an acute balance of payments crisis in 1991 led to the adoption of a broad program of economic liberalisation. Since the start of the 21st century, annual average GDP growth has been 6% to 7%, and from 2014 to 2018, India was the world’s fastest growing major economy, surpassing China. Historically, India was the largest economy in the world for most of the two millennia from the 1st until 19th century.
The long-term growth perspective of the Indian economy remains positive due to its young population and corresponding low dependency ratio, healthy savings and investment rates, and is increasing integration into the global economy. The economy slowed in 2017, due to shocks of “demonetisation” in 2016 and introduction of Goods and Services Tax in 2017. Nearly 60% of India’s GDP is driven by domestic private consumption and continues to remain the world’s sixth-largest consumer market. Apart from private consumption, India’s GDP is also fueled by government spending, investment, and exports. In 2018, India was the world’s tenth-largest importer and the nineteenth-largest exporter. India has been a member of World Trade Organization since 1 January 1995. It ranks 63rd on Ease of doing business index and 68th on Global Competitiveness Report. With 520-million-workers, the Indian labour force is the world’s second-largest as of 2019. India has one of the world’s highest number of billionaires and extreme income inequality. Since India has a vast informal economy, barely 2% of Indians pay income taxes. During the 2008 global financial crisis the economy faced mild slowdown, India undertook stimulus measures (both fiscal and monetary) to boost growth and generate demand; in subsequent years economic growth revived. According to 2017 PricewaterhouseCoopers (PwC) report, India’s GDP at purchasing power parity could overtake that of the United States by 2050. According to World Bank, to achieve sustainable economic development India must focus on public sector reform, infrastructure, agricultural and rural development, removal of land and labour regulations, financial inclusion, spur private investment and exports, education and public health.
Challenges faced by Indian Economy :
Indian economy faces many challenges that include Unemployment, Poor educational standards, Poor infrastructure, Balance of payments deterioration, High levels of Private Debt, Large Budget Deficit, Rigid labor Laws, Inefficient agriculture, Poor tax collection rates, Business difficulties, Inequality within regions.
The causes of high unemployment and under-employment in India are subject of intense debate among scholars. A group of scholars state that it is a consequence of “restrictive labor laws that create inflexibility in the labor market”, while organized labor unions and another group of scholars contest this proposed rationale. India has about 250 labor regulations at central and state levels, and global manufacturing companies find the Indian labor laws to be excessively complex and restrictive compared to China and other economies that encourage manufacturing jobs, according to the economist Pravakar Sahoo.
Poor Educational Standards –
Modern education in India is often criticised for being based on rote learning rather than problem solving. New Indian Express says that Indian Education system seems to be producing zombies since in most of the schools students seemed to be spending majority of their time in preparing for competitive exams rather than learning or playing. BusinessWeek criticises the Indian curriculum, saying it revolves around rote learning and Express India suggests that students are focused on cramming. Preschool for Child Rights states that almost 99% of pre-schools do not have any curriculum at all. Also creativity is not encouraged or is considered as a form of entertainment in most institutions.
Poor Infrastructure –
Poor infrastructure is among the biggest hurdles facing the Indian government’s ambitious program, called “Make in India,” which aims to improve the nation’s manufacturing capabilities and support higher growth for generating employment. We believe corporate growth and investments can be hampered if the government fails to close the infrastructure deficit, which some experts estimate costs about 4%-5% of GDP due to inefficiencies. Infrastructure development can not only help remove some of these inefficiencies contributing immediately to economic expansion but also support stronger long-term growth.
Balance of Payments Deterioration –
The balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services. The balance of payments consists of three components: the current account, the capital account and the financial account. The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.
Inefficient Agriculture –
The Indian food distribution system is highly inefficient. Although India has attained self-sufficiency in food staples, the productivity of its farms is below that of Brazil, the United States, France and other nations. Indian wheat farms, for example, produce about a third of the wheat per hectare per year compared to farms in France. Rice productivity in India was less than half that of China. Other staples productivity in India is similarly low. Indian total factor productivity growth remains below 2% per annum; in contrast, China’s total factor productivity growths is about 6% per annum, even though China also has smallholding farmers. Several studies suggest India could eradicate its hunger and malnutrition and be a major source of food for the world by achieving productivity comparable with other countries.
Large Budget Deficit –
A budget deficit occurs when expenses exceed revenue and indicate the financial health of a country. The government generally uses the term budget deficit when referring to spending rather than businesses or individuals. Accrued deficits form national debt. The gap between the revenue and expenditure during the same period in 2019-20 stood at 61.4% of the budgeted target, according to data on the website of the Controller General of Accounts. India’s fiscal deficit target estimated in the Union Budget 2020-21 was Rs.7.96 lakh crore, or 3.5% of the gross domestic product.
Business Difficulties –
Controls on business creation also lead to poor infrastructure development. India started having balance of payments problems in 1985, and by the end of 1990, the state of India was in a serious economic crisis. The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. According to Nomura India Business Resumption Index economic activity fell from 82.9 on 22 March to 44.7 on 26 April.