The Economy of India

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The Economy of India
ECO 201 - Macroeconomics

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Prepared by:
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Lindzay Daye
Sarah Olewinski
Christian Hernandez
Jose Valencia


THE ECONOMY OF INDIA
Code of Ethics 
Team Expectations – Everyone is responsible for their own duties, and is expected to
be done by the date agreed upon.  If we say we will do something, we keep our word
and do it.  Everyone is expected to take responsibility for mistakes made and take
immediate action to fix them, as well as respectfully accept whatever consequences
are incurred. We are expected to resolve our disagreements like adults, accept
constructive criticism gracefully, and only criticize constructively.  We will help each
other to be better team players, better researchers, better writers, and better
professionals.   
Meetings – Group members should attend every group meeting.  Come prepared
(see below) and make sure everybody is clear on what is happening and what is
expected to be completed by the end of the meeting.  Before leaving, make sure
everybody is clear on what has been accomplished and what should be
accomplished for the next meeting.   
Level of Preparedness – Come to meetings with creativity, ideas, and work assigned
for you to complete.  
Responsibilities – We are a team and we will work together as a team. We will do our
assigned work to the best of our abilities to help benefit the project and team, but if
any one of us is having trouble, we are expected to ask for help, and if we are asked
to help, we are expected to help.  
Communication – If a group member cannot make a meeting, they are expected to
notify each other member by either text or e-mail.  If someone is having trouble with a
portion of their task or research, it is expected that said person will contact the other
members of the team to inform them and ask for help so that the tasks can be
completed in a timely manner. 
Respect – It is expected that each group member treats each other member with
respect.  We will listen to each other’s ideas and build off of them or respectfully
discuss what we don’t like about it. 
Plagiarism – It is not tolerated in any circumstance and we will respect the property
rights of others and properly cite all sources used as well as give credit where credit
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Corrective Action – The first plan of action is to deliver a verbal warning to the
individual.  After the verbal warning an email will be sent out to all members of the
team as well as the Professor.  If the action continues to occur the team member will
receive a written warning that must be signed by all members and our Professor. 

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Sarah Olewinski:  
Lindzay Daye:  
Christian Hernandez:
Jose Valencia:

Date:  
Date: 
    Date:
  Date:


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THE ECONOMY OF INDIA

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Executive Summary
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In Asia, there is a country that is home to a peninsula that separates the Arabian
Sea and Bay of Bengal. With a thriving economy that has made one of the best
comebacks in history, India rose to the occasion when the world was affected by
recession in 2008. The Republic of India is located just southwest of a major
economy known as China, and just Southeast of some troubling territory known as
Pakistan, Afghanistan, and Iran. India currently inhabits over 1.2 billion people, and
is the second most populated country in the world (CIA, 2013).

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Some of the major challenges in India are more than just economic, but also
political and ethical. Not only is the country’s economy stagnating - with a slowing
GDP growth rate of 4.7 percent, high inflation, and high unemployment rates
reaching almost 14 percent this year, but the government is plagued with 

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THE ECONOMY OF INDIA
“bottleneck” officials (CIA, 2013). The Infrastructure project completion rate is
about 25 percent currently, and politicians will not make any moves due to
upcoming elections (Rupee dive…, 2013). The countries citizens are also suffering
with issues such as an inadequate sanitation system, over-regulated agriculture
and extreme income inequality.

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India’s economy is stronger in terms of the GDP growth rate, but the United States
has a stronger labor force, lower inflation rates, as well as unemployment rates. In
terms of poverty the United States also beats out India but this can be unfair
because of the population differences, with India having 1.2 billion inhabitants
compared to roughly 300 million in the US. The US also dominates in terms of
corruption in politics, and business (CIA, 2013).

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For the first key question, it is more than safe to say that the overall risk level of
India’s economy is between moderate to relatively high. The conclusions drawn
were based on several areas of concern such as corruption within politics, slow
implementation of policies, the alarming amount of suffering citizens, and an
unskilled labor force. Other areas of concern included the unemployment rate and
high inflation.

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The second key question involves an analysis of India’s monetary and fiscal
policies. Since India has both a high unemployment and inflation rate, the focus
fell upon the greater issue. Fixing the unemployment would involve an increase in
the economy’s money supply. In terms of the fiscal policy, we determined there
was a need for emphasis on several issues through a side-by-side comparison of
India’s actual spending and our recommendations. These issues involved the
improvement of the well-being of India’s citizens as well as the country’s overall
productivity.


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THE ECONOMY OF INDIA
India Country Overview

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A landmass sub-continent in the South of
Asia, India (formally known as the Republic
of India) is filled with a diverse selection of
religions, languages, cultures and people.
Ranked as the world’s second-most
populated country, it holds over 1.2 billion
people as of 2012 and has become a
central part of the global economy today
(World Bank, 2012).

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The country follows a federal political
system in which the government consists
of a central body and numerous states.
Although discrimination on the basis of
caste is now illegal in India, these tensions
continue to influence Indian politics, which
can act as a deterrent from its vast potential
in overall growth and expansion.

Figure 1 - Retrieved April 7, 2014 from The EIU

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United States Country Overview
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The United States of America, commonly referred to as the U.S., is widely
renowned for holding one of the top spots in fields such as medicinal innovation
and military powers. It is almost appalling to hear that the U.S. budget for military
expenditures is higher than the next top ten countries combined (Koba, 2014). The
U.S. is also home to one of the most diverse populations in the world today. Due
to numerous waves of immigration, the U.S. boasts ethnical and racial diversity
with its so-called “melting pot” ideology at the core of its identity. Unfortunately,
the U.S. is plagued in categories such as a high national crime rate, energy
consumption, cost of living and obesity - all of which can greatly affect the growth
of the economy. However, the U.S. holds boundless potential from its vast amount
of natural resources and skilled labor force.

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India Economic Overview
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Several decades after India gained independence from the United Kingdom,
India’s economy was kickstarted into a boom in 1991 after leaning towards a more
capitalistic market. India also shortly began pushing for a self-sufficient system
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THE ECONOMY OF INDIA
imposing higher tariffs on imported goods to promote local production and
spending (Shilling, 2012). Today, the economy of India continues to expand at such
an alarming rate. The workforce is plentiful and highly skilled - particularly in areas
such as technology and agriculture - but is plagued with widespread poverty.

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With one of the most diverse cultures in the world, some consider India to be a
continent rather than a country itself. Putting aside India’s alarming population, it
has 16 official languages, with English as the means of communication for most
written media, and Hindi as the language most widely used verbally (CIA, 2001).
Dealing with the internal economy of India requires both patience and a firm
understanding of how all of its cultures influence work, function, and influence
society.

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United States Economic Overview
The United States has one of the most diverse economies in the world. Reflecting
a laissez-faire persona, the free enterprise that is the U.S. economy is relatively
unregulated by the government. The U.S. boasts one of the most competitive and
innovative markets which is the fuel that drives the constantly growing and
changing environment that businesses take place in. Unfortunately, the economy
has been struggling through a dragging recession for the past decade, which has
become one of the primary issues being addressed by its leaders today. Other
pressing issues that the U.S. is currently facing include its colossal long-term debt,
unemployment, increasing reliance on imports that decreases sustainability, and
its detrimental dependence on offshoring and outsourcing.

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India’s Gross Domestic Product (GDP)
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Arguably one of the most important indicators of the health of a country’s
economy, the Gross Domestic Product (GDP) is a representation of the total dollar
value of all goods and services that are domestically produced by a country over a
specific time period (Koba, 2011). It can be determined by a combination of goods
and services including public consumption, government expenditures,
investments, and net exports - found by subtracting the country’s gross imports
from the gross exports. As of 2013, India’s GDP (PPP) was ranked fourth in the
world at approximately $4.962 trillion and its GDP per capita (PPP) ranked 168th at
$4,000 (CIA, 2013). The GDP per capita can be calculated by evenly dividing it’s
GDP by the total population at that time.

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THE ECONOMY OF INDIA
United States Gross
Domestic Product (GDP)

Top GDP Countries in USD Billion

GDP in USD Billion

16,000

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12,000
8,000
4,000
0

United States China

Uk

Russia

India

Figure 2 - Numerical values retrieved April 18, 2014 from Trading Economics

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The United States holds a
confident spot at the top
of the world in terms of its
Gross Domestic Product
(GDP) at approximately
$15.684 trillion, with
almost twice the GDP of
China and over six times
that of the United
Kingdom’s (Trading
Economics, 2012).

Similar to most economies in the world, the GDP of the U.S. is dominantly
composed of the country’s consumption, which pertains to public spending.
Consumption takes up $11.1 trillion (over 70 percent of the GDP), investments $2.1
trillion (13.5 percent), government spending $3 trillion (19.2 percent) and net
exports of –$0.6 trillion (Vo and Francis, 2012). The negative net exports value
indicates that the U.S. consumes more of its imports than it makes out of its
exports to other countries around the globe. The high amount of consumption
within the economy of the U.S. reflects a high quality of life within the country.

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India’s GDP Annual Growth Rate



India’s Quarterly GDP Growth Rate in 2008 - 2013

GDP Growth Rate

Within all of the countries
12
in the world, there is a
sound, universal
9
numerical value that
reflects the changes in the
6
value of all the goods and
3
services that are
domestically produced in
0
India. This value is
2008
2009
2010
2011
2012
2013
referred to as the GDP
Figure 3 - Numerical values retrieved April 9, 2014 from Trading Economics
Annual Growth Rate.
Currently down from a GDP
Annual Growth Rate of 11.4 percent several years ago (seen in Figure 3 above),
India now sits at only 4.7 percent in the fourth quarter in the fiscal year of 2013
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THE ECONOMY OF INDIA
according to the Ministry of Statistics and Programme Implementation (Trading
Economics, 2014).

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GDP and The Quality of Life

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Overpopulation:
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As mentioned earlier, with over 1.2 billion people, India sits at the top two most
populated countries in the world. With it’s current rate, according to a study by the
United Nations (UN), the population of India is set to surpass the population of
China (currently the most populated country in the world) in the year 2028 at a
high of over 1.45 billion people and counting (United Nations, 2013). Other
possible factors would include the culture and literacy in the nation, both of which
are also discussed in this report. India’s literacy rate for the entire population is at
a low of 62.8 percent, with women at a concerning rate of about 50.8 percent
(CIA, 2013). There is also the inevitable phenomenon of the correlation between
family size and social status. For most countries, it is definitely a trend for families
in impoverished areas to be larger than families in well-to-do parts of the nation.

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Overpopulation can be a serious issue in India for the following reasons: the
depletion of natural resources, a rise in unemployment and a possibly higher cost
of living. A larger number of people in a nation would require more of its
resources to be consumed at a faster rate to sustain its masses, depleting its
natural resources such as food, water, coal, oil, etc. faster than it should. An
overpopulated country would also develop larger unemployment rates when
handled poorly, which means more people means a tighter competition for
specific jobs. Also, as the demand for resources such as food, water and other
necessities increases when the supply remains constant, a higher cost of living
would develop, leading to a larger problem for the overall population of India.
These issues can easily be prevented by educating the people about modern
contraceptive measures and effective family planning.

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Sanitation:
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With a glaring population of 1.2 billion people, India faces a severe lack of access
to the sanitation facilities based on the standards of The United Nations Children’s
Fund or UNICEF (formerly the United Nations International Children’s Emergency
Fund) - a United Nations Program that provides lasting humanitarian and
developmental aid to both children and mothers in the developing countries of
today (UNICEF, 2011).
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THE ECONOMY OF INDIA
Access to Improved Sanitation Facilities in 2011

Percent With Access

100
75
50
25
0

India

USA

Rural

India

USA

India

Urban

USA

According to UNICEF’s
numbers, over 35 percent of
India’s total population has
access to proper sanitation,
seen in Figure 4 (UNICEF,
2011). This issue can be
translated into about 778.8
million people in the country
without access to clean
drinking water and adequate

Total

Figure 4 - Numerical values retrieved April 6, 2014 from UNICEF

methods of sewage disposal. According to these numbers the number of people
in India without access to proper sanitation is over double the amount of people in
the United States itself.

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India’s Consumer Price Index

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The consumer price index deals with the average price of basket consumer goods
and services. According to Investopedia “The CPI is calculated by taking price
changes for each item in the predetermined basket of goods and averaging them;
the goods are weighted according to their importance. Changes in CPI are used to
assess price changes associated with the cost of living.” The cost of living is very
important, it affects directly to India’s consumers. When the cost of living increases
it affects society in many
India’s Consumer Price Index (CPI) 2013 - 2014
different ways.

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Consumer Price Index (CPI)

The price of bread has
recently increased in India
because of high demand of
bread in the United States and
Europe. The reason is these
two countries are looking to
negotiate with India’s grain
suppliers because of the
recent drought that has
prevented and limited their
production of wheat.

245
240
235
230
225
220
Jan 13

Mar 13

May 13

Jul 13

Sep 13

Dec 13

Feb 14

Figure 5 - Data retrieved April 6, 2014 from Trading Economics

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THE ECONOMY OF INDIA
According to India Times, “The Cabinet Committee on Economic Affairs (CCEA)
decided to export 2 million tons of wheat from its overflowing stocks to create
storage space for the new Kharif crop. Exports are currently attractive because of
the drought in the US and lower or poor quality crops in other locations like
Europe have raised international wheat prices substantially this year.” This was an
excellent move for Kharif because it allows them to produce grains. If the CCEA
did not export 2 million tons of wheat there would have been an abundance of
wheat in storage meaning the cost of wheat would decrease because of the high
supply of wheat. This was a great business maneuver because it benefited the
United States, Europe and Kharif.

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In reality, it resulted in driving the cost of wheat and flour, affecting millions of
consumers that will pay for rising cost of these goods that are found in everyday
items. India’s government deserves to take the majority of the responsibility
because they do not have anyone appointed to look over this sector. Other major
corporations like Kharif are going to take advantage of this opportunity and raise
the consumer price index. When the cost of goods rise it will still make an impact
on (CPI) driving the cost of living enough to hurt the cost of living.

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According to Trading Economics, India recently reached an all-time high in index
points in November of 2013 (refer to Figure 5 on previous page). As of February
2014, the index points of India reached 238. From December 2013 to February
2014 India's index points have remain steady and have fluctuated vary slightly.
With the recent price increase in flour and wheat we expect the (CPI) to return to
its all-time high of November of 2013. If other consumer goods also increase we
project that India’s CPI to continue to increase and be a significant amount.

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The United States’ Consumer Price Index
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According to trading economics, the Consumer Price Index for the United States
has fluctuated over 2013 and 2014. Due to the price of consumer goods and
services fluctuating in 2013 there have been increases and decreases through the
year. In January of 2013, the United States consumer price index was at 231.198
and by January of 2014 it was at 234.594. That is an increase 3.396 increase
during that time period.

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Inflation in India
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India's consumer price inflation has slowed to a 15-month low (refer to Figure 6 of
the next page for an in-depth look at India’s inflation). According to Trading
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Inflation Rate

India’s Inflation Rate 2013 - 2014
Economics, the inflation rate
12
has decreased 8.31 percent.
The significant decrease was
11
due to lower food prices,
which had a significant impact
that brought down inflation
10
rapidly from what it was
before. Lower food prices
9
allow people to buy more with
their income therefore
8
increasing the effects of their
Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14
income. Food prices are not
Figure 6 - Data retrieved April 6, 2014 from Trading Economics
the only factor that
contributes to inflation
consumer price index. The consumer price index is also affected by fuel prices,
cost of electricity, sugars and other oils.

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The consumption of edible oils has risen in India drastically. According to Solvent
Extractors Association of India, “India’s consumption of edible oil has risen to
around 17.5 million metric ton (mmt) in 2012-13 from 11.6 mmt in 2003-04,
compounded annual growth rate (CAGR) of 4.6%.” The significant growth of the
consumption in edible oil means how important cooking oil is to consumers in
India. With inflation decreasing, more consumers should be able to buy more high
quality cooking oil. According to FnBnews, “Apart from population growth, another
significant factor that is impacting edible oil demand is the increase in disposable
income amongst the growing middle class. This has led to change in the lifestyle,
which has increased the consumption of edible oils.” Instead of the middle class
buying higher quality or healthier cooking oil they could change their lifestyle in
order to adapt to the rise and
US Inflation Rate 2013 - 2014
decrease of inflation.

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Inflation in the United States
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Inflation Rate

2

1.5

1

0.5
Feb 13

Apr 13

Jun 13

Aug 13

Oct 13

Dec 13

Figure 7 - Data retrieved April 6, 2014 from Trading Economics

The United States Inflation rate
has been unpredictable during
2013. According to Trading
Economics, it has reached up to
2.0 percent and has reached its
low of 1.0 percent. Plenty of key
factors can change the inflation
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THE ECONOMY OF INDIA
rate from the cost of food to the cost of energy. Inflation varies through each
month. In November 2013 the Inflation rate was at 1.0 percent. In the months of
March and August they reached a yearly high of 2 percent (refer to Figure 7 of the
previous page for more information).

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India’s Real Interest Rates
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According to BBC "The Reserve Bank of India (RBI) raised the benchmark repo
rate - the amount at which it charges to lend to commercial banks - to 8% from
7.75%”. The Reserve Bank of India has also projected interest rates to double and
continue to rise. Although India's manufacturing sector is the key to their
economic growth it has significantly slowed over the past two years. The cause of
their recent slowdown is due to the high interest rates for borrowing currency
from banks. India's central bank has refused to lower the interest rate because of
the unpredictable inflation. The Reserve Bank of India believes that keeping
interests rates the same will end up stimulating businesses and consumers but
due to high interest rates it has decreased the amount business and consumers
are borrowing. For instance, BBC News reported that "higher inflation causes
consumers to spend less, and its impact is felt most by India's poor.”  According to
the World Bank, nearly two-thirds of India's population live on less than $2 a day.
When households can live on very low wages they are less likely to consider
taking out a loans especially when interest rates are high and on the rise. With an
inconsistent inflation rate, consumers and entrepreneurs shy away from borrowing
from banks. The average consumer is spending less, knowing that they can live
without the luxuries they can't afford while still enjoying their day-to-day lives.

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The United States’ Real Interest Rates
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In the United States interest rates were at an all-time high between January of
2006 through January of 2007. Interest rates instantly dropped when the stock
market crashed in 2008 (Trading Economics). Society was not prepared and
millions of Americans were affected. Interest Rates fluctuate based on inflation.
The lower the interest rate, the higher inflation.

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Worker Productivity in India
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According to Business Standard, worker productivity is extremely important when
manufacturing goods because the lower the worker productivity is the more labor
hours are involved in producing items. The goal is to be very efficient in producing

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THE ECONOMY OF INDIA
goods so that labor hours don't go to waste because workers could be
manufacturing other good or be producing more otherwise.

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India has recently made enormous strides in trying to revive their economy by
investing in their infrastructure. The Indian government believes that this will
stimulate the economy and stop the high inflation rates. According to Reuters,
"India's government has set a five year target of investing $1 trillion infrastructure
by 2017, with half coming from the private sector, in a bid to lift economic growth
to 8.4 percent”. Investing in infrastructure employs thousands of workers while
opening the way for more efficient manners of transporting goods throughout the
country. If implemented correctly, this will benefit the economy and consumers.
Rediff Business reports, "India’s Average growth in productivity in 2008 through
2012 is 5.1 percent”. India wants to improve their infrastructure, but without the
workers who are skilled enough to perform the labor, it's going to take additional
time to actually to improve infrastructure by 2017. India is going to end up
spending more funds than what they expected due to this lack of skill. According
to Teach for India, "In India today, 4% of our children never start school. 58% don’t
complete primary schools. And 90% don’t complete school. At Teach For India, the
fact that only 10% of our children go on to college both saddens and angers us."
This plays a key role in whether India is able to contribute to the labor force with
educated and skilled workers. This issue also needs to be addressed in order to
increase worker productivity and improve infrastructure that will benefit India
overall.

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Worker Productivity in the United States
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Worker productivity is measured by how much a worker can create or
manufacture in an hour, in terms of goods and services. The higher worker
productivity is, the more likely it will improve the development of a country's
economic growth. This is because the country will be able to produce more goods
and increase revenue. A key component to worker productivity would be the
advancement of technology and skilled laborers. According to Trading Economics,
the United States worker productivity in January 2008 was at 96.087, and by
January 2014, worker productivity increased to 106.922. That is a significant
percentage improvement.

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India’s Unemployment Rate
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Unemployment in India has slightly increased over the three-year period by about
0.1 percent. According to The Times of India, "The Unemployment rates in India
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THE ECONOMY OF INDIA
are showing an increasing trend since 2011 when it was 3.5%. The same rose to
3.6% in 2012 and climbed to 3.7% last year”. Additionally, economists have
predicted that the increase will carry over into 2014 according to Global
Employment Trends 2014. In reality, these statistics have been underestimated
because of the recent elections that are taking in India. Public officials are trying to
keep the general public unaware of what issues are going on in India. T. S. Papola,
a well-known economist, was quoted saying that a memorial lecture "against the
official estimate of 3-4%, the actual unemployed labor force in India comprises
13-14%”. According to The Times of India, T. S. Papola spoke during the annual
conference of Indian Association of Social Science Institutions. He brought some
key points to the table on how unemployment actually has not been researched or
explored in depth and can drastically change or be miscalculated. Speculations
are that the public officials are underestimating the unemployment rate because
of elections. Unemployment is a serious issue especially when public officials try
to cover it up by using catering statics to needs of campaign just to keep the
public content. If the rate of unemployment rate was underestimated, this may
lead to some skepticism from people on whether other major issues have been
closely looked at or are yet to be exposed.

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India's unemployment rate is a serious issue that needs to be addressed. India
needs to act fast and fix this issue. The reason the unemployment rate is so high is
because of the number of unskilled labors who can't fill the job openings that are
available. Consequently, India needs to fix their education system in order to have
a decrease in its unemployment rate.

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The United States’ Unemployment Rate
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According to Trading Economics, the United States’ unemployment rate has
significantly decreased from 2012 to 2014. This is a step in the right direction in
terms of the labor force. The lower the unemployment rate is, the more workers
can contribute to mass production of goods and services. Therefore increased
worker productivity as whole will lead to a decrease in the unemployment rate.
The United States unemployment rate has steadily decreased over the years
which means the economy is heading into a positive direction.

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Government Budget Surplus or Deficit
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A budget deficit occurs when the government spends more than it is taking in,
and the opposite would occur for a surplus to be true (Trading Economics, 2014).

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The US and India are both currently in a deficit and are facing some of the same
issues.

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India’s Deficit
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In India, the current deficit is at about 5.3 percent of the total GDP. The Ministry of
Finance is responsible for the record of such deficit. (Trading Economics, 2014). As
you can see in Figure 8 on the
India Government Budget as a Percent of GDP
right, India, along with the rest
0
of the world, was hit hard in
2008 - 2009 which created
-2
the largest deficit India has
seen in over 10 years. In 2011,
India slowed it’s rate of
-4
investment due to very high
interest rates and inflation. The -6
government later implemented
some reforms and deficit
-8
reduction measures (CIA,
2005 2006 2007 2008 2009 2010
2011
2012 2013
Figure
8
Data
retrieved
April
6,
2014
from
Trading
Economics
2013). Today, India is showing
a push on infrastructure, and
foreign investment, and has a GDP of 3.8 percent. However, India does face some
challenges with it’s economy and deficit due to slow regulation passing from the
government, crime, corruption, discrimination against women, and limited job
opportunities that do not involve agriculture (CIA, 2013).

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United States Narrows the Gap, for Now
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There has not been a surplus in the government budget of the United States in
many years. During the 2009 to 2012 span, the U.S. government’s deficit was the
largest in the world relative to the population of the country since 1946 (CBO,
2013). The U.S. is slowly bouncing back, with a GDP growth rate of 1.6 percent and
has gotten the current deficit down to 4 percent (World Fact Book, 2013). This
recovery can be mainly accounted to the changes in taxes and spending within
the country’s government. Some of the tax provisions that helped narrow the gap
would be the “expiration” of tax rates to high-income families, Social Security
payroll tax, and new taxes (CBO, 2013). “Federal debt held by the public is now
about 73 percent of the economy’s annual output, or gross domestic product
(GDP)” (CBO, 2013). Under current laws it is inevitable that the deficit will rise again

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THE ECONOMY OF INDIA
though due to the increased amount of spending on Social Security, and Health
Care such as Medicare and Medicaid (CBO, 2013).

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Economic Policy
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In recent years, like many other countries India was experiencing hard times with
a GDP growth rate of -1.90 percent in 2009 (TE.com, 2014). After this record low,
India bounced back with a vengeance putting the economy on a fast track at the
end of that year into 2010, and then finally tapering off around 2 percent for the
last three years. Today, India is showing some promising turnarounds, as well as
some that need to be monitored. With the growth rate slowing down, some are
very skeptical about where the country is going and some see nothing but
opportunity, it depends on the perspective. In this section, some of the major
issues that need to be monitored will be covered, as well as various economic
indicators that indicate an improvement in the Indian economy.

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Things to Monitor
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Few parts of India’s economy are gaining the attention of the government with a
dire need to create change. Examples of these areas include the lack of initiative
in government, the country’s infrastructure, and the major inequality and poverty
that millions of citizens are facing in India.

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Policy Paralysis
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In the past years, India’s government has been known to start things and not finish
them in many aspects. Some examples include infrastructure, foreign direct
investment, and high interest rates (The IMF Blog, 2014). Last year, India was
supposed to bring in the Walmart Chain through FDI, and the government later
stalled (CNBC, 2014). Manmohan Singh, India’s government leader has acquired
the title of having “policy paralysis”, and he is also known for flip-flopping on
policies after they start (CNBC, 2014). An uncertainty of Economic Policy has fallen
over the country dealing mainly with fiscal and monetary concerns, as well as
regulatory ones (IMF direct 2014). This uncertainty is spilling over in the papers
and this brings up major concern within the citizens of India (IMF Direct, 2014).

!
Crumbling Infrastructure Image
!

India’s track record when it comes to infrastructure is low with only one in four
projects being completed on time (Financial Times: Rupee dive.., 2014). Investors
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THE ECONOMY OF INDIA
worry about the lack of initiative from the “bottlenecks” – as they call it – which
pertain to many of the government officials and policy makers of India (Financial
Times: Rupee dive.., 2013). A big concern when talking about infrastructure in
India deals with land. In India, according to the World Bank’s competitive index, it
takes about 295 days to obtain a lease on public land, and 99 days for private
land. The global average is only 61 days (Financial Times Rupee dive.., 2013). This
sluggish process can easily turn away foreign investors because time is money.

!
Suffering Citizens
!

India is one of the fastest growing economies in the world, and in turn the citizens
are paying the price. There is so much push for development in India that the
government is taking over farmers’ land to use for resources and expansion. This
leaves many farmers without any income, and with many citizens without a supply
of food (Todhunter, 2013). For example, bigger corporations are moving into
agricultural areas and polluting the soil. As a result, the structure for agriculture
has changed and has become so regulated that India faces bad food supply,
health, water, and soil. To highlight the severity of this problem, over 250,000
farmers have committed suicide in India since 1997 as a form of protest
(Todhunter, 2013). This issue is even flowing over into the country’s child mortality
rate and underweight babies. According to UNICEF, 28 percent of the children
born in India between 2006 and 2010 were born underweight, and 48 percent of
children under five years old suffered extreme growth stunting due to malnutrition
(Childfund, 2014). However, there has been some improvement regarding this
issue in recent years thanks to the Child fund and several other organizations. The
Childfund has been in India since 1951 (Childfund, 2014). As of 2008, UNICEF
reported that 88 percent of the population living in rural areas had access to good
drinking water (Childfund, 2014). The Dream Bike Campaign was also created for
the cause of promoting education for children all across India.

!
Income Inequality
!

India has never been so plagued with inequality than it is today. It is estimated that
almost 42 percent of the population is living under the poverty line as of this year
according to the OECD (Childfund, 2014). In 2011, the richest 10 percent of the
population was making almost 12 times as much money as the poorest 10 percent,
as opposed to in 2006 when the gap was only 6 times as much (Childfund, 2014).

!
!
!

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Promising Turnarounds

!

India has implemented some recent initiatives to attract foreign capital and
strengthen the economy (CNBC, 2014). Some could say their efforts are a little
late, as many had written India off, but off-shore investors still see the vast amount
of opportunity in the country (CNBC, 2014). John Luke, chairman of MWV – a U.S.
packaging group that sells pharmaceutical and consumer goods packaging – says
“We’re excited by what we see happening and we’re excited by the longer-term
prospects”(Financial Times: Bright Eyes… 2013). This became obvious after MWV
bought a company in Gujarat and invested millions of dollars into India (Financial
Times: Bright Eyes.. 2013).

!
Foreign Capital/Foreign Direct Investments
!

India used to operate as a closed economy back in the 90’s. At the time tariffs
went above 200 percent and there were also strict restrictions on any foreign
investments, but since then India has loosened its grip. In September 2013, the
Indian Government decided to open up to foreign investment markets such as
retail, aviation, and broadcasting. The government also “cut taxes on overseas
borrowing, and raised the price of fuel” (CNBC, 2014). Quantitative restrictions
have been eliminated on imports and the customs of foreign investments have
settled in numerous sectors (WorldBank, 2014). India has recently signed many
trade agreements with countries, both near and far, in an effort to increase exports
and to continue the growth of the economy. Examples of which include
Bangladesh, China, South Korea, and the United States. Some the these
agreements include the India-Sri Lanka Free Trade Agreement, The
Comprehensive Economic Cooperation Agreement with Singapore, and the IndiaNepal Trade Treaty. There have also been Preferential trade agreements with
Chile, Afghanistan and Mercosur (Worldbank, 2014). The country has made a shift
towards the benefits of consumers when addressing trade and investment policies
protection. In the Foreign trade policy for 2009, it states, “For India to become a
major player in world trade, we have to also facilitate those imports which are
required to stimulate our economy” (Worldbank, 2014).

!
Infrastructure in India
!

India has put up over $1 trillion for spending on infrastructure for the next five
years (Financial Times: Rupee dive.., 2013). This effort for development benefits
companies in India and also becomes a source of attraction for many foreign
investors. In 2013, India created the Cabinet Committee on Investment (CCI) to
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keep investment projects more on task for success. The Project Monitoring Group
was then created to assist in these same efforts (iMF direct, 2014). In January of
2013, the CCI cleared projects with infrastructure that represented about 5
percent of GDP (iMF direct, 2014). Although India has held a long record of
incomplete projects and creating a surplus of unnecessary debt, these programs
can be of great benefit to India, as it helps keep deadlines and create results.
Conclusion

!

India is trying to keep its economy on the fast track, but the government is
overlooking its citizens. This is a major issue flagged by the alarming size of the
population that is suffering today. Wage is high and labor opportunities are low.
Although there are some positive policies that India has implemented to help the
image of infrastructure and improve foreign capital and trade policies, the country
still has a long way to go. If India plans to sustain the economy close to the level it
was even at last year, the government needs to continue creating strong and
lasting relationships for trade, and address the internal issues the country is
facing, while also balancing its many goals in infrastructure.

!
India’s Roadblocks and Challenges
!
Corruption
!
Government Corruption
!

As of 2014, India is currently going through an election period. “Unfortunately,
Indian elections tend to be riddled with corruption as powerful government
positions are both held in high status and with little legal oversight from an article
titled “Fifth of India’s election candidates face criminal charges, says study” (The
Guardian). This is saying that corruption is a problem for India. How can a
government run smoothly when their own candidates that could possibly be
elected have a criminal record? “Almost a fifth of candidates in India’s upcoming
elections are facing criminal charges including rape, murder and extortion” (The
Guardian). It’s not like these candidates were accused of a petty crime or minor
offense, they were accused of murder and rape, very serious crimes. The authority
of a leader that has murder and rape attached to them can’t be very trustworthy
while in office. The research looked at records of 1,492 candidates contesting
more than 120 seats in India’s 545-seat lower house (The Guardian). This raises
many questions about the “criminalization” of politics in the worlds largest

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democracy” (The Guardian). The current Congress's tenure has been marked by
high-profile cases of suspected or proven corruption (BBC).

!

Approximately 815 million voters will be eligible to vote for the upcoming election
(The Guardian). This election period will focus on corruption, unemployment,
raising inflation, a faltering economy, womens safety and national security as just
some key issues for India (BBC). “The election phased over six weeks to allow
successive redeployment of security personnel- has been described by analysts
as the most important in decades” (The Guardian). Professor Jaydeep Chhokar of
the association for Democratic Reforms said in the article “you can’t have
lawbreakers making laws for society” (The Guardian). One government official
states “heinous crimes are one thing, but a lot of the other charges are made just
to defame someone. There should at least be a convection in a higher court
before ending someone’s career” (The Guardian). A problem with the Indian
people according to Milan Vaishnav who is a specialist in Indian politics says that
voters often support politicians with criminal records, rather than shunning them
(The Guardian). He also said “there are a lot of issues of corruption but that is
distinct from criminality. Criminals may be broadly negative in terms of general
society welfare but for one section of society can be very positive” (The Guardian).
I would not want to see my country driven by corruption. It is safe to assume that it
would not run very smoothly like India. They are facing a lot of corruption and it
needs to be fixed to give the Indian people a better place to live.

!
Economic Corruption
!

Another recent article entitled “A Bad Boom” looked at the serious issues of
fighting economic corruption (The Economist). A massive scam was uncovered
with hundreds of officials and politicians in the state of Karnataka in the pockets of
an illegal mining mafia (The Economist). Over five years the illegal mafia has made
profits of 2 billion or more shipping illegal iron ore to China (The Economist).” This
is not the first time India has heard of a scandal like this. “A lot of transactions that
put public resources into private hands – allocations of radio spectrum, for
example, credit from state banks – have come under suspicion (The Economist).”

!

“Before he became boss of the central bank in India last year, Raghuram Rajan
worried publicity in India could start looking like an oligarchy along the lines seen
in Russia: “too many people have got too rich based on their proximity to the
government” (The Economist). “In a recent poll 96% of Indians said corruption was
holding their county back, and 92% thought it has got worse in the past five years”
(The Economist). A senior figure in the Congress party worries that the law for
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THE ECONOMY OF INDIA
common people does not apply to the political princelings and industrials (The
Economist). The relationship between companies and state is broken (The
Economist). India needs the private sector to build roads, factories and cities but
the relationship is not there (The Economist). “Corruption produces bad decisions;
concern over corruption produces indecision” (The Economist). Private firms have
been faced with the corruption. Private firms have been forced to cut investments
(The Economist). “A fall in investment from 17% of GDP in 2007 to 11% in 2011 is one
reason why GDP growth had slumped to 5%, the lowest level for a decade” (The
Economist). It seems like in an effort to make things better; it has only made things
worse. “India’s cranky legal system, its overlapping investigative agencies and it
raucous media have meant that responses to the problem may have done as
much to paralyses business in general as the punish wrongdoers” (The
Economist).

!
Health Issues - Disease
!

Another problem in India is disease. In a recent article entitled “India may be free
of polio- but the disease hasn’t be eradicated yet” it explains that India is poliofree (The Guardian). A regional certification commission is expected to declare the
World Health Organization south-east Asia region polio-free (The Guardian). This
is a historic achievement for India (The Guardian). Last January India completed
three full years without a new case of polio (The Guardian). This means the
disease had finally stopped within its borders (The Guardian).

!

Other diseases that are causing problems in India are Tuberculosis and HIV.
“Every fifth new tuberculosis case in the world lives in the Indian
subcontinent” (healthissuesindia). “India has been less severely affected by the
HIV epidemic than many other countries, despite early predictions of disaster, but
still has almost three million people living with the virus” (healthissuesindia).

!
Education
!

The human capital of India is not very good and needs to be improved. About 4
percent of children that live in India never start school (Teach For India). “58%
don’t complete primary schools” (Teach For India). “90% don’t complete school
and only 10% of children go on to college” (Teach For India). With children not
going to school at all or not completing school in India, it lowers the amount of
skilled workers in India and skills needed to accumulate for people in the labor
force. This can also be considered under technological knowledge. With Indian

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people not having a good education, they cannot have a good understanding of
technology and technological advances.

!
Natural Resources
!

India has many rich natural resources. “The country produces as many as 87
minerals including fuel, metallic, non-metallic, and atomic minerals” (Business
Today). India is very rich in coal and investors want to expand their business to
India. Investors say that the Indian mining environment is scaring them away
(Business Today). “There have been problems in acquiring land for new mines and
delays in government approvals” (Business Today). “Increased judicial scrutiny
following corruption scandals in the allotment of mining blocks and environmental
degradation caused by illegal mining have made matters worse” (Business Today).
Again, we see the aspect of corruption. Anil Agarwal chairman of Vedanta Group
says “developing our natural resources and the resultant growth of manufacturing
can generate enough funds for infrastructure, alleviate poverty and create
employment” (Business Today). Poverty, unemployment and bad infrastructure are
major problems in India today.

!
U.S Connections with India
!

India has a strong relationship with the United States. The United States are
working on a lot of projects with India. “India –U.S bilateral relations have
developed into a global strategic partnership, based on increasing convergence
of interests on bilateral, regional, and global issues” (Indian Embassy). “President
Obama characterized India-U.S relationship as one of the defining partnerships of
the 21 century” (Indian Embassy). India is a strong resource to the United States as
well. President Obama should utilize all that India has to offer. “The bilateral
cooperation is now broad-based and multi-sectoral, covering trades and
investment, defense and security, education, science and technology, cyber
security, high-technology, civil nuclear energy, space technology and applications,
clean energy, environment, agriculture and health” (Indian Embassy). All of these
aspects listed above are important but the one that needs the most attention in
particular would be India’s trade.

!
Trade
!

The trade between India and the United States is very strong. “Indian exports
accounted for USD 35.96 billion during the period January-October 2013,
registering a growth rate of 4.11% over the same period last year and the growth
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THE ECONOMY OF INDIA
was faster than the overall growth in bilateral trade in goods of 3.4%, enabling
India to maintain a healthy surplus (Indian Embassy).” In 2011 the total Indian
exports to the United States was 26.60 billion (Indian Embassy). The United States
exports to India accounted for 27.62 billion (Indian Embassy). Total trade services
in 2011 were 54.42 billion which has a growth rate of 16.12% (Indian Embassy).
There was a substantial growth in 2011, making trade for both India and the United
States better.

!

A Ministerial Trade Policy Forum and a Ministerial level Economic and Financial
Partnership was put in place to strengthen the bilateral engagement with the trade
and economic issues (Indian Embassy). Also as of 2009, the two governments
issued a joint statement to strengthen their bilateral agreement (US Embassy).
“The two governments outlined a Strategic Dialogue that will focus on five
principal pillars: strategic cooperation; energy and climate change; education and
development; economics, trade and agriculture; science and technology, health
and innovation” (US Embassy). The development of two way trading listed above
have developed innovation, economic growth, and job creation for both nations
(US Embassy). The last part of job creation is very important in both countries
today considering their high unemployment rates.

!
Problems With Trade
!

With what is going on in Russia right now, it does have the United States
concerned and it could be affecting trade. India is supporting Russia (The
Diplomat). “As the largest democracy in the world, a burgeoning capitalist
economy and an increasingly important military power, India has been viewed as a
counterweight to China’s rise and an anchor of the U.S.-led international
order” (The Diplomat). Through the collapse of the Soviet Union India and Russia
maintain deep cooperation on political, military and economic dimensions” (The
Diplomat). Russian trade with India rivals the latter’s trade with the United States,
and Indian companies have made huge investments in Russian energy firms and
energy projects in the Bay of Bengal” (The Diplomat). Rather than using an
American energy firm, India decides to use Russia.

!

From an India Today article, it talks about how the people of India think that trade
between India and the US is not going very good. The circulation of trade will
depend on the US, as the responsibility for the malaise affecting out ties rest
mainly on its shoulders (India Today). The US misjudged their current US
ambassador to India. “A more serious political misjudgment by the US for which

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THE ECONOMY OF INDIA
the ambassador cannot escape blame is the failure to mend political fences with
Narendra Modi in a timely manner” (India Today).

!

Key Question #1: What is the level of economic risk for conducting business in
this country?

!

India is an economy that has been seen as a power house in terms of growth
since 2008, but there are many issues facing India that make us believe that the
growth rate will not sustain their economy for long. Through our research we rate
India’s Economy at a moderate to high level of risk.

!

The Political System in India is very corrupt with many politicians obtaining a
criminal record, and the citizens labeling them as “bottlenecks” meaning not much
is being accomplished. The relationship between companies and the government
is very disconnected and has led to decline in the amount of business done
between the two. Having the whole country, and the world for that matter, openly
knowing that conducting business in India is at risk for corruption and backhanded
strategy forces international businesses to be hesitant in conducting business
there. Furthermore, Indians are more willing to vote a politician that has a criminal
record into office versus a “clean” one. This raises more issues that go deeper
than politics, but raises issues of ethics of the people.

!

The ability to do business in India is another issue. For a decades India had cut
itself off from the rest of the world in order to regain stability and build the county
up without any risk. This worked but it closed India off from international business.
India has of course opened up to doing business with the world again, but the
government still creates many challenges like high tariff rates, local content
requirements, and many other red tap strategies that push away foreign
investment.

!

The labor force in India is very poor, and this has created a lag in productivity. A
major issue within the labor force is the lack of skills and specialization to do high
level jobs that will promote economic growth; one of these sectors is in
Infrastructure. India is trying to boost their infrastructure industry to stimulate the
economy but without skilled labor, the work is falling behind. This is another
reason for the slowdown in GDP growth.

!

A major drawback in terms or natural resources is that because of corruption
within the government in India, natural resources are being hoarded by
government owned businesses and not being utilized with in the country. This
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THE ECONOMY OF INDIA
could be creating so many jobs, and promoting growth, but instead is creating a
disconnect, and hindering job opportunities as well as underutilizing the natural
resources of India.

!

Concerning issues such as the corruption in politics, an unskilled labor force,
suffering citizens as well as the slow implementation of new policies bring up the
risk level of the economy in India from between moderate to relatively high.

!

Key Question #2: What Fiscal & Monetary Policies should India pursue to
promote economic growth and development?

!
Monetary Policy
!

When deciding what would be best for India in terms of Monetary Policy, we
struggled at first. The reason being is when a country is deciding whether to look
at shrinking or expanding the money supply, you typically look at two things:
Inflation and the Unemployment rate. If Inflation is high, the government should
shrink the money supply to bring inflation down. When Unemployment is high, the
government will normally expand the money supply to promote spending, and
investment. Most countries have only one of these issues at a high level, but in
India, both are extremely high. This made us feel that no matter which we choose
the other is going to suffer. Our only solution was to go with the one that had a
higher rate, and focus our efforts towards bringing that one down, which ends up
being the Unemployment rate which is currently resting at around 14 percent (CIA,
2014). For India, we decided the government will expand the money supply to
help the more than 40 percent of India’s citizens living under the poverty line
(Childfund, 2014). The goal is with more money circulating the country, more
people will be able to supply for themselves, and be able to better their lives, and
get a job. Also with more money circulating, businesses are more likely to hire,
and invest back into the community which will also lower the unemployment rate.

!
Fiscal Policy
!

In economics, a country’s fiscal policy refers to the specific use of government
spending for the development of the country’s ultimate well-being. In this section,
India’s fiscal policy is recognized and compared to what we believe is ideal for the
current state of the nation. The actual fiscal policy of India, portrayed in Figure 9 of
the next page, is translated from indicators in the WorldBank. The recommended
fiscal policy, based on the assessed needs of India from our studies, can be seen
in Figure 10 on page 26.
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THE ECONOMY OF INDIA

!
Health
!

We chose to decrease the amount of
spending on India’s Health Sector
because it did not come across as a
major issue through our findings in
terms of the massive population. Any
issues that arose could be fixed through
other solutions besides the actual
health system. Examples of such fell
within the lines of sanitation, which was
covered earlier under India’s Quality of
Life.

!
Education
!

Breakdown of India’s Fiscal Policy in 2011

Health
28%

Education
23%

Research & Dev.
8%
Other
22%

Defense
19%

Figure 9 - Data retrieved April 6, 2014 from WorldBank

We wanted to raise the amount of
spending on Education for a few reasons. One of the main reasons is because of
the lack of skills in labor. If there is more money put into primary and secondary
schooling, especially in the poorer areas of the country, our hope is this will
increase individuals drive to continue their education. This will benefit the country
with more educated and skilled workers, thus increasing overall productivity.

!
Research & Development
!

We were extremely surprised by how low this section was maybe because of the
fact the India closed themselves off from the rest of the world for so long.
Spending on research and development is the best way for a country to gain
innovation and a competitive edge in areas other than technology, so we
substantially raised the percentage. Some of the areas we felt specifically needed
more attention in research and development would be labor training, and
efficiency in business, as well as sanitation systems, and health.

!
Industry & Employment
!

One of the main reasons that we wanted to emphasize this sector was the
unskilled labor force in the country due to the lack of proper training available in
most industries. With more money going into this sector, availability for more
important training within the workforce would be more feasible for businesses
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THE ECONOMY OF INDIA
which lead to a significant
increase in productivity within
India’s economy.

!
Infrastructure
!

Suggested Breakdown of India’s Fiscal Policy 2015

Infastructure
3%

Health
30%

When deciding what to
Transportation
Research & Dev.
2%
change or add in terms of
11%
government spending we
Other
thought it was very important
4%
Education
to create a specific
25%
Defense
infrastructure sector. We raised
18%
the infrastructure budget to 3
percent in hopes of having
Industry & Employment
6%
more money available; there
will be less pressure on
Figure 10 - Numerical values recommended
budget, and more emphasis
on completing the numerous
upcoming projects. The result
of an increase in infrastructure will create many attractive opportunities for India
through foreign investment, as well as through businesses within the country
looking for room to expand, thus leading to a greater circulation of money. Local
investment groups are looking at helping with infrastructure through the
development of natural resources. This relates to some of the issues of the
country dealing with disconnect between the government withholding natural
resources to businesses. If this can be resolved, the benefits will spill over into the
infrastructure sector.

!
Transportation
!

The reason we created a separate section for transportation is because of the
extremely large population of India, and the fact that transportation wears down
so quickly. Under this sector we thought trade would be interesting to touch on
because it could directly affect transportation through how India ships their
exports, and how they distribute those goods throughout the country, as well as
the efficiency of both. With many small communities lacking good roads, and
infrastructure transportation measures need to be addressed so that people can
receive goods and services. Currently India does and an extreme of amount of
trade with the US and China, and this is done mostly by plane or overseas by ship.
If India can invest in the efficiency of these approaches to trade, as well as the
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THE ECONOMY OF INDIA
distribution of the goods once in the hands of the country, the citizens will benefit
through better goods, and services, in a quicker fashion. Also the economy will
benefit because trade can be done faster and more efficiently.

!

India’s government spending is currently stipulated with a lot of emphasis on
sectors such as education, health and defense. It felt necessary to become more
specific on sectors while improving health and education to address growing
concerns within the country such as suffering citizens and an unskilled labor force.
Improvements on health and sanitation would greatly alleviate the country’s issues
specifically with HIV and other easily contractable diseases seeing that over 42
percent of the country’s population live under the poverty line (Childfund, 2014).
Added efforts within the Research and Development sector and the infrastructure
of the country would not only significantly affect the overall development of India,
but would also attract foreign investors. Such improvements combined with extra
funding for proper training applicable to the workforce which in turn would lead to
a significant increase in the country’s overall productivity and reflects a stronger
economy.

!
Conclusion
!

In conclusion to this report, India is a country of boundless potential. It’s high
population and vast amount of natural resources can be an important source of
the nation’s economical growth and success with a mix between timely and
proper implementation of the right policies. As of now, the country’s economic risk
is between medium to relatively high. India will have the capacity to take its proper
place as one of the world’s economic powers after it addresses its major issues
such as corruption, high unemployment and inflation rates, lack of health and
sanitation facilities, and its large unskilled labor force.

!

The second part of this conclusion pertains to our deepest gratitude and highest
acknowledgment for our instructor Elizabeth Manser-Payne. Her persistent and
perpetual guidance for India’s representative team (along with the other teams
representing countries such as Germany, Japan, Mexico, and Russia) was crucial
to both the development and growth of each respective team’s reports. Not only
has her work and time been beneficial to the reports, but her constant chiding and
strict policies have molded her students into fine individuals ready to take on what
is thrown in the workforce. 


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