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India: An upward battle

Although the remnants of India’s centrally planned economic system can still be witnessed to this day, huge strides in economic liberalization including measures such as industrial de-regulation, privatisation of enterprises and the laxation of policies concerning foreign investment, since the 1990s, have helped kick start the economy. With the second largest population in the world and massive land reserves India hosts a wide array of goods extracted from industrial production and boasts internationally used services.

 

Despite the fact that almost 50% the work force is in agriculture, the service sector is the main attributer to India’s economic growth. Not only has India’s large percentage of English educated population allowed them to become a chief exporter in informatics technology services but also allowed them to become one of the primary business havens for outsourcing. However growth has been anything but steady; in 2011 economic development began declining because of augmenting inflation/interest rates, thus weakening investor confidence. This was due to an apparent lack in commitment to the future of India’s economy on the part of the Government. Fortunately nearing the end of 2012 economic activity picked up as additional reforms and deficit reduction measures were announced, these opened the doors for foreign participation and direct investment.

India’s current situation may seem dire, with this fiscal year’s GDP growth reporting at below 5%, a decade low minimum; high corporate debt and recent surges in inflation coupled with the burden being plagued with the memory of: minimal GDP growth, double digit inflation rates, threats from rating agencies, a weakening rupee, lack of political reform and corruption. In light of all these deterrents the new government spear headed by Narendra Modi has been able to resolve many of these issues. Modi has since eased restriction on foreign investment in key sectors and has pushed up interest rates in order to steady the rupee and stabiles inflation.

Prior to his position as prime minister he was the chief minister of Gujarat, a state with a population greater than that of Spain, he has since been able to cut red tape in many sectors and has tripled their GDP. Under Modi’s leadership the state now produces 25% of Indian exports while accounting for barely 5% of its population. His past experience is indicative of his great potential, testament that under the guidance of Modi, India should be capable of turning its economy around.

Foreign Relations

There is often talk of an economic race between China and India, though most are supporters of the Chinese titan their victory might not be set it stone just quite yet, but not for the obvious reasons. It should be noted that since 1962 there has been great tension between these two barons due to territorial disputes that caused India to endure a humiliating defeat.

By quickly glancing into the current affairs over in China, it is noticeable that recent plans of credit tightening will take longer than expected; moreover the effect of the Chinese addressing corruption, on retail consumption, should not be dismissed. Currently it appears as though the two nations might be putting their differences aside in an attempt to commence integrated cooperation. Astonishingly there has been a recent surge in China – India relations as Narendra Modi welcomed Xi Jingping to Ahmedabad to initiate ‘political negotiations’. Already Modi has promised to remove the 49% foreign ownership cap on the rail way system, clearly indicating that Chinese investment would be much appreciated. Though nothing is clear as of now, this may be the start of a mutually beneficial relationship, meaning that they would see each other as less of competitors but more as partners.

A matter that remains of great importance for China are the tight ties between Japan and India, fearing that the U.S. and Japan may be making an effort to wrench India out of the hands of China in an attempt to subdue their influence. How and who India chooses to dedicate its allegiances to will be based on their ability to continue exercising diplomatic tranquility, the results of which will have critical economic implications on a greater than national scale.

Economic Growth Factors

India’s economic growth is often over looked beneath the massive shadows cast by the likes of its Asian neighbors, China and Singapore. Therefore the question that many modern day economists ask themselves is: Can India outrun its autarkic past and keep up with the other Asian economic power houses in time to still remain relevant as a key economy?

Cheap and efficient labour, a population with one in three English speakers, and generally low living conditions all attribute to factors that attract foreign direct investment a primary driver of economic development. None the less with low levels of bureaucratic institutionalization investors will often think twice before pumping money into what could potentially be an all-consuming black hole concealed in thick layers of red tape.

Though not having the most stable of pasts, compared to other emerging markets, the future outlook for India seems anything but grim. Sustainable long term growth seems likely with an emerging young population, plump savings, decent investment rates and an ever increasing integration in the international world of trade, granted they manage to suppress many of the notorious issues that plague their accountability. These include but are not limited to wide spread poverty, un-equal power distribution, weak laws concerning intellectual property rights as well as infamously abysmal transportation and infrastructure. It is clear that a lot of pressure lies on the shoulders of Narendra Modi to restore investor confidence, tackle the many of social issues and bring India’s economic growth up to par with the other emerging countries and its partners in the BRIC.

Recent socio-political and economic turmoil, though by no means irrelevant, should not be overly weighted with importance because based on precedence it appears as though India has managed to fall into a small cycle of economic crisis almost every ten years. In 1991 the well-known balance of payment crisis was remedied by all out market deregulation, which was consequently the catalyst for vast economic growth during the preceding decade. Similarly a comparable crisis re-occurred by the year 2000 and yet again deregulation as well as privatization followed. This is to say that although obviously having a highly volatile economy, by the law that past precedence dictates future performance, India is likely to bounce back.