How India achieved its economic growth

Term Paper 2015 37 Pages

Business economics - Economic and Social History


Table of Contents







Special Economic Zones




The following report examines India’s path towards becoming an emerging economy. One question arises when dealing with India’s economy: How has India managed to become of the fastest growing economies worldwide with 29.8 percent of its population still living below the poverty line (CIA, 2014) and what leads experts such as the Centre for Economics and Business Research (CEBR) to the prediction that India will become the third largest economy by 2028 (Corfe, Davis, and McWilliams, 2013)? To answer said question the author will pick out key political, economic and technological factors that have had indirect impacts on India’s growth and then drawing a conclusion using statistical evidence in order to confirm how these factors have contributed to economic success. To give some insights on the predictions of the CEBR the author will then give a few recommendations that present possible pathways of India’s future industries.

Globalization as a starting point of economic growth

Before analyzing essential factors that have led India to becoming an emerging economy one needs to define a relevant time period with a specific starting point in order to identify the most significant factors that have enabled India to become an emerging economy. The timeframe of this report will be set from the beginning of the year 2000 and will include the most recent data. The findings are centered on the principle of Globalization, which makes up the first major step that has enabled India to become an emerging economy. Czinkota and Ronkainen define Globalization as follows: It “...reflects a business orientation based on the belief that the world is becoming more homogenous and that distinctions between national markets are not only fading but, for some products, will eventually disappear” (Minocha, Rees, and Wall, 2010: p. 14)). This is particularly insightful concerning the IT sector of India, which largely depends on the concept of offshoring. The basis for the economic expansion of India was laid out through the ratification of the WTO treaty in 1995 (WTO, 200?b), which aided India in gaining broader access to global markets. Furthermore it is important to note that: “About two thirds of the WTO’s around 150 members are developing countries. They play an increasingly important and active role in the WTO because of their numbers, because they are becoming more important in the global economy, and because they increasingly look to trade as a vital tool in their development efforts. Developing countries are a highly diverse group often with very different views and concerns.” (WTO 200?a) It must be highlighted that the existence of the WTO represents a neutral authority that regulates the: “[…] different views and concerns.” (WTO, 200?a) and standardizes trades between its approximately 150 members while providing a division between developed and developing countries, when dealing with trade concessions. Furthermore it must be considered that the majority of the WTO is made up of developing countries. What comes to mind is the term BRIC or BRICS, a term coined by the Economist Jim O’Neill, then head of Global Economics, Commodities and Strategy Research at Goldman Sachs, in 2001. BRIC consists of Brazil, Russia, India and China, which represent four emerging economies that are predicted to have a major economic impact following the invention of the term in 2001 (O’Neill, 2001).

Political and economic factors

There are several factors that have led to the development of India into an emerging economy. In the following chapter some of the key political and economic factors will be analyzed that have aided India’s economic growth. In order to gain a broader perspective on the topic it is necessary to point out the political system of India. Political systems and a country’s constitution influence the market and therefore the attractiveness to trade within that particular market. The republic of India has been an independent democracy since 15 of August 1947. The constitution came into effect in January of 1950 and is the foundation of the national legal system. It is important to underline the influence of the public sector on the private sector. Regulations such as the License Raj (Appendix B) although being initially successful have discouraged foreign investment and the establishment of a free market. This has been changed through a number of economic reforms known as the reforms of the 1990s and further changes of the 2000s. There are countless measures, which have been taken by the Indian Government to decentralize economic power and some significant changes have been picked out in the following chapter.

The PPP (= Public Private Partnership) Model

One example showing the close association of private and public investments is displayed through the PPP or Public Private Partnership model. This type of investment partnership is used extensively for the improvement of national infrastructure. First of all funds for public projects can be extended through the use of private investments and the second accelerator of economic growth is due to the fact that 89.3 percent (as of 2013) of Public Private Partnership Projects are funded by domestic companies and only 10.7 percent are backed by international bidders boosting India’s economy in two ways. That means the investments as a well as the returns stay within the market (PPP in India, 200?a). The Indian Ministry of Finance has identified the main sectors that are funded with the use of Public Private Partnerships and as of 2013, 758 projects with an economic value of 60,580,384,158.89 USD (PPP in India, 200?a) have been officially recorded. The following graph will reveal the distribution by numbers of projects between relevant sectors:

Figure 1: PPP-Projects by Sector

illustration not visible in this excerpt

(Source: PPP in India, 200?)

The Planning Commission of India identifies the: “most significant criteria for a continued growth rate of an economy is rests on the provision of a quality infrastructure.” (PPP in India, 200?b)

More than half of the funded projects to be exact 53.43 percent or 405 projects have been focused on the development of roads. India has the second biggest road network in the world with a total of 4,689,842 km of registered roads as of 2013 (PPP in India, 200?a). The necessity of such a large network is reflected by a number of factors. First of all it needs to be noted that the number of motorized vehicles has been steadily increasing and as of 2012 159,491,000 (Appendix B: number of vehicles) vehicles are officially registered. More importantly roads are the major channel of when it comes to moving passengers or freight in India, as the following comparison with transportation on railways will point out:

Figure 2: Passenger Transportation in Percent

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(Source: Author’s own work based on Government of India data)

Figure 3: Passenger Transportation in Percent

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(Source: Author’s own work based on Government of India data)

Both graphs confirm the increasing importance of road transportation. As of 2012 85.9 percent of passengers were transported on roads that equals to 6351.2 billion passenger kilometers up from 81 per cent or 1831.6 billion passenger kilometers in the year 2000 (Appendix B). Meanwhile railways only account for 1046.5 billion passenger kilometers in 2012 and 430.7 billion passenger kilometers in 2000. Passenger transportation has increased by more than three times whereas railway transportation has only a little more than doubled. Similar findings can be observed when analyzing the freight data leading to a successful representation of the increasing importance of roads while showing a decrease in railway transports.

Five Year Plans

Since 1947 India has set a clear structure for its economic development using the concept of drafting five year plans, which are planned, overseen and implemented by the Planning Commission of India. These reports amongst other factors contain expected growth rates, plans for public investments and analyses of deficits that need to be reduced and also act as a revision of the previous development. The only relevant information for this report are to be found in the Tenth- (2002 to 2007), the Eleventh- (2007 to 2012), and the Twelfth Five Year Plan (2012 to 2017). They are particularly useful for sector and State comparisons and enable the reader to spot regional economic differences as well as presenting some key economic reforms of the 2000s. As a whole the plans serve as background information and act as a guideline for the author. Some specific are listed in the appendix of this report.

The private Sector by industries

Having looked at several political efforts to enable India into becoming an emerging economy one must not forget the private sector itself and what makes it successful. There are several industries that can be mentioned such as services, logistics and telecommunications but there is one in particular, which has a vast economic impact on the country; Agriculture. The industry employs approximately 50 percent (IBEF, 2014a) of the Indian workforce with a GDP share of 18 percent of the total GDP of India (Appendix A: Figure 20). This makes it by far the largest industry by employment and shows that India still heavily relies on its manual labor force.

Though this sounds significant enough it also must be reviewed whether agriculture creates any economic growth, which can be measured by the Crop Production Index:

Figure 4: Crop Production Index

illustration not visible in this excerpt

(Source: Author’s own work based on Worldbank data)

Initially being relatively inefficient compared to the base years of 2004 until 2006, India has picked up its performance steadily, which helps the country achieve more production with less labor and also shows an increasing crop yield currently at 131.2 per cent of the base years’ crop production.



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Anglia Ruskin University – Lord Ashroft International Business School
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Title: How India achieved its economic growth