Unit 4 Macro: Drivers of Economic Growth in India

Identify and explain four factors that have contributed to Indian economic growth in recent years

One arguably major contributor to growth has been the effects of India’s demographics. Since 1980, the proportion of the population who are of working age (15-64 years) has been rising and the dependency ratio (the number of people aged less than 15 or more than 64 as a proportion of total population) has been increasing. As a result, India has had at its disposal a working population that has been getting larger relative to the rest of the population, meaning a larger workforce without the associated increased burden of dependents.

This burden can come in the form of increased welfare payments in developed countries, but in India, it is more likely to result in increased poverty as a result of these groups receiving insufficient support, and decreased tax revenue relative to population size. Instead, India has been able to reap the demographic dividends of having a large and strong working force (the country’s median age is 26.2 years), resulting in a potential addition of up to two percentage points to growth over the next two decades. This has come as a result of falling fertility rates, meaning fewer children (who, particularly in a developing country, are the main group of dependents) and a larger workforce. If the trend continues, India’s dependency ratio is likely to rise and the country will be faced with an ageing population, but the demographic benefits are predicted to increase until at least 2050 (according to the IMF).

Since 1976, India has only experienced negative growth once (-5%, 1979). In 2009, the year of the global recession in which world output fell by 2% and world trade fell by 12%, India still grew in real terms by almost 7%. This high level of stability is both a symptom and a cause of India’s economic strength. As of 2011, India’s government debt was estimated at 52% of GDP. Though high, this is lower than a large number of developed economies and is a fall over previous levels of debt – it was as high as 82% of GDP in 2003. India’s fiscal situation, combined with a relatively strong and rising level of domestic consumption, suggest it is well-placed to weather external shocks. This makes the country a much more attractive venue for investment, as it provides a much greater level of economic stability as well as an increased likelihood of return.

Another factor that has contributed to economic growth in India, according to Jim O’Neill from Goldman Sachs, is its credible legal system combined with its many English language speakers. This has allowed many home-grown firms and companies in India to sprout up as they have access to a strong legal and patent system that other developing economies do not. These legal systems allow entrepreneurs in India to feel secure when developing their own products or brand identities. Combined with the widespread use of the English language in India, acting as a means to negotiate deals and seek investment across the country and overseas, this has led to a surge in the number of small businesses in India, one of the fundamental necessities of a growing economy.

One example of this is Northgate Technologies Limited, a fast-growing small business in India. Its major strengths are in infrastructure and internet services. Through the use of India’s legal and patenting systems, its sales have been able to post a three-year average growth rate of a staggering 102.1%, typifying the strong growth environment India provides.

The final factor that has helped Indian economic growth significantly is the recent surge in exports and the consequent rebalancing in this market. Since the year 2000 in particular, exports from India have skyrocketed. Its share of world exports has risen from a lowly 0.6% in 1993 to over 1.5% only 17 years later (in 2010), representing an increase of more than 150%. In addition to this, in just the first few months of the 2011-12 fiscal year alone, exports grew by a staggering 50%. In fact, such has been the success in this area that the Congress Party-led government believes that in three years after the beginning of 2011 its export market can more than double to £500 billion (from £246 billion). In addition to the surge in the export market, India has been rebalancing its trade towards Asia, in particular to China, with whom it has had a turbulent past. By 2011 exports to the US only accounted for 13% of all its exports (compared with 21% in 2000).

Currently over two-thirds of Indian exports now go to markets other than the US and the EU (mainly to African and Asian countries). This has enabled India’s growth to remain strong and stable over the years and is a significant factor in this area

Authors: Mark Austen and Max Goswami-Myerscough

Exports from India