Factors That Have Enabled India to Become an Emerging Economy - Essay Example

Factors that have enabled India to become an emerging economy Table of Contents INTRODUCTION: 3 DIFFERENT ECONOMIC, POLITICAL, SOCIAL, AND TECHNOLOGICAL FACTORS CONTRIBUTED TOWARDS THE GROWTH OF INDIAN ECONOMY: 4 Economic Factors: 5 Domestic consumptions 5 Currency Exchange Rate and Rise of investments 6 Shares in global trade (exports) 6 Increase in productivity (labour and capital) 9 Agriculture sector as a key player of the economic growth of India 9 Political and Social Factors: 9 Foreign collaboration 10 Special focus on health and education 10 Political liberalisation and Liberalisation of Foreign Direct Investment Policy of the Country 10 Confining monopolies in different sectors 11 Technological Factors: 11 Energy (requirement) security and growth 12 Technological Advancements, Scientific Research, and Innovations 13 IT, BPO, and KPO Industry 17 RECOMMENDATION FOR INDIA IN ORDER TO MAINTAIN (SUSTAIN) ECONOMIC GROWTH: 18 Political Conflicts to Be Resolved: 18 Air Transport Industry: 18 Muzzling Corruption: 19 Collaboration with China 19 Education Services: 20 Developing Infrastructure and Switching Towards Alternative Sources of Energy: 20 Proper Utilisation of Ports: 20 Capitalise On Future Workforce: 21 List of References 22 Appendix 25 INTRODUCTION: The increasing competition and changes in the global marketplace have resulted in forcing the organisations to come up with new and innovative methods for increasing the market growth and share. Increasing globalisation and internationalisation have resulted in providing these organisations with an option to expand in international markets. On the other hand different countries and international markets are trying to attract the organisations and foreign investment with the help of favourable policies and factors in order to improve the overall economic condition of the country. India is eyeing to become one of the powerful economies of the world, as it can be seen from recent past that Indian economy is showing rapid growth and is amongst the top growing economies of the world at present. India being the tenth largest economy in terms of nominal GDP and is amongst the top three (third largest) economy with respect to purchasing power parity (PPP) (D&B, 2012). The main reason behind this growth comes from various alterations and transformations made in economic, social and political practices of the country or in simple words by adopting reforms. This have lead towards creating a situation that country which was few decades ago under the list of under developing countries is amongst the top powerful economies of the world. Meanwhile at present according to the economic survey of 2011-2012, Indian GDP showed a positive growth and is amongst the top three economies of the world that have shown significant growth over a recent past in terms of GDP (Government of India, 2012). Figure 1: (Source: Government of India, 2012). However given below are some of the important factors that are playing important role in the growth of the Indian economy. DIFFERENT ECONOMIC, POLITICAL, SOCIAL, AND TECHNOLOGICAL FACTORS CONTRIBUTED TOWARDS THE GROWTH OF INDIAN ECONOMY: India has been able to grow and improve its economy by attracting more and more international business and organisations. The country is striving hard to provide the international investors with feasible conditions in order to increase the Foreign Direct Investment in the country. The economic, political, social, and technological factors all have been shaped in such a manner that more and more international organisations are investing in the country. The economic, political, and technological factors of India are attractive for any method of internationalisation including; export based, non equity based, and equity based methods for internalisation (Wall, Minocha, and Rees, 2010). Some of these factors have been discussed below: Economic Factors: In order to make sure that more and more foreign direct investment is attracted towards the country, it is important to provide the investors with the favourable economic environment. The economic factors are directly linked with the business progress and development (Wall, Minocha, and Rees, 2010). Some of the economic factors which have enabled India to classify as emerging economic are as follow: Domestic consumptions The first and foremost factor that is behind the growth of Indian economy is the mass demand of goods and services in the local market or national market. As India enjoys the luxury of having huge local market therefore the growth is definite in this regard. An average annual growth of 6.3% is recorded in the consumption and expenditures of the national economy in the past few years. Furthermore since economic growth is related with the growth of the people in many ways therefore demands of products also increased (Chidambaram, 2007). This in turn has resulted in attracting more exports into the country along with more international companies establishing their operations in the regions in order to capitalise on the basis of the increasing domestic consumption (Wall, Minocha, and Rees, 2010). Currency Exchange Rate and Rise of investments The currency exchange has an important role to play in influencing the economic growth of the country. The currency of India has remained very much stable over the last few years and this has helped the country in attracting more investors around the world. Meanwhile it is clear that India is able to engage more foreign direct investments because of stable currency exchange rate, their values are showing continuous growth; for instance the foreign direct investments according to world bank database for India are 25,482,651,962, 43,406,277,076 35,595,861,689 and 24,159,180,720 (in US dollars) for the years 2007, 2008, 2009 and 2010 (World Bank, 2012). Shares in global trade (exports) Export of various commodities and services are also integral part of Indian economy. For instance the exports of services has shown decline around the world because of the crisis. However Indian economy managed to increase its shares of services exports by 3.3%, this increase are mainly because of information technology (IT) services (Government of India, 2012). Figure 2: (Source: Government of India, 2012). Moreover in terms of imports and exports of different financial services, India again holds its position and is amongst the top ten financial service importer and exporters of the world. As these services play vital role in the development of the economy (see figure 3). Figure 3: (Source: Government of India, 2012). However overall exports of goods and services of Indian economy also showed increase, as the value of GDP with respect to exports of goods and services which was 7.1% in 1992 enhanced and attained the value of 21.5 in 2010 (Government of India, 2012) (see figure 4): Figure 4: (Source: Government of India, 2012) India is enjoying rapid growth in the exports in recent years as shown in the figure below: Figure 5: (Source: index mundi, 2011). The detailed figure shown in the appendix reflects the list of exports with respect to different industries and the amount of value generated through these exports in US dollars (index mundi, 2011) (See Appendix): Increase in productivity (labour and capital) According to the IMF (2004), India showed large amount of productive growth by making changes and alterations in the reforms. However Bosworth, Collins, and Virmani (2006) (the relatively new study) testified that 1.3 % growth was recorded annually in terms of output per worker from 1960s-80s. Moreover in the total factor productivity regard the value remained zero. However from 1980s to 2004 3.8% increase was shown in average output per worker likewise for the same years total factor productivity also showed increase by 2% (Chidambaram, 2007). Agriculture sector as a key player of the economic growth of India Agriculture sector is playing key role in the development of the Indian economy. As majority of people are directly or indirectly associated with this sector. However India is amongst the top three in terms of agriculture productions (output). According to stats of World Bank, 17.5% of the total GDP was generated from agriculture sector in 2009, and in terms of workforce or labour force agriculture sector is responsible for providing or catering 50% of the total workforce working in India (Economy watch content, 2010). Political and Social Factors: Apart from the favourable economic environment, it is also important that the political and social factors are also conducive for the international investors. In this regard the most important is that of the government. The government should come up with friendly policies and regulations in order to make sure that more and more international investors are attracted towards the region (Wall, Minocha, and Rees, 2010). Some of the political and social factors which have helped India in becoming emerging economy are as follow: Foreign collaboration Foreign collaboration is another important factor that has resulted in creating growth of Indian economy. For instance if a business is seeking aid and assistance from foreign organisations, it is likely to place public sector in ideal position. As public sector guarantee in terms of returning the loan will be crucial because of the involvement of the country’s name. Moreover creative ideas and different perspective regarding business can be achieved through collaboration. This ultimately results in bettering the economy in so many different aspects (Deloitte, 2012). Special focus on health and education Another reason for economic development of India is related to health and education expenditures. Serious growths were shown in the government’s budget allocation for these departments. For instance for the year 2007-08 the health budget which was previously RS 70 billion was raised to 143 billion. Likewise education budget was also enhanced and allocation was done. To be precise RS 286 billion were allocated for this sector (Chidambaram, 2007). Political liberalisation and Liberalisation of Foreign Direct Investment Policy of the Country Another important factor for economic growth of India is political liberalisation. Previously Indian government was showing reluctant behaviour in terms of relaxing their policies and allowing private sectors and foreign investors to participate in the growth. However in 1990s various important changes were made in the government’s control (regulations), more specifically policies were revised for the foreign investments category. Various relaxations were allocated for private investments, former restrictions were limited. As a result enormous foreign and domestic investments circulated since then. Apart from this the liberalisation of the foreign direct investment policy is also contributing towards the economic growth of the country (Patel, Sethi, Bartz, and Israel, 2012). Confining monopolies in different sectors Another important reason for economic growth of India is its ability to control or end the monopoly of various different sectors. For instance the aviation sector and the telecommunication sector are the two major sectors which were previously facing monopoly. Because of confining monopoly and providing opportunities for new companies to enter in the market, has resulted in bringing more economic growth. Because of this an average of 5 million users each month are joining the mobile phone club. Likewise revolution was also seen in the air transport industry. Because of the competition and open markets new entrants came into the field. Cities that were previously not targeted by the air aviation industry are now targeted. As various flight operations are carried out reaching to far distant places of India. Almost 30.5 % growth was seen in the domestic flights traffic within the spam of past few years (Chidambaram, 2007). More flight operations will drive more economic betterment. Still aviation industry holds more opportunities and chances for the local and foreign investors or companies. Technological Factors: The country should be technologically sound in order to attract more foreign investors and organisations. Many organisations are outsourcing their business operations to the overseas countries on the basis of the technological proficiency (Wall, Minocha, and Rees, 2010). Some of the technological factors which have resulted in making India an emerging economy are as follow: Energy (requirement) security and growth One of the main reasons for achieving good economic development over years is the ability of India in order to muzzle the demand of energy. As India comparatively is a reserved energy consumer or has low energy intensity GDP in comparison to other BRICS countries (Brazil, Russia, India, China, and South Africa). For instance its value is low against China, South Africa and Russia, but enjoys greater value against Brazil in terms of low intensity GDP. Figure 6: (Source: Government of India, 2012) Energy dependence of India is modest against the other developing economies of the world. As its energy consumption value is confined to 25.7% in 2009. This is one of the major achievements that have resulted in growth of Indian economy. Figure 7: (Source: Government of India, 2012) Technological Advancements, Scientific Research, and Innovations India has been considerate about technological advancements and innovations and has been investing in the research and development activities in all domains including finance and human resource. This gross expenditure in the Research and Development (GERD) is further divided into higher education Research and Development activities (HERD), business Research and Development activities (BERD), government research and development activities (GOVERD), and private non-profit research and development activities (PNPERD) (Wolf, Dalal, DaVanzo, Larson, Akhmedjonov, Dogo, Huang, and Montoya, 2011). The figures presented below highlight the research and development expenditure of India along with other leading economies: Figure 8: (Source Wolf et al., 2011) Figure 9: (Source Wolf et al., 2011) India is also investing in the human resources allocated for the research and development activities, as the tendency of any country for the innovation and research is measured by the skilled human resources available. The growth of the human resource in the science and technology for selected countries is shown in the figure below: Figure 10: (Source Wolf et al., 2011) Along with this the doctoral degrees in the domain of science and technology are presented in the figure below: Figure 11: (Source Wolf et al., 2011) Another measure of the economic growth is the growth in the science and energy related publications as shown in the figure below: Figure 12: (Source Wolf et al., 2011) The overall gross expenditure in research and development activities of India is around 0.8 percent of GNP and according to the 11th five year plan the country plans to increase it by more than three times: Figure 13: (Source Wolf et al., 2011) This plan is supported by the increasing number of graduates with English speaking skills, and around 700,000 postgraduates, and 1500 PhDs (Bajpai and Sachs, n.d). IT, BPO, and KPO Industry The Information Technology industry of India has shown rapid growth and development in past few years and is still growing at rapid pace. Different companies from US and Europe have outsourced their support and other back office operations in several Indian cities. (Bajpai and Sachs, n.d) This growth of the IT industry has been gradual starting from self sufficiency in the time period of 60s and 70s, to exports of software in the time period of 70s and 80s, and finally to the starting of offshore outsourcing in 90s till present (Mathur, 2010). The sector wise break up of IT industry of India is given in the figure below: Figure 14: (Source: Mathur, 2010) The Business Process Outsourcing (BPO) industry of India is providing high value proposition to the clients all over the world and is thus attracting more Foreign Direct Investment (FDI) in the country which in turn is resulting in economic growth (Nasscom, 2011). Same goes for the Knowledge Process Outsourcing (KPO) in which India is emerging as an international leader (Agarwal, 2009). RECOMMENDATION FOR INDIA IN ORDER TO MAINTAIN (SUSTAIN) ECONOMIC GROWTH: Political Conflicts to Be Resolved: The first and foremost thing that India should do in order to continue the current trend of growth in the future is to resolve the conflicts. As various political issues that are currently active are somewhat restricting India’s growths up to major extent. For instance the relationship of Indian government with Pakistan every now and then gets worse due to many reasons. This as results restricts India’s growth because a massive army is always asked to be set active on the borders. This army consumes a handsome amount of revenue on borders. Moreover expensive means of transportation is another reason in this regard because the place is above the average altitude and no proper roadways are connecting. Likewise the energy transit issue (gas pipeline) is another reason why India should enhance friendly relationship with Pakistan. Gas pipeline from Iran transiting through Pakistan to India will likely going to benefit India more than other participant’s (countries). The main reason behind is that India will likely going to require more energy in order to set new industries. Therefore friendly relationship with Pakistan will further open gateways for more success. Air Transport Industry: India is amongst the top ten massive air transport industry. With respect to domestic traffic India holds 4th position (fourth largest) after America, Japan and China. However regardless of these important factors India is still amongst the slightest pierced air markets of the world even having less share then other smaller countries like Pakistan, Srilanka and Nigeria (USEAC, 2012). Therefore since the country is enjoying economic growth over some time. Therefore Indian government should take serious concerns in order to develop this industry. As this industry holds many benefits and can generate handsome amount of revenues. Muzzling Corruption: Corruption is one of the prime factors that should be muzzled in order to attain future economic growth. Every now and then various corruption cases and scams are reported on the media which one way or other creates an impact on India’s economic growth and also results in hampering it badly. For instance corruption cases related with telecommunication industry (rigged licensing), common wealth games (regarding poor organiser and lack of standard infrastructure and unhealthy environment), mining scandals (illegal export of Iron to China) are amongst the few scandals that resulted in jolting Indian economy badly therefore serious efforts and clean measures should be taken in order to muzzle corruption scandals (BBC, 2012). Collaboration with China China is another country that is enjoying serious economic growth for so many reasons. Therefore friendly relationship with china with respect to more trade should be ensured by India in order to further attain economic development. For instance India is likely going to develop and do more construction. For doing that so they will require high tech and big machineries. Importing those machineries from other distant places will cost India more. In order to save that money India should import directly from China. Besides construction commodities or machineries this same practice can be applied on other needs as well for instance imports of LED lighting goods that saves energy. Education Services: Since many Indian students go abroad in order to achieve high and quality education, therefore those foreign universities generate enormous amount of revenues from Indian students. However in order to achieve economic development with reference to higher education, the government should further engage more foreign universities opening their campuses in the native soil. This will benefit both the university and the Indian student too. Developing Infrastructure and Switching Towards Alternative Sources of Energy: India has the second largest road infrastructure in the world (3.14 million kilometres to be precise) (US holds first largest). The current road lengths for National highways are to be 70 thousand kilometres (USEAC, 2012). There this sector needs to be improved so that distant area and places should be interconnected. The more good the roads will be, the more benefits they will give to enhance the economy. Similarly a great number of public and private transportation is used in India. And oil is used as a number one energy source preferred by masses around India. If alternate energy sources are preferred than this will likely going to boost Indian economy more. Keeping in view that India do have large amount of natural gas reservoirs, utilising these resources will further ameliorate the economic growth in so many different ways. Proper Utilisation of Ports: India is amongst the top ten importers and exporters of the world. Therefore utilisation of its all three ways of transport and communication should be made sure. As India’s potential in order to become one of the economic giants will easily be served, provided all three modes of transportation sectors are well aligned. Ports therefore hold key importance because mass level of products can be brought in and out using ports. Albeit Indian government is investing 66 billion US dollars in ports and 27 billion US dollars in the shipping industry (USEAC, 2012), but still there is more need of improvement in this regard. As more input in the ports, will enable more economic growth. Capitalise On Future Workforce: As discussed above that one third of the population of India was below 15 years (2007), therefore India needs devise strategies in this regard so that proper utilisation of its workforce can be done in order to further explode the economic growth. As the role played by this young population will likely give India advantage over other economic giants of the world. Moreover India in order to gain more economic growth should also provide secure and friendly climate to the foreign investors. Secure ambiance means more investments. Furthermore film industry, sports industry (mainly cricket) and tourism industry are the other industries that will prove beneficial for overall economic growth of India in the future. List of References Agarwal, R. (2009). Knowledge process outsourcing: India’s emergence as a global leader. Asian Social Science, vol. 5, no. 1, pp. 82-92. Bajpai, N., and Sachs, J. (n.d.). ‘India in the Era of Economic Reforms – From Outsourcing to Innovation’. Columbia. Available from http://www.earth.columbia.edu/sitefiles/file/about/director/documents/altana.pdf [Accessed 4 December, 2012] BBC. (2012). India's corruption scandals. Available from http://www.bbc.co.uk/news/world-south-asia-12769214 [Accessed 7 December, 2012] Bosworth, B., Collins, S., and Virmani, A. (2006). Sources of Growth in the Indian Economy. India Policy Forum 2006-2007. Chidambaram, P. (2007). India’s economic growth and outlook. Available from http://www.iie.com/publications/papers/paper.cfm?ResearchID=810 [Accessed 8 December 2012] D&B. (2012). India Outlook 2011-2012. Available from http://www.dnb.co.in/India_Outlook_2011-12.pdf [Accessed 8 December, 2012] Deloitte. (2012). Current state of the Indian economy: A balancing act. Available from http://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Thoughtware/State%20of%20economy.pdf [Accessed 8 December, 2012] Economy watch content. (2010). India Economic Development. Available from http://www.economywatch.com/indianeconomy/india-development.html [Accessed 8 December 2012] Government of India. (2012). India and the global economy. Economic Survey 2011-12, pp. 337-357. Available from http://indiabudget.nic.in/es2011-12/echap-14.pdf [Accessed 8 December 2012] index mundi. (2011). Indian Exports by product section in US Dollars – Yearly. Available from http://www.indexmundi.com/trade/exports/?country=in [Accessed 8 December 2012] Mathur, S. (2010). Indian Information Technology Industry: Past, Present and Future & A Tool for National Development. Available from http://perso.univ-rennes1.fr/eric.darmon/floss/papers/MATHUR.pdf [Accessed 8 December, 2012] Nasscom. (2011). The IT-BPO Sector in India. Available from http://www.nasscom.org/sites/default/files/researchreports/Exec%20Summary.pdf [Accessed 8 December, 2012] Patel, R., Sethi, R., Bartz, S., and Israel, R. (2012). ‘Liberalization Of India’s Foreign Direct Investment Policy On Single-Brand Retail’. The Metropolitan Corporate Counsel, Available from http://www.metrocorpcounsel.com/pdf/2012/March/24.pdf [Accessed 8 December, 2012] USEAC. (2012). Doing Business in India: 2012 Country Commercial Guide for U.S. Companies. Available from http://export.gov/india/build/groups/public/@eg_in/documents/webcontent/eg_in_049379.pdf [Accessed 8 December, 2012] Wall, S., Minocha, S. and Rees, B. (2010). International Business, 3rd edition. London: Financial Times/Prentice Hall Wolf, C., Dalal, S., DaVanzo, J., Larson, E., Akhmedjonov, A., Dogo, H., Huang, M., and Montoya, S. (2011). ‘China and India, 2025: A Comparative Assessment’. RAND, Available from http://www.rand.org/content/dam/rand/pubs/monographs/2011/RAND_MG1009.pdf [Accessed 9 December, 2012] World Bank. (2012). Foreign Direct Investments, net inflows (BoP, current US $). Available from http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD [Accessed 8 December 2012] Appendix India Exports (source: index mundi 2011) Read More