India has experienced remarkable economic growth, averaging an annual rate of 8 percent from 2000 through 2010.(1) It declined slightly to 7.2 percent last year, and is anticipated to hover just under 7 percent this year, the International Monetary Fund reports. With rising investment, production and consumption, the Indian economy has become the world’s ninth largest, at $1.7 trillion, just after Italy and before Canada.(2)

As market demand rises, U.S. and foreign companies have expressed increasing interest in India. Thus, according to a Deloitte survey, 57 percent of foreign companies currently operating in emerging markets anticipate revenues of 25 percent or more in India; 56 percent predict similar returns in China.

India has come a long way. Faced with a foreign exchange crisis in 1991, then Indian Minister of Finance, Manmohan Singh, urged India’s Parliament to reduce the government’s protectionist measures and globalize the economy. In his first budget, Singh reduced the maximum import duty from 300 percent to 150 percent.(3) Today the standard import duty is 10 percent, and the effective rate for many items is approximately 7 percent, close to the average for southeast Asian countries.(4)

The result: since the early 1990s, more than 100 million Indians rose above the poverty line to create a vibrant middle class, says author Basharat Peer in a recent Foreign Affairs article. And merchandise trade, as a percentage of India’s gross domestic product, continues to increase despite the adverse effects of the global financial crisis, illustrating India's increasing participation in the global economy.

India vs. China

An important metric is the amount of investment a country is able to attract, and China clearly has an advantage. For example, in 2010, about $106 billion in foreign direct investment flowed into China, making it the second largest recipient well below the United States.(5) India, on the other hand, attracted about one-quarter of China’s take and is hoping to attract much more.(6) In light of India’s current economic issues, The Wall Street Journal reports that Prime Minister Manmohan Singh expressed the country’s need to make tough decisions on spending and tax generation to boost investment.

Another important metric is population growth, since an increase in income-earning consumers typically boosts national output and benefits an economy. Here, India has a long-term advantage.

In 2010, China’s total economy was 3.3 times bigger than India’s.(7) And China’s gross domestic product, per capita, was more than 3 times that of India’s $1,406.(8) On the other hand, India’s population, at 1.2 billion, is the second largest after China’s. But by 2025, India’s population is anticipated to take the top position at nearly 1.4 billion people.(9) Plus, as both countries’ growth rates decline, India’s rate of descent will be slower.

Another long-term advantage held by India is its population demographics. By 2015, India’s medium age will be 26 years old. This means half the population will be older and half younger than 26, an age considerably younger than China’s medium age of 36.(10) In turn, China’s population will grey at a much faster rate while its workforce shrinks. This will create an imbalance in the proportion of children and older people to working-age adults in China, in addition to a number of other problems. Meanwhile, India’s workforce will continue to grow, increasing the size of its economy. But that’s not all.

When comparing India and China, Thomas Friedman, New York Times columnist and author of The World Is Flat, says that despite China’s rapid economic growth, India could still race ahead because it has already passed the “speed bump” of Democratic reforms. India’s advantage, he says, lies in the fact that it has gone through democratic transition, which China must someday face.

Indian Opportunities

The Indian services sector has engaged American companies for decades and continues to offer much opportunity. Unlike other emerging markets, India developed a service-led economic growth model, which represented an atypical approach to the traditional manufacturing economic development model. As a result, India’s service sector is almost four times larger than its manufacturing sector.(11) And from 2000 through 2010, India’s services industry, measured by value-added output, also grew by a factor of four, while the average size of the world’s services industries doubled.(12) In recent years, the Indian service sector contributed more than half of the country’s value-added output.(13)

What has led to this success? Since the 1980s, India began liberalizing its telecommunications services and equipment manufacturing sectors, and opened them to private sector participation. Recognizing the importance of the sector to India’s economy, the government established the Ministry of Communications and Information Technology in 1999 to facilitate growth and foster cooperation between central and state governments, academia and the private sector.

Much of the industry’s strength is reflected in its exports, which jumped nearly 800 percent from $17 billion to approximately $150 billion from 2000 to 2011.(14) Consequently, India has become the world’s sixth largest services exporter; the United States ranks first and China fourth.(15)

The U.S. demand for computer coders, testers and software programmers—jobs commonly performed by English-speaking Indians to alleviate potential Y2K (year 2000) millennium problems—put the country front and center in American boardrooms. In addition, as Indian technicians gained knowledge and experience, India became positioned as a major information technology and business process outsourcing provider.

Other leading Indian sectors for U.S. exports and investment, according to the U.S. Department of Commerce, cover a variety of products, services, and sectors, including:

  • Architecture, Construction, Engineering and Construction Equipment;
  • Civil Aviation;
  • Education Services;
  • Environment and Water;
  • Healthcare and Medical Equipment;
  • Infrastructure, including Roads, Ports and Railways;
  • Mining and Mining Equipment;
  • Plastics;
  • Power and Renewable Energy; and
  • Travel and Tourism.

Challenges Remain a Burden

Although India has made tremendous strides, many problems persist, and some may be getting worse. The Heritage Foundation’s 2011 Index of Economic Freedom ranked India 124th out of 183 countries; the Fraser Institute’s 2010 Economic Freedom of the World report ranked India 87th of 141 countries; and the World Bank’s Doing Business report put India at 134th of 183 countries.(16) Many of the reforms that began in the 1990s have stalled. In turn, business people—inside and outside of the country—often say India is a constant challenge.

State government corruption is considered high, and inadequate infrastructure—from roads, railroads, ports, airports, education, and power grids to schools—has become a critical constraint to India's economic development. And currently, short-term economic growth is poor. Some analysts say progress is still being made under the government of Prime Minister Singh, but at a slow pace.

Footnotes:  1. United Nations  2. Ibid  3. Cato Institute  4. Ibid  5. United Nations  6. Ibid  7. Ibid  8. Ibid  9. Department of U.S. Census  10. Ibid  11. United Nations  12. Ibid  13. Ibid  14. Ibid  15. Ibid  16. Cato Institute

This article appeared in International Insights, A Fifth Third Bank publication, June 2012.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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