Overview of the Indian Economy

India, with a population of 1.2 billion individuals, is the world’s largest democracy.[1] The Indian economy has become one of the fastest-growing economies across the globe. However, this boom was halted significantly by the outbreak of COVID-19, which put the Indian economy into a confute of 7.3% in the Financial Year(FY), which ended in March 2021.[2] In addition, poverty declined from 21.6% to 13.4% between 2011-2015 in India, but the containment policies by the government during the pandemic affected this progress, causing the poverty rate to increase again.[3] Furthermore, the informal sector of society, where most of the labor class is employed, was affected severely, aggravating the proneness of traditionally eliminated groups such as women and migrants. The impacts of COVID-19 were cut down by putting in policies such as the National Rural Employment Guarantee Scheme(NREGS) and subsidized food items that acted as a buffer to ensure social stability.[4] Moreover, significant fiscal and monetary policies were drawn by the government of India together with the Reserve Bank of India to protect the most exposed sections of the society and to cushion the impact of the virus on the economic end.[5] Hence, the economic growth stabilized after that.

Measures Having Multiplier Effect on the Economy

• Global Offshoring

Since the advent of the internet, companies around the globe have been outsourcing services relating to IT, such as software development and business procedures, to India. However, in the face of tight global labor markets and an upsurge of distributed working models, India has been acting as the back-end office for the world. The citizens of India employed abroad due to offshoring would double in the coming decade, reaching several 11 million due to swelling in global spending on outsourcing from $180 billion per year to $500 billion by the end of the coming decade, that is, by 2030.[6]

Tighter global labor markets and distributed working models are enabling India to act as a back office for software development and customer service base international companies.

• Manufacturing

India has an opportunity to become a factory for the world as corporate tax cuts, investment incentives, and infrastructure spending help boost capital investment in manufacturing. “Multinationals are now optimistic about India’s investment prospects, and the government is helping them by investing in infrastructure and making land available to build factories,” said Upasana Chachra, India’s Chief Economist.[7] Business sentiment on India’s investment outlook is at an all-time high. The manufacturing sector’s share of India’s GDP could increase from 15.6% to 21% by 2031, doubling India’s share of the export market.[8]

*Fig Source: CEIC, Morgan Stanley Research estimates.

• Investments in Technology and IT

India’s position as the third most attractive investment destination for technology transactions globally has led to an increase in multinational companies establishing their research and development (R&D) centers.[9] This has resulted in a surge in investments in the technology sector in recent years. India has also emerged as one of the world’s top countries in scientific research, particularly in space exploration. The country has successfully undertaken numerous space missions, including missions to the moon and the renowned Polar Satellite Launch Vehicle (PSLV).[10] Other nations are also utilizing India’s space facilities, and it is expected to play a leading role in launching satellites for the South Asian Association for Regional Cooperation (SAARC) nations, generating revenue through its space capabilities. In addition, new projects have been found, such as:

• Norwest Venture Partners invests $32 million in Cerebral Technologies for a minority stake, specializing in AI, big data, and enterprise cloud. This is a landmark step taken towards technological development in India.[11]
• NITI Aayog, Amazon Web Services, and Intel are collaborating to develop an experience studio in India to accelerate digital innovation and problem-solving using technologies such as Artificial Intelligence(AI), Internet of Things(IoT), blockchain, and robotics in the public sector.[12]
• Unicorn Landscape of India

India has experienced the emergence of a startup ecosystem currently acting as a torchbearer of India’s economic growth capabilities.

Till the FY 2017-2018, the number of unicorns (i.e., privately held businesses reaching a valuation of $1 billion within a year of their emergence) was increasing steadily, but with the advent of FY 2017-18, this number grew exponentially at a rate of 66% year on year.[13] Startup-solving problems were recognized in 56 diverse sectors, including health tech, ed-tech, fintech, food tech, e-commerce, etc. These startups are not only bringing innovative solutions within the economy but also are providing large-scale employment. As of records till September 2022, India is home to 107 unicorns with a valuation of $340.79 billion.[14] They are flourishing as individual entities and drawing investments from international funding agencies, making India emerge as the third largest ecosystem for startups globally.

Market Reforms

• India is rapid in digitization, particularly in e-commerce and financial services. The online commerce market is projected to reach $200 billion by 2026, up from $38.5 billion in 2017. Digital platforms like Amazon and Flipkart are making their presence felt, and fin techs are emerging as a significant economic force.[15] Digitization has provided time and cost savings for consumers and businesses, contributing to India’s growth momentum.
• Another critical step is ‘Make in India,’ an initiative launched on September 25, 2014, to promote investment, foster innovation, build world-class infrastructure, and establish India as a manufacturing, design, and innovation hub.[16] In addition to its indigenization projects, it invites international manufacturers to come and build in India employing Indian labor.
• India has welcomed Foreign Direct Investments (FDI) as it is vital for India’s development.[17] It significantly boosts infrastructure, productivity, and employment, acquiring technology and mobilizing foreign exchange reserves.
• Another essential factor to be noted is the Indian government’s policy of absorbing food price shocks and providing counter-cyclical evokes where the increased taxes being slashed on the citizens are countered by providing subsidies on food and fertilizers.[18] This cuts off the extreme impact of inflation on people only and creates a balance for both government and citizens regarding local financial flows.

Budget 2023-24 Geared Towards Sustainable Economic Growth

A highly ambitious, inclusive, growth-oriented Union Budget for 2023-24 has been presented to lay the foundation for India’s economic development covering various economic sectors, setting the tone for next year’s financial procedures. The Budget aims at 7% GDP growth, Rs. 10 lakh crore capex, i.e., capital expenditure, focusing on regional connectivity, manufacturing, agriculture, ease of doing business, ‘green budget,’ and self-reliance.[19] However, this budget has posed some challenges to various sectors as well; for instance, the defense spending increased by a whopping 7% in comparison to the same capital expenditure spending that hurt the local firms such as Hindustan Aeronautics Ltd which got support due to local manufacturing push.[20] In addition, oil refineries, such as Indian Oil Corp., etc., received a shock as the budget was announced since no compensation was offered to them in the form of budgetary support for the losses they bear due to international oil pricing fluctuation. Hence, Union Budget 2023-24 has also given birth to certain liabilities.

Hurdles to India’s Economic Growth

Amidst such big economic aspirations, India does face plenty of unsaid yet visible economic challenges, some of which are posing a burden to the forecasted growth orientations of the country as a whole, some of which are as follows;

• Income inequality has been widening in India, with a significant wealth gap between the rich and poor. The top 1% owns 40% of the national wealth, leading to social tensions and reduced consumer demand.[21]
• India’s fiscal deficit is another issue with the gap between expenditure and revenue. [22] This complicates governing social welfare spending, infrastructure development, and economic growth.
• Issues such as low productivity, lack of irrigation facilities, market volatility[23], and rural indebtedness are agricultural challenges.
• Air pollution, water pollution, deforestation, and climate change pose economic risks to India, necessitating investments in renewable energy, sustainable agriculture[24], and environmental conservation measures.

Implications for the Region and Pakistan

India’s economic boom has had several implications for the South Asian Region, particularly for Pakistan.

• Security Concerns: The fiscal affluence of India could have security implications for Pakistan. With India becoming a more robust economic player in the region, it could use its financial strength to pursue strategic and military objectives against Pakistan and China by already adopting military modernization and allocating billions of dollars to upgrade its warfare capabilities[25].
• Potential for Trade and Economic Cooperation: Although Pakistan and India possess nuclear weapons, poverty and inequality persist. Bilateral trade between the two could improve conditions, as evidenced by ongoing illegal or third-country trade via Afghanistan, demonstrating economic opportunities and potential for cross-border business.[26] In addition, the overall trade within the South Asian Region could also boost the standard of living in the region as it is home to abundant resources and the world’s largest workforce population.
• Competition in the Region: Considering India’s current economic boom, it could become a more attractive destination for foreign investment and trade. If translated efficiently, this boom could lead to increased competition in the region, which could impact Pakistan’s and other regional actors’ economic growth.
• Regional Stability: Recently, the SCO Meeting took place in Goa (India) during May 4-5, with Pakistan’s Foreign Minister Bilawal Bhutto Zardari becoming the first FM to visit India in over a decade as both countries have frosty relations, especially after 2019 incident of the revocation of Articles relating Kashmir’s autonomy. The Indian FM, Dr. S. Jaishankar coldly welcomed Zardari, referring to him as the FM of a terrorist economy and calling off terrorism as an Islamophobic wolf to coerce [27]. This was an extremely unpleasant move by India even though both countries could benefit immensely if the bilateral relations improvement (e.g. bilateral trade) yet countless issues such as Kashmir, LOC fights, surgical strikes, water issues, and above all Modi Government blaming Pakistan for every mishap taking place in India hinders the way to strategic stability.

Conclusion

India is working towards gaining economic stability; however, only time shall reveal how much the above-explained ventures and investments shall bear fruit for future growth, with inflation and unemployment being the most significant constraints in India. While India’s rising economy has the potential to bring both assets and liabilities for Pakistan and the region, both countries must work towards building strong economic ties and promoting regional stability for the collective benefit of all.

References

[1] “Overview of Indian Economy,” World Bank, October 4, 2021. https://www.worldbank.org/en/country/india/overview.

[2] “Globalization; Elephant on the Move: India’s Economy Gathers Momentum,” DHL(logistics company). https://www.dhl.com/global-en/delivered/globalization/elephant-on-the-move-indias-economy-gathers-momentum.html

[3] “Poverty and Equity Brief; India,” World Bank, April 2020. https://databankfiles.worldbank.org/public/ddpext_download/poverty/33EF03BB-9722-4AE2-ABC7-AA2972D68AFE/Global_POVEQ_IND.pdf

[4] Maurice Kugler and Shakti Sinha, “The Impacts of Covid-19 and the Policy Response in India,” Brookings. July 13, 2020.  https://www.brookings.edu/blog/future-development/2020/07/13/the-impact-of-covid-19-and-the-policy-response-in-india/

[5] “Globalization; Elephant on the Move: India’s Economy Gathers Momentum,” DHL.

[6] “India’s Impending Economic Boom,” Morgan Stanley, November 8, 2022.  https://www.morganstanley.com/ideas/investment-opportunities-in-india

[7] “India’s Impending Economic Boom,” Morgan Stanley.

[8] “India’s Impending Economic Boom,” Morgan Stanley.

[9] “Science and Technology Development in India,” India Brand Equity Foundation, December 2022. https://www.ibef.org/industry/science-and-technology

[10] “Science and Technology Development in India,” India Brand Equity Foundation.

[11] “Science and Technology Development in India,” India Brand Equity Foundation,

[12] “Science and Technology Development in India,” India Brand Equity Foundation.

[13] “The Indian Unicorn Landscape,” Invest India. https://www.investindia.gov.in/indian-unicorn-landscape

[14]“The Indian Unicorn Landscape,” Invest India.

[15] “The Impact of Digitization on India’s Economic Growth,” Linkedin Newsletter, March 11, 2023. https://www.linkedin.com/pulse/impact-digitalization-indias-economic-growth-anjali-shrivastva/

[16] “Initiatives to shape India into global manufacturing Hub,” News On Air, December 10, 2022. https://newsonair.com/

[17] “Role of FDI In Indian Growth,” FDI India, June 18, 2021. www.fdi.finance

[18] “India’s Economic Reforms will help boost potential growth beyond 6%: Goldman Sachs,” Money Control. November 24, 2022. https://www.moneycontrol.com/news/economy-2/indias-economic-reforms-will-help-boost-potential-growth-beyond-6-goldman-sachs-9593381.html

[19] “India’s Budget 2023-24:A Comprehensive Approach to Growth and Development,”  Indians. https://indiacsr.in/indias-budget-2023-24-a-comprehensive-approach-to-growth-and-development/

[20] “Who Gained and Who Lost from India’s Union Budget 2023,” Mint, February 1, 2023. https://www.livemint.com/budget/news/who-gained-and-who-lost-from-india-s-union-budget-2023-11675256896414.html

[21] “The Inequality Virus Report,” Oxfam India, January 2021.https://www.oxfamindia.org/press-release/inequality-virus-india-supplement-2021

[22] “ Economic Survey, 2021-22,” Ministry of Finance, Government of India.

[23] “Indian Agriculture and Rural Development Report 2020,” From National Bank for Agriculture and rural development.

[24] “State of Environment Report, 2020,” Ministry of Environment, Forest and Climate Change, Government of India.

[25] Masood Ur Rehman Khattak, “Indian Military Modernization; Implications for Pakistan,” ISSI (Institute of Strategic Studies, Islamabad), April 24, 2019. https://issi.org.pk/wp-content/uploads/2019/04/2-SS_Masood_Ur_Rehman_Khattak_No-1_2019.pdf

[26] Muhammad Zuhaib Javed, “Why Pakistan and India Should Resume Trade,” The Express Tribune, February 8, 2022. https://tribune.com.pk/article/97540/why-pakistan-and-india-should-resume-trade

[27] Zeeshan, “Why India Pakistan Normalization Makes Strategic Sense,” The Diplomat, May 8, 2023. https://thediplomat.com/2023/05/why-india-pakistan-normalization-makes-strategic-sense/