Chapter 1 - The Economy

Abstract

This chapter looks behind the well-known facts about GDP growth to provide an understanding of the strengths and weaknesses of India at the level of growth and macroeconomics. Since the time of independence in 1947 up to 1979, a per capita GDP growth of just 1.3% per year implied that the Indian GDP would double only once every 53 years. However, from 1979 onward, GDP growth started accelerating. The share of agriculture in GDP dropped sharply from 55.1% in 1950–1951 to 18.5% in 2006–2007. Industry grew modestly from 15% to 26.6% over this same period. Services grew dramatically from 29.6% to 54.9%—India had started “leapfrogging” to the structure of rich countries where services dominates. An important strength in the economy is the good quality labor force with a supportive demographic outlook for the coming 25 years, which is being effectively harnessed by a vibrant set of private companies. High levels of competition, globalization, and a gradual process of improving infrastructure are positively influencing the productivity of these companies. The weakest link in the Indian growth story is the State where growth is greatly constrained by an inadequate quantity and quality of public services such as law and order, the judiciary, infrastructure, etc. If India is able to improve its focus and the quality of execution in producing public goods, then powerful productivity growth can come about. This understanding forms a vital foundation for the growth of Indian financial products and markets in a global strategy.