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Indian Economy

Last updated: June 28, 2015

Introduction

India is set to emerge as the world’s fastest-growing major economy by 2015 ahead of China, as per the recent report by The World Bank. India’s Gross Domestic Product (GDP) is expected to grow at 7.5 per cent in 2015, as per the report.

The improvement in India’s economic fundamentals has accelerated in the year 2015 with the combined impact of strong government reforms, RBI's inflation focus supported by benign global commodity prices. 

Market size

According IMF World Economic Outlook April, 2015, India ranks seventh globally in terms of GDP at current prices and is expected to grow at 7.5 per cent in 2016.

India’s economy has witnessed a significant economic growth in the recent past, growing by 7.3 per cent in 2015 as against 6.9 per cent in 2014. The size of the Indian economy is estimated to be at Rs 129.57 trillion (US$ 2.01 trillion) for the year 2014 compared to Rs 118.23 trillion (US$ 1.84 trillion) in 2013.

The steps taken by the government in recent times have shown positive results as India's gross domestic product (GDP) at factor cost at constant (2011-12) prices 2014-15 is Rs 106.4 trillion (US$ 1.596 trillion), as against Rs 99.21 trillion (US$ 1.488 trillion) in 2013-14, registering a growth rate of 7.3 per cent. The economic activities which witnessed significant growth were ‘financing, insurance, real estate and business services’ at 11.5 per cent and ‘trade, hotels, transport, communication services’ at 10.7 per cent.

Stating that its great time to invest in India, Minister of State for Finance Mr Jayant Sinha said the Indian economy has potential to become a US$ 4-5 trillion economy in the next 10-12 years.

Investments/developments

With the improvement in the economic scenario, there have been various investments leading to increased M&A activity. Some of them are as follows:

  • India has emerged as one of the strongest performers with respect to deals across the world in terms of mergers and acquisitions (M&A). M&A activity increased in 2014 with deals worth US$ 38.1 billion being concluded, compared to US$ 28.2 billion in 2013 and US$ 35.4 billion in 2012. The total transaction value for the month of May 2015 was US$ 3.3 billion involving a total of 115 transactions. In the M&A space, pharma continues to be the dominant sector amounting to 23 per cent of the total transaction value.
  • India’s Index of Industrial Production (IIP) grew by 4.1 per cent in April 2015 compared to 2.5 per cent in March 2015. The growth was largely due to the boost in manufacturing growth, which was 5.1 per cent in April compared to 2.8 per cent in the previous month.
  • India’s Consumer Price Index (CPI) inflation rate increased to 5.01 per cent in May 2015 compared to 4.87 per cent in the previous month. On the other hand, the Wholesale Price Index (WPI) inflation rate remained negative at 2.36 per cent for the seventh consecutive month in May 2015 as against negative 2.65 per cent in the previous month, led by low crude oil prices.
  • India's consumer confidence continues to remain highest globally for the fourth quarter in a row, riding on positive economic environment and lower inflation. According to Nielsen’s findings, India’s consumer confidence score in the first quarter of 2015 increased by one point from the previous quarter (Q4 of 2014). With a score of 130 in the first quarter (2015), India's consumer confidence score is up by nine points from the corresponding period of the previous year (Q1 of 2014) when it stood at 121.
  • India’s current account deficit reduced sharply to US$ 1.3 billion (0.2 per cent of GDP) in the fourth quarter of 2015 compared to US$ 8.3 billion (1.6 per cent of GDP) in the previous quarter, indicating a shrink in the current account deficit by 84.3 per cent quarter-on-quarter basis.
  • India's foreign exchange reserve stood at a record high of US$ 354.28 billion in the week up to June 12, 2015 – indicating an increase of US$ 1.57 billion compared to previous week.
  • Owing to increased investor confidence, net Foreign Direct Investment (FDI) inflows touched a record high of US$ 34.9 billion in 2015 compared to US$ 21.6 billion in the previous fiscal year, according to a Nomura report. The report indicated that the net FDI inflows reached to 1.7 per cent of the GDP in 2015 from 1.1 per cent in the previous fiscal year.

 

Government Initiatives

Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. Mr Narendra Modi, Prime Minister of India, has launched the Make in India initiative with an aim to boost the manufacturing sector of Indian economy. This initiative is expected to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Currently, the manufacturing sector in India contributes over 15 per cent of the GDP. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP. Following the government’s initiatives several plans for investment have been undertaken which are as follows:

  • Foxconn Technology group, Taiwan’s electronics manufacturer, is planning to manufacture Apple iPhones in India. Besides, Foxconn aims to establish 10-12 facilities in India including data centers and factories by 2020.
  • India Electronics and Semiconductor Association (IESA) and Nasscom have signed a MoU to push electronics manufacturing share to 25 per cent of GDP by 2025. Under the MoU approval has been given to 21 electronic clusters.
  • Hyderabad is set to become the mobile phone manufacturing hub in India and is expected to create 150,000 – 200,000 jobs. Besides, the Telangana Government aims to double IT exports to Rs 1.2 trillion (US$ 18.7 billion) by 2019.
  • Ford Motor Company has started working on plans to manufacture EcoSport in India for exporting it to US. The company has provided the quotation for 90,000 units every year, which is greater than the vehicles it sells in India.
  • Hyundai Heavy Industries (HHI) and Hindustan Shipyard Ltd have joined hands to build warships in India. Besides, Samsung Heavy Industries and Kochi Shipyard will be making Liquefied Natural Gas (LNG) tankers.
  • Mercedes-Benz plans to increase the number of cars it manufactures in India by doubling the capacity to 20,000 vehicles a year and has come up with a new plant in Pune.

Under the Digital India initiative numerous steps have been taken by the Government of India. Some of them are as follows:

  • The Government of India has launched a digital employment exchange which will allow the industrial enterprises to find suitable workers and the job-seekers to find employment. The core purpose of the initiative is to strengthen the communication between the stakeholders and to improve the efficiencies in service delivery in the MSME ministry. According to officials at the MSME ministry over 200,000 people have so far registered on the website.
  • The Ministry of Human Resource Development recently launched Kendriya Vidyalaya Sangthan’s (KVS) e-initiative ‘KV ShaalaDarpan’ aimed at providing information about students electronically on a single platform. The program is a step towards realising Digital India and will depict good governance.
  • The Government of India announced that all the major tourist spots like Sarnath, Bodhgaya and Taj Mahal will have a Wi-Fi facility as part of digital India initiative. Besides, the Government has started providing free Wi-Fi service at Varanasi ghats.

Based on the recommendations of the Foreign Investment Promotion Board (FIPB), the Government of India has approved 10 proposals of FDI amounting to Rs 2,857.83 crore (US$ 445.21 million) approximately. Out of the 10 approved proposals, six belonged to the pharmaceutical sector with a total value of Rs 1,415 crore (US$ 221.05 million) excluding the outflows.

The Union Cabinet, chaired by the Prime Minister Mr Narendra Modi, has given its approval to enter into a Memorandum of Understanding (MoU) for strengthening cooperation in the field of Micro, Small and Medium Enterprises (MSMEs), between India and Sweden. The purpose of the MoU is to achieve and promote cooperation between MSMEs of the two countries by providing a structured framework and creating an environment to identify each other’s technologies, strengths, markets, policies, etc.

The Government of India has launched an initiative to create 100 smart cities as well as Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for 500 cities with an outlay of Rs 48,000 crore (US$ 7.47 billion) and Rs 50,000 crore (US$ 7.78 billion) crore respectively. Smart cities are satellite towns of larger cities which will consist of modern infrastructure and will be digitally connected. The program was formally launched on June 25, 2015. The Phase I for Smart City Kochi (SCK) is set to launch in July 2015 which will be built on a total area of 650,000 sq. ft., having a floor space greater than 100,000 sq. ft. Besides, it will also generate a total of 6,000 direct jobs in the IT sector.

 

Road Ahead

The International Monetary Fund (IMF) and the Moody’s Investors Service have forecasted that India will witness a GDP growth rate of 7.5 per cent in 2016, due to improved investor confidence, lower food prices and better policy reforms. Besides, according to mid-year update of United Nations World Economic Situation and Prospects, India is expected to grow at 7.6 per cent in 2015 and at 7.7 per cent in 2016.

As per the latest Global Economic Prospects (GEP) report by World Bank, India is leading The World Bank’s growth chart for major economies. The Bank believes India to become the fastest growing major economy by 2015, growing at 7.5 per cent.

According to Mr Jayant Sinha, Minister of State for Finance, Indian economy would continue to grow at 7 to 9 per cent and would double in size to US$ 4–5 trillion in a decade, becoming the third largest economy in absolute terms.

Furthermore, initiatives like Make in India and Digital India will play a vital role in the driving the Indian economy.

 

References: Press Information Bureau (PIB), Media Reports, World Bank, Department of Industrial Policy & Promotion (DIPP), Grant Thornton, Database of Indian Economy (DBIE)

 

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