The Fundamentals of How India Makes Its Money

India is currently one of the fastest-growing economies in the world since 2000. It is also the world’s fifth-largest economy in nominal GDP terms.

Overall, in 2019, the economy of India grew at a rate of 5%. This growth was primarily due to strong demand for the country's goods and services, in addition to a high level of industrial activity. The country, once a supplier of British tea and cotton, now has a diversified economy with the majority of activity and growth coming from the service industry. India is now considered a "global player" in the world of international economics.

In 2020-2021, India's economy has been hard hit by the reaction to the COVID-19 pandemic. During 2020 India's GDP for the second quarter came nearly 24% below the second quarter of 2019, as COVID-19 motivated restrictions on all non-essential businesses sharply curtailed economic activity.

Historical Development of India's Economy

In 1947, after gaining independence from Britain, India formed a centrally-planned economy (also known as a command economy). With a centrally planned economy, the government makes the majority of economic decisions regarding the manufacturing and the distribution of products.

The government focused on developing its heavy industry sector, but this emphasis was eventually deemed unsustainable. In 1991, India began to loosen its economic restrictions and an increased level of liberalization led to growth in the country's private sector. Today, India is considered a mixed economy: the private and public sectors co-exist and the country leverages international trade.

Citizens can choose their own occupations and start their own private enterprises. However, in certain areas of the economy, such as defense, power, banking, and other industries, the government maintains a monopoly. The country’s economy has grown exponentially–from $288 billion in 1992 to $2.66 trillion in 2020.

Agricultural Sector

Agriculture, once India’s main source of revenue and income, has since fallen to approximately 18.32% of the country’s GDP, as of 2020. However, analysts have pointed out that this fall should not be equated with a decrease in production. Rather, it reflects the large increases in India’s industrial and service outputs.

The agricultural industry in India currently faces some problems. First, the industry is not as efficient as it could be: millions of small farmers rely on monsoons for the water necessary for their crop production. Agricultural infrastructure is not well developed, so irrigation is sparse and agricultural product is at risk of spoilage because of a lack of adequate storage facilities and distribution channels.

Today, India is the world's second-largest producer of fruit, and the global leading producer of lemons, bananas, mangoes, papayas, and limes. While forestry is a relatively small contributor to the country's GDP, it is a growing sector and is responsible for producing fuel, wood-based panels, pulp for paper, paper, and paperboard. An additional small percentage of India’s economy comes from fishing and aquaculture, with shrimp, sardines, mackerel, and carp being bred and caught.

Industrial Production

Chemicals are big business in India; The petrochemical industry, which first entered the Indian industrial scene in the 1970s, experienced rapid growth in the 1980s and 1990s.

In addition to chemicals, India produces a large supply of the world’s pharmaceuticals as well as billions of dollars worth of cars, motorcycles, tools, tractors, machinery, and forged steel.

India also mines a large number of gems and common minerals including iron ore, bauxite, and gold along with asbestos, uranium, limestone, and marble. From 2019 to 2020, for example, India mined 729 million tons of coal (which, surprisingly, was not enough to meet the country’s coal needs). Oil and gas were extracted at a rate of 34.2 million metric tons and 32.9 billion cubic meters, respectively, in the 2018 to 2019 year.

Information Technology (IT) and Business Services Outsourcing

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to approximately 55% between 2019 and 2020. India–with its high population of skilled, English-speaking, and educated people–is a great place for doing business.

Among the leading services industries in the country are telecommunications, IT, and software, and the workers are employed by both domestic and international companies including Intel (INTC), Texas Instruments (TXN), Yahoo (YHOO), Meta (META)—formerly Facebook, Google (GOOG), and Microsoft (MSFT).

Business process outsourcing (BPO) is a less significant but more well-known industry in India and is led by companies like American Express (AXP), IBM (IBM), Hewlett-Packard, (HPQ), and Dell. BPO is the fastest-growing segment of the ITES (Information Technology Enabled Services) industry in India thanks to economies of scale, cost advantages, risk mitigation, and competency. BPO in India, which started around the mid-90s, has grown by leaps and bounds.

Retail Services

The retail sector in India is huge. But it's not just apparel, electronics, or traditional consumer retail that is booming; agricultural retail, which is important in an inflation-conscious country like India, is also significant.However, in recent years, the issue of agricultural wastage has come to the forefront. It is estimated that from 2018-2021, over 400,000 tons of wheat and rice were wasted due to storage and transportation issues. This is enough to feed over 80 million people within the country. Reports suggest there is little storage for Indian agricultural products, and experts believe that the solution to the massive waste issue is a combination of government policy, technology, and infrastructure. The Indian government is purported to be exploring a range of options.

Other Services

Other parts of India’s service industry include electricity production and tourism. The country is largely dependent on fossil fuels oil, gas, and coal but it is increasingly adding capacity to produce hydroelectricity, wind, solar, and nuclear power.

In 2018, over 10 million foreign tourists visited India. In 2018, the estimated foreign exchange earnings from tourism in India was $28.585 billion. The World Travel and Tourism Council calculated that tourism generated 10.3% of India's GDP in 2019.

Medical tourism to India is also a growing sector. India's market for medical tourism is expected to touch the $9 billion mark by 2020, according to a report released by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Ernst & Young. Medical tourism is popular in India because of its low-cost healthcare and international standards compliance. Customers come from all over the world for heart, hip, and plastic surgery procedures, and a small number of people take advantage of India’s commercial surrogate facilities.

The Bottom Line

India has become a rising economic power in the 21st century. Between the years 2011 and 2015, more than 90 million people in India rose out of extreme poverty, thanks in part to robust economic growth that has improved the overall standards of living in the country. According to the World Bank, growth in India is projected to be 6% this fiscal year; it is expected to rise to 6.9% between 2020 and 2021 and to 7.2% in the following year. Among the major emerging economies, India is one of the fastest-growing. It has also become a focus of investors across the globe.