India, a former British colony that has been independent for almost 70 years, is currently the fastest growing economy in the world. According to 2015 World Bank data, it also has the seventh largest nominal GDP (and third largest in PPP) in the world. The country, once a supplier of British tea and cotton, now has a diversified economy with the majority of the activity and growth coming from the service industry. Since the economic liberalization policies of the 1990s, Indians have seen their quality of life grow immensely.

Historical Growth

In 1947, India gained independence from Britain and created a centrally-planned, mixed economy. The country’s economic focus was on heavy industry and was eventually deemed unsustainable. In 1991, India began to loosen the economic restrictions and to take advantage of international trade. The country’s economy began to grow exponentially – from $275 billion in 1992 to $2.07 trillion in 2015.

Agriculture

Agriculture, once India’s main source of revenue and income, has since fallen to only 17% of the country’s GDP. However, analysts are quick to point out that this “fall” shouldn’t be equated with a fall in production, but rather a relative fall when compared with the large increases in India’s industrial and service outputs.

Agriculture in India is plagued by a few problems. First off, the industry is not efficient: millions of people have small farms and 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.

Despite this, production is increasing. Today, India is the lead producer of lemons, oilseeds, bananas, mangoes, and papayas, and the second largest producer of wheat, rice, sugar cane, many vegetables, tea, cotton, and silkworms (among others).

Forestry, while a relatively small contributor to the GDP, is a growing sector and is responsible for producing fuel, wood, gums, hardwood and furniture. Just 1% of India’s economy comes from fishing and aquaculture, with shrimp, sardines, mackerel, and carp being bred and caught.

Industry

Chemicals are big business in India; the chemical sector contributes about 7% to the Indian GDP. Petrochemicals, oil, natural gas, dyes, and plastics also made up part of the 30% of the industrial contributions to the Indian economy in 2014. In addition to chemicals, India produces a large supply of the world’s pharmaceuticals as well as $67 billion worth of cars, motorcycles, tools, tractors, machinery, and forged steel.

India mines a large amount of minerals and gems which, when combined, make up over 2% of the country’s GDP. In 2015, for example, India mined 638 million tons of coal (which, surprisingly, wasn’t enough to meet the country’s coal needs), 155 million tons of iron ore, 19 million tons of bauxite and close to 1.56 tons of gold, along with asbestos, uranium, limestone and marble. The aforementioned oil and gas were extracted at a rate of 36.9 million metric tons and 32.2 billion cubic meters, respectively, in the 2015-2016 year.

The cost of India’s economic industrial boom seems to have come at the cost of human rights and illegal operations, reports the BBC. Not only are resources being illegally extracted, but people who live near mines are suffering from health problems associated with the under-regulated industry. In addition, there are reports of the mining areas not being fully-assessed and the mines themselves being accident prone.

IT and Business Services Outsourcing

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to over 52% in 2014. India, with its high population of low-cost, skilled, English-speaking, educated people, is a great place for businesses to set-up shop. IT companies in Bangalore, Hyderabad and Chennai contribute over 9% to the country’s GDP in 2015, and the workers are employed by both domestic and international companies like Intel (INTC), Texas Instruments (TXN), Yahoo (YHOO), Facebook (FB), 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 Amex (AXP), IBM (IBM), HP (HPQ) and Dell. According to a 2005 PricewaterhouseCoopers survey, 43% of BSO is from the IT sector, 17% from the financial sector, and 16% from the telecom sector. American and European companies represent 59% and 27% of the BSO companies, respectively. A leading factor in a company’s decision to outsource to India is the cost savings (call center employees in the United States cost about 2.5 times the cost of an Indian employee).

Bangalore, called the Silicon Valley of India, is a prime example of the problems that India faces with its international business service sector. For one, the companies and local administration clash over government policy with the companies wanting better infrastructure and the governments wanting to serve their electorate. Additionally, employees at companies that provide outsourcing services throughout India struggle to adopt more western mannerisms and language in an effort to appear more like their parent companies, a practice that is considered detrimental to the traditional Indian identity.

Retail Services

The retail sector is huge, in fact it's the second largest in the world with retail sales exceeding $1 trillion according to A.T. Kearney's 2016 Global Retail Development Index. But its not just apparel, electronics or traditional consumer retail that is big; agricultural retail, which is important in an inflation conscious country like India, is also significant.

Reports suggest there is little storage for Indian agricultural product and 20-40% of the agricultural output of the country is lost to spoilage. Between 2013 and 2016, reportedly over 46,000 tons of grain was spoiled or stolen that could have fed over 800,000 people for a year on the government's subsidized food scheme. FDI in cold storage solutions are allowed by the Indian government but, so far, there has been little interest.

Retail reform is happening. India is relaxing some barriers to foreign entry and hoping to spur an increase in the number of foreign retailers in the country. However, there is opposition and debate about whether or not to let large foreign companies like Wal-Mart (WMT) to open stores in India. The arguments against Wal-Mart are similar to those in the United States, while the arguments for Wal-Mart center on the money and infrastructure support that the company would bring.

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 is increasingly adding capacity to produce hydroelectricity, wind, solar and nuclear power.

In 2015, over 7 million tourists visited India, spending $1.2 trillion according to the World Travel and Tourism Council. That, combined with the domestic travel and indirect economic activity because of tourism amounts to about 6% of the country’s 2015 GDP.

Medical tourism to India is growing incredibly. The industry estimated in 2015 at $3 billion is expected to more than double to $8 billion by 2020. 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’s economy is enormous and is expected to grow at close to 7% in 2016 alone. While recent economic data may cast a doubt on that estimate, the economy is growing in excess of 6% and that is fast. With that level of growth, the country has surpassed China in the pace of growth and become a hot favorite with investors across the globe. In its attempts at becoming a developed country though, problems still plague India, namely malnutrition, lack of infrastructure and education, poverty, and corruption.

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