MAJOR DRIVERS OF GROWTH, EMPLOYMENT AND TRADE IN INDIA

INTRODUCTION

It is interesting and rewarding to study India as an economy that has evolved over a period of 65 years since its independence. The country has grown economy-wise and population-wise since 1950 and the major contributors to Gross Domestic Product (GDP) has gradually shifted from agricultural sector to the services sector. Widespread globalization of industries and liberalization of trade along with technological advancements have played an important role in adding to its growth. In terms of Purchasing Power Parity India took position as the world’s third largest economy in April 2014 replacing Japan proving to be one of the fastest growing economies of the world (“India displaces Japan,” 2014).

For the purpose of clearly understanding the major contributors and policies to the effect India’s growth and development, I have conducted my research under the primary, secondary and tertiary sectors using graphs and figures to explain whenever required. The primary sector being Agriculture, the secondary sector being Industry and the tertiary sector being Services have also been analyzed to indicate the major trading partners of India. A sufficient period of time has been considered for the purpose of this assessment to provide good insight on the topic. The paper will also further discuss some of the recent policy measures taken to further improve the growth of India.

MAJOR POLICY REFORMS THAT INFLUECED TRADE AND GROWTH POST LIBRALIZATION

Following independence India believed in being self-sufficient rather than depending on international trade as a source of income (Mukherjee, S. &
Mukherjee, S., 2012). The challenge to alleviate poverty was a main concern due to a large number of people living in hopeless poverty. Hence to address the issue the government followed a complex, extensive and expensive system of price controls and quantitative restrictions (Mukherjee, S. &Mukherjee, S., 2012). This protectionist move of the Indian government keeping its economy closed did not generate any welfare for its citizens or lead to economic growth.

The Indian economy grew at the rate of 3-4 per cent per annum and evidenced to be sluggish in the 20th century as a result of an import substitution trading system (Kohli, A. 2006). The end of the Gulf war devaluing the Indian rupee by 20% against the US dollar in 1991, also causing a major increase in oil prices left India in a weak external payment position compelling the economy to seek support from the International Monetary Fund (IMF) and thus marked the beginning of trade liberalization in India (Krishna, P. & Mitra, D., 1998).

India had a much brighter objective and understanding to integrate its economy with the global economy through trade, investment and technology flows giving entrepreneurs a better environment equivalent to other developing countries compared to its reforms in the 1970s (Ahluwalia, M. S. 1995). Reforms were introduced to repair macro-economic stability and covered a variety of sectors of the economy (Ahluwalia, M. S. 1995). The reforms extended to industry and trade policy, foreign direct investment, reforms in agriculture, financial sector reform and labor market reforms (Ahluwalia, M. S. 1995, 2002). A brief view on some of the reforms introduced in the trade-oriented sectors of the economy is as follows:

(i) Industry and trade policy – the public sector comprising of 18 industries including iron and steel, heavy plant and machinery, telecommunications, minerals, oil, mining, air transport and electricity generation and distribution was reduced considerably to 3 industries (Ahluwalia, M. S. 2002). Excepting for a few environmental sensitive industries industrial licensing was abolished along with the Monopolies and Restrictive Trade Practices Act that discouraged the concentration of economic power. Import licensing was eliminated for capital and intermediate goods (Ahluwalia, M. S. 2002). The government adopted a flexible exchange rate system to manage balance of payments (Ahluwalia, M. S. 2002).

(ii) Foreign Direct Investment – foreign ownership was allowed up to 100% in many industries and a majority ownership I industries except banks, insurance companies, telecommunications and airlines (Ahluwalia, M. S. 2002). It also opened up for portfolio investment by allowing foreign institutional investors to purchase shares of Indian listed companies in the stock market (Ahluwalia, M. S. 2002).

(iii) Reforms in Agriculture – the existence of outdated laws such as the Essential Commodities Act imposed restrictions on the movement of agricultural products from one state to another depriving farmers and consumers of the benefit of a national integrated market (Ahluwalia, M. S. 2002). Amendments were made in such laws. Recapitalization of banks and restructuring of corporate lending units to reduce interest rates and improve rural lending (Ahluwalia, M. S. 1995).

(iv) Financial Sector Reforms – demolishing the complicated regulations imposed on interest rates, decreasing statutory requirements to invest in government securities, strengthening bank supervision, liberal licensing of private banks and liberated expansion by foreign banks are some of the reforms introduced in this sector (Ahluwalia, M. S. 1995).

(v) Labor Market Reforms – the National Renewal Fund was created to pay compensation for employees displace due to the restructuring of the public sector (Ahluwalia, M. S. 1995). It also financed training programmes offered to these employees in order to reorganize them. The Central Budget and aid from multilateral and bilateral donors in support of this activity financed this fund (Ahluwalia, M. S. 1995).

GROWTH TRENDS IN GDP, EMPLOYMENT AND EXPORTS.

Figure 1: Sectorial contribution to India’s GDP from 1950-51 to 2011-12. Value in % share

Source: Wadhwani foundation 2014.

From Figure 1 analysis of growth trends of the sector wise contribution to India’s GDP for almost 62 years can be made. We are able to understand the sharp decline in the contribution of the primary sector over the years, a stagnating performance by the secondary sector with no significant growth patterns and the emergence of the tertiary sector as a dominant contributor to over all GDP (Aggarwal, A. 2014).

Figure 2: Sectorial composition of workforce in India from 1972-73 to 2011-12.

Source: Wadhwani foundation 2014.

From Figure 2 we can conclude that agriculture is still the major contributor to employment in India even with the drastic shift from the agricultural sector to the services sector. The figure also shows increased employment growth in construction making industry one of the major employers in India (Aggarwal, A. 2014).

Transition from the primary sector to the tertiary sector

The process of economic development in India over the years 1950-51 to 1999-00 shows the changes in the sectorial contribution to the GDP change shift from agriculture to towards industry and then the tertiary sector (Joshi, S. 2004). The agricultural industry fell from holding a share of 55.53% in the GDP in the 1950s to 28.66% of the GDP in the 1990s, the industrial sector rose to hold a share of 28.09% of the GDP in the same period from a share of 16% in 1950s and the services sector jumped to a high of 44.22% share in the GDP from a share of 27.12% of the GDP in the 1950s (Joshi, S. 2004).

The high productivity activities of the services sector are mainly professional or legal and new services like software and Information Technology (IT) and IT enabled services such as call centers, design and Business Processing Outsourcing, telecommunications and financial services such as ATMs and credit cards (Joshi, S. 2004). The services sector also involves activities of the informal sector like repairs, hawkers, transport and personal services like hairdressers, which are low in productivity (Joshi, S. 2004).

The performance of the services sector can be largely understood from the performance of the software and IT industry in India. The Indian software industry has boomed in comparison to Israel and Ireland who are also new exporters of software and especially when compared to the performance of other sectors in the Indian industry the software industry has succeeded (Athreye, S. S. 2005). Indian firms such as Accenture, EDS and IBM had a keen eye for the outsourced-software market and were able to employ talented engineers capable of providing technical, outsourced service to different customers anywhere in the world much to the strength of the industry (Athreye, S. S. 2005).

India’s advantages in the software industry remain in the fact that they produce customized software services catering to the needs of a large market and the domestic firms rather than the foreign firms led to its software growth (Athreye, S. S. 2005).

India is pre-dominantly export led in the software industry and therefore generates more revenues (Athreye, S. S. 2005).

Figure 3: The growth of software revenues in India 1984-2002.

Source: (Athreye, S. S. 2005).

Figure 4: India’s services export growth between 1981 and 2011

Source: Hyvonen, M. & Wang, H. (2012).

A combination of less regulation, proficiency in English language skills of a large number of the population, lower labor and other operating costs when in comparison to advanced countries has resulted in the expansion of the services sector and account for a large share of the exports in the Indian economy (Hyvonen, M. & Wang, H. 2012). Maintaining cost advantage will be one of India’s major factors in achieving positive growth in the near future of the services industry (Hyvonen, M. & Wang, H. 2012).

INDIA’S KEY TRADING PARTNERS AND TRADING ITEMS

Figure 5: India’s key destinations for global trade.

Source: Export-Import Bank of India 2015.

Figure 6: Key trading items of Indian global trade

Source: Export-Import Bank of India 2015
Figure 7: Evolution on India’s trade balance
Source: Institute for studies in industrial development 2011

From this table we can observe that the increase in demand for imports have led to chronic current account deficits (Bhatt, T.P. 2011).

RECENT POLICIES FOR EMPLOYMENT, GROWTH AND TRADE

One of India’s key motivations for trade policies is development and lifting poverty.
The Foreign Trade Policy (FTP) of India published on 1st April 2015 focuses on improving India’s participation in International trade by a significant raise of 3.5% in its share of total global exports by the year 2020 (www.wto.org, 2015).

Recent initiatives such as “make in India”, “digital India” and “skills India” along with a sustainable and stable policy for foreign merchandise and service trade adopting procedures and incentives in order to do so will be implemented to achieve export diversification (www.wto.org, 2015). This will be significantly responsible for achieving India’s goals to involve with key regions of the world by making its key sectors more competitive (www.wto.org, 2015).

TRADE

The agricultural sector has been contributing to 18% of the GDP since 2011 and employs about 56% of the total workforce (www.wto.org, 2015). Therefore it is one of the main aims of the government to improve productivity in this sector since it also plays a major role in achieving food security and price stability (www.wto.org, 2015). When compared to non-agricultural products for which the tariff is 9.5%, agricultural products are protected and supported with a higher percent of tariffs amounting to 36.4% (www.wto.org, 2015). Two-thirds of the population enjoys subsidies for food grains procured by the government under the Security Act 2013 (www.wto.org, 2015).

The introduction of a scheme for setting up wholly-owned subsidiaries, raising foreign equity limit in insurance to 49%, amending the main securities legislation, adopting the National Telecom Policy 2012 and allowing FDI in railway transportation except in the operation of railways are a few changes introduced by the government for the further betterment of the services sector which accounts for more than half of the country’s GDP and the main driver of economic growth (www.wto.org, 2015).

The manufacturing sector has been showing a slight decline but the new manufacturing policy introduced by the government in 2011 seeks to increase the sectors share in GDP to a significant 25% by attracting investments to strengthen the sector (www.wto.org, 2015).

EMPLOYMENT

In order to ensure quicker, sustainable and inclusive growth of the economy the government of India focuses on quality employment (www.oecd.org, 2014). Even as one of the fastest growing economies with high level of potential the working force lack the necessary skills to keep up with the growth mainly because of rural migrants and urban poor (www.oecd.org, 2014).

The 2012-2017 five-year plan is framed to increase the overall literacy rate by 80% and also expects to see a reduced gap of 10% between genders (www.oecd.org, 2014). The quality and relevance of education has also be paid attention to in order to make available quality work force to meet competition effectively during the further integration of the Global Value Chain (www.oecd.org, 2014). Career centers will be established to analyze the local job scenario and provide good quality career counseling for young people through job fairs for better placements (g20.org, 2014). Apprentice schemes have shifted to focus to being industry friendly and attractive to the youth in order to encourage them to make available their time for skills development (g20.org, 2014). “Skill India” will focus on increasing apprenticeship seats from 5 lakhs to 23 lakhs (g20.org, 2014).

The “make in India” initiative taken by the government is to create employment opportunities in the manufacturing sector (g20.org, 2014). The Government is also encouraging the private sector to participate in employment generation through initiatives like the National Manufacturing Policy (NMP) 2011 which seeks to achieve a goal of creating 100 million jobs (g20.org, 2014). The manufacturing industry has the capability to create a multiplier effect on the creation of jobs (g20.org, 2014). The government also focuses on promoting labor-intensive industries to promote job growth (g20.org, 2014). With an aim to encourage private participation in employment generation the government is working to promote ease of business and as a result around 25 Cluster Development Programmes have been set up in different parts of the country encompassing different sectors of the economy (g20.org, 2014).

Government attention has been specifically paid to the agricultural sector because India employs more than half of its labor force in this sector (g20.org, 2014). Agricultural activities and number of days of employment are inadequate therefore through Public Works Programme employment is being generated to reduce employment deficit (g20.org, 2014). The various Public Works Programme in India include the Mahatma Gandhi National Rural Employment Guarantee Act is designed to guarantee employment for at least 100 days in the rural areas, and others such as SGSY, SJSY, NRAM and PMEGP also seek to improve the purchasing power of the rural poor and create positive spillover effect through the creation of assets for the community, strengthening internal resource management and raising social and gender equality by encouraging participation especially by disadvantaged groups (g20.org, 2014). Efficiency and transparency of these programmes are being followed up to address challenges by employing innovative measures (g20.org, 2014).

CONCLUSION

Favorable demographics, relatively high savings and recent policy efforts to improve skills and domestic market integration support the long-term growth of India (www.worldbank.org, 2014). In addition to this firm policy actions, reduced global oil prices, and improved growth prospects in the U.S will further improve the potential for enhanced growth (www.imf.org, 2015).

India has come a long way since the colonial rule and from the above research paper we know that the economy has high potential for future growth and development and will emerge as one of the worlds most powerful economies in the near future.

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