• The Invisible Hand

India's economy

Updated: Mar 14, 2019

Will India become the new economic empire in 2019?

With a new year comes new economic development and in 2019 one of the most likely seems to be that India will overtake the UK and become the fifth largest economy. This is a powerful reminder of the declining powers of post-Empire states and the remarkable rise of emerging economies. In this post we will look at the strengths and weaknesses of the Indian economy to get an idea of who is overtaking us.

We should remember that GDP is quite a poor measurement of the health of an economy. If suddenly Britain and France merged, we would become third in the global GDP ranking yet the fundamental state of the economies of both countries hasn’t improved at all. Therefore, we should not necessarily all start moving to India.

Although the UK and India have economies of a similar size, they are very different. India’s economic power comes mostly from its massive population of 1.4bn while the UK relies on being a high-income country. But as incomes rise in India, they will grow even quicker. Many suggest India has been a larger economy than Britain for a long time. If PPP adjusted figures are used, which more accurately reflect the cost of living, then India is over three times as big.

India is currently the largest growing economy in the world at 7.2% growth, dwarfing the UK’s 1.5% growth and its population is increasing faster. Unlike the UK it also benefits from having a youthful population and low dependency ratio so long-term growth in the future seems likely. Meanwhile the UK finances are becoming increasingly burdened by an ageing population. India is also a rising service economy which comprises 57% of the economy and provides higher income jobs. The IT sector in particular has grown rapidly and Bangalore is now the Silicon Valley of Asia.

However, the issue with India remains that it is still a very poor economy at the beginning stages of development. Still 12.5% live in extreme poverty and archaic practices such as the use of child labour persist. Agriculture is the biggest employer, however it only provides low paid jobs often at a subsistence level.

India’s government is less accommodating than the UK as companies are hampered by excessive bureaucracy, poor infrastructure and inflexible labour laws. Corruption can sometimes be positive if it helps overcome burdensome regulation. However, the fact remains that corruption is a pervasive problem in India although it is improving. A large informal sector limits the tax revenue the government receives and therefore the public services they can provide.

India is still poor and far from competing with living standards in the West. However, the news of its growing economy this year provides a pleasant reassurance that developing countries are growing and that this sort of growth is lifting people out of poverty.

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