Fundamentals Of How India Makes Its Money

India, a former British colony that has been independent for less than 70 years, currently has the ninth 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 $1.88 trillion in 2013.

Agriculture

Agriculture, once India’s main source of revenue and income, has since fallen to only 18% 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 31% of the industrial contributions to the Indian economy in 2013. 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 2013, for example, India mined 613 million tons of coal (which, surprisingly, wasn’t enough to meet the country’s coal needs), 136 million tons of iron ore, 15 million tons of bauxite and 1.56 tons of gold, along with asbestos, uranium, limestone and marble. The aforementioned oil and coal were extracted at a rate of 37.9 million tons and 40.7 billion cubic meters, respectively, in the 2012-2013 year.

IT and Business Services Outsourcing


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.

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to over 51% in 2013. 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 2014, 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 2011 22% of the country’s economic value added comes from intermediaries and middlemen in the retail sector. The retail sector is so large because of a point mentioned above: there is little storage for Indian agricultural product. As such, 20-40% of the agricultural output of the country is lost to spoilage. 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. In 2012, electricity for the country was supplied by Indian oil, gas, and coal (71%); hydroelectricity (15%); renewable (12%); and nuclear (2%).

In 2013, 7 million tourists visited India, spending $85 billion. That, combined with the domestic travel amounts to about 6% of the country’s 2013 GDP.

Medical tourism to India is growing incredibly and is expected to receive 3.2 million patients in 2015, worth an estimated $2 billion. Medical tourism is popular in India because of its low-cost healthcare and international standards compliance. Customers come from all over the word 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 estimated to grow over 6% in 2016 alone. While doubts have been raised about the math behind that estimate, the economy is growing. Even with smaller growth, the country can easily stay in the top 10 world economies. In its attempts at becoming a developed country though, problems still plague India, namely malnutrition, lack of infrastructure and education, poverty, and corruption.

By Vanessa Page

Source: http://www.investopedia.com/articles/investing/043015/fundamentals-how-india-makes-its-money.asp