Since 2003 India has been one of the fastest growing major economies in the world, leading to rapid increases in per capita income, increasing demand, and integration with the world economy. India has made structural reforms that have led to its growing prowess in certain sectors of the service economy as well. Should the government maintain a growth orientation with respect to economic policy, trade, and globalization, India’s GDP in dollar terms could surpass that of the United States by 2050, making it the world’s second largest economy.
India’s GDP growth at 5 percent in 2012 was the lowest reported in more than a decade. Private capital formation declined due to the high cost of financing, infrastructure bottlenecks, poor investments sentiment, and weak domestic and global demand. The latest data on industrial production and manufacturing suggests very modest growth of 1 percent. Despite the low growth, inflation has continued to remain high, with consumer price inflation (CPI) hovering above 10 percent year over year for most of 2013. Supply constraints, particularly in food and infrastructure, the resulting food price rise, and high dependence on fuel imports have kept inflationary pressures high. In the past gradual opening up of the economy introduced competition that forced the private sector to restructure, emerging leaner and more competitive. The factors leading this change have been international trade, financial sector growth, and the spread and adoption of information technology.
One recent challenge that India has been facing is the reversal of capital inflows. In the past, foreign investors have brought capital into the Indian stock market due to high global liquidity, interest rate differentials between advanced and emerging nations, and better growth prospects relative to the advanced economies. However, lower-than-expected growth, macroeconomic imbalances that include fiscal and current account deficits, poor investment conditions and corporate earnings, and a volatile currency have led to a reversal of the trend. Institutional investors are turning into net sellers in the Indian equity market. The market expectation of an improvement in the US economy and the hint of a possible exit by the US Federal Reserve this year have also contributed to the reversal of capital inflows. In a recent monetary policy review meeting, the Reserve Bank of India (RBI) expressed apprehension of a sudden stop and reversal of capital inflows from emerging markets, including India. The government is considering further opening up the Indian economy including raising the cap on foreign investment in rupee-denominated government debt by up to $5 billion, reducing taxes on such investments, easing access to foreign funds for Indian companies, and reducing curbs on foreign investment in sensitive sectors such as defense, telecommunications, and media.
The twenty-first century will likely see a majority of India’s population living in urban areas for first time in history. India has ten of the thirty fastest growing cities in the world and is witnessing rapid urbanization. This is happening not only in the larger cities, but in small and mid-size cities as well. India’s rapid urbanization has implications for demand in housing, urban infrastructure, location of offices, retail, and hotels. The increasing expenditures in infrastructure will likely drive growth in the transportation sector, spur demand for vehicles, contribute to increasing real estate values along road corridors, and boost suburban growth, the natural next phase of urbanization.
