The Indian Economy

Economic Section -- Embassy New Delhi

Prepared by Economic Affairs

Key Social Indicators

1980s 1990s latest

Population (millions) 685 845 1090

Poverty Incidence (% pop.) 44.5 36 25

Teledensity (per 100 pop.) 0.37 0.8 12

Literacy 44 52 66

Infant Mortality (per 1000 births) 115 79 60

prevalance of HIV (millions) n.a 3.5 6

Sources: CMIE, RBI

India Economic Facts

GDP is $752 billion; world's 10th largest economy in terms of GDP.

Economic liberalization began in 1991; continues at a slow pace. India is slowly integrating with global markets.

Since the 1990s, the middle class has grown and poverty levels have fallen.

GDP growth has fallen only slightly to 6.4% (2000-2005) from 6.7% (1994-1999).

Tariffs are still among the world's highest (average 22%).

Challenges ahead: reduce poverty, accelerate pace of reform, reduce fiscal deficit, upgrade infrastructure.

India's successes: IT, pharma & biotech, telcom, science and technology skills, manufacturing gaining competitiveness.

Two-way U.S.-India trade tops $25 billion a year, was $10 billion in 1997.

India's GDP grew at an impressive 7.8% during 2005-2006.

English and education versus higher incomeRead

EnglishSpeak Hindi

Read Hindi

Speak English

YESNO

NOYESNO

YESNO

Class

Read Hindi

Read English

Poor 4% 2% Middle Class 37% 23% Upper Class 11.5% 10%

Total 51.5% 35%

Source: New Delhi, B.K. Sharma

Sectors of the Indian Economy1990 2004

30.8%

29.1%0.6%

39.5%

54.1%

16.7%

26.2%

Services Agriculture

Manufacturing IT/Software

3.0%

Source: CMIE, RBI, World bank

Nominal and Per Capita GDPFiscal year end March

600

400

200

01996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Nominal GDP USD billions Per Capita GDP US $

Source: Central Statistical Office

Real GDP Growth RatesFiscal year end March

10

8

6

4

2

0

19911992199319941995199619971998199920002001200220032004200520062007 (est)

factor cost %

Source: Reserve Bank of India, Economic Survey, 2005-2006

GDP at Factor Cost by Sector(1999-2000 Bare Year Prices)

%

Agriculture, forestry, fishing

Mining and quarrying

Manufacturing

Electricity, gas & water supply

Construction

Trade, hotels, transport, and communication

Financing, insurance, real estate, & services

GDP

0 2 4 6 8 10 12 14

Source: The Economic Times, CMIE, CSO

Comparative Growth Rate of GDP% per annum

China

Korea

2002

2003

2004

2005

2006

Indonesia

Malaysia

Philippines

Thailand

Bangaladesh

India

Pakistan

0 2 4 6 8 10

Source: Asian Development Outlook, World Economic Outlook

Sources of Government RevenueFiscal year 2006

corporate tax 30.0%excise duty 27.0%

income tax 17.5%

customs collections 17.4%

service tax 7.8%

other sources 0.3%

Source: India Ministry of Finance, India Budget 2006-2007

Expenditure of General Government Combined Center and State -- 2005

interest26.5%

Source: IMF

defense16.4%

subsidies9.4%

education10.5% health

4.9%

other social services6.8%

other25.4%

Tax Revenues as Percent of GDPFiscal Year end March

30

Fiscal gap25

20

15

10

5

0

2000

1999

2001

2002

2003

2004

2005

2006

Tax revenues Total revenue and grants Total expenditure and net lending

Source: IMF

Government Expenditure% total expenditure

35

30

25

20

15

10

5

Source: IMF

19911992

0

19931994199519961997199819992000200120022003200420052006 (proj)

defense subsidies interest on debt

Gross Domestic Savings and Investment % GDP 2002

ChinaKorea

IndonesiaMalaysia

PhilippinesThailand

BangaladeshIndia

PakistanSri lanka

0 10 20 30 40 50

Investment Savings

Source: Asian Development Outlook 2002

General Government DebtFiscal year end March

100

80

60

40

20

1997

0 2005 (

1998

2003

1999

2000

2001

2002

2004

proj.)

Debt Stock/ GDP ratio External Debt/GDPSource: IMF

GOI Fiscal Deficit: States vs. Center%

14 GDP

12

10

8

6

4

2

0

19911992199319941995199619971998199920002001200220032004

Center StatesSource: Indian Ministry of Finance

Government Debt/GDP Ratio2003-2007

120

115

110

105

100

95

90

852003 2004 2005 2006 2007

Base Case Reform CaseSource: IMF

Composition of India's 2004 Sovereign Debt

IBRD7.0%

IDA19.6%

IMF1.0%

Bilateral19.2%

Other Multilateral4.6%

Short-term3.0%

Private45.5%

Source: IBRD

India’s External Debt

1990199119921993199419951996199719981999200020012002200320042005

0

20

40

60

80

100

120

140US $ billions

Fiscal year end March

Multilateral

Bilateral

IMF

Trade Credit

Commercial Borrowing

NRI & FC Deposits

Russian Rupee Debt

Short-term debt

Source: Reserve Bank of India; Finance Ministry

Gross Nonperforming Loans % of Total Loans

20

15

10

5

01997 1998 1999 2000 2001 2002 2003 2004 2005

Public sector banks Private sector banks Foreign banks

Source: IMF

Indian Saving and Investment% of GDP

30

25

20

15

10

5

01996 1997 1998 1999 2000 2001 2002 2003 2004

Private Domestic Savings Private Domestic Investment

Source: IMF, Ministry of Finance

Bet You Didn't Know (Part One)India is one of only three countries that makes supercomputers (the US and Japan are the other two).

India is one of six countries that launches satellites.

The Bombay stock exchange lists more than 6,000 companies. Only the NYSE has more.

Eight Indian companies are listed on the NYSE; three on the NASDAQ.

By volume of pills produced, the Indian pharmaceutical industry is the world's second largest after China.

India has the second largest community of software developers, after the U.S.

India has the second largest network of paved highways, after the U.S.

India is the world's largest producer of milk, and among the top five producers of sugar, cotton, tea, coffee, spices, rubber, silk, and fish.

100 of the Fortune 500 companies have R&D facilities in India.

Current Account Goods and Services-- Fiscal year end March

US $ billions100

80

60

40

20

19820

1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

imports exports

Source: IBRD

Current Account balanceFiscal year end March

US $ billions10

8

6

4

2

0

-2

-4

-6

-8

1992199219941995199619971998199920002001200220032004

Source: IBRD, CMIE

Sources of Real GDP GrowthFiscal Year End March

14

12

10

8

6

4

2

0

-2

-4

1996

2002

1997

1998

1999

2000

2001

2003

2004

2005

Agriculture

Industry

ServicesSource: CSO, RBI, CMIE

Foreign Institutional Investment2004

Source: Reserve Bank of India; SFBI; ABN-AMRO

FII $ millions

Sensex Thousands2,000 7

1,5006

1,000

500 5

04

-500

3-1,000

May Ju

l

Oct

Feb

Apr

DecJun

Sep

Jan

Aug NovMar

FII Investments

Sensex average

U.S. Investment in IndiaCalendar YearUS $ billions

5

4

3

2

1

0

1999

2000

1995

2004

2005

1996

1997

1998

2001

2002

2003

FDI

PortfolioSource: SIA, Ministry of Commerce and Industry

Market Capitalization of Listed Companies2002

% GDP

India

Brazil

China

Egypt

Kenya

Malaysia

Mexico

Poland

Turkey

USA

0 20 40 60 80 100 120 140 160

Source: World bank, IMF

Domestic Listed Companies 2003

India

Brazil

China

Egypt

Kenya

Malaysia

Mexico

Poland

Turkey

USA

30 1 2 4 5 6Thousands

Source: World Bank. IMF

Bet You Didn't Know (Part Two)Two million people of Indian origin live in the U.S.

Indian-born Americans are among the most affluent and best educated of the recent immigrant groups in the U.S.

Thirty percent of the R&D researchers in American pharmaceutical companies are Indian Americans.

Nearly 49% of the high-tech startups in silicon Valley and Washington, D.C. are owned by Indians or Indian-Americans.

There are over 700 companies in Silicon Valley owned by Indian-Americans.

India sends more students to U.S. colleges than any country in the world. In 2004-2005, over 80,000 Indian students entered the U.S. China sent only 65,000 students during the same time.

In a case decided by the U.S. Supreme Court, an Indian-American woman scientist, Dr. Ananda Chakrabaty, won the argument that persons may be granted patents for useful �manufacture� of living organisms. She defeated the U.S. Patent Office, that argued that living things may not be patented, thus establishing the legal foundation for the biotech industry, (Diamond vs. Chakrabaty, 1980). Dr. Chakrabaty invented a microbe that eats oil spills.

Indian Rupees to 1 USDMonthly Average - December

50

40

30

20

10

0

2000

1994

2001

2002

2003

2004

2005

1995

1996

1997

1998

1999

Source: Reserve Bank of India

Indian Rupees to 1 USDMonthly average

50

40

30

20

10

Source: Reserve Bank of India, CMIE

JanFeb

0 MarAprMayJuneJulyAugSepOctNovDecJanFebMarApr

World's Ten Wealthiest CountriesGDP

USA

Japan

Germany

Britain

France

Italy

China

Spain

Canada

India

0 1 2 3 4 5 6 7 8 9 10 11 12

$US (In Trillions)

Source: World Bank

Forex Reserves Increase and Import CoverUS$bn Mnths

18200

16180

160 14

140 12

120 10100

880

660

440

220

00

FY91

FY92

FY93

FY94

FY97

FY96

FY95

FY04

FY05

FY06

FY07

E

FY03

FY02

FY01

FY00

FY99

FY98

Reserves

Months of Import Cover

Source: DGCI&S; RBI; Citigroup

Foreign Exchange Reserves

87198819891990199119921993199419951996199719981999200020012002200320042005Mar 2006

0

20

40

60

80

100

120

140

160

US $ billions

SDRs

Gold

Foreign Currency Assets

Fiscal Year end March

1985198619

Source: Reserve Bank of India

Exports by CommodityA China-India Comparison

China

India

Agricultural products

22.2 7.9

Fuels and mining products

18.1 6.4

Manufactures

397.0 48.0

Of which Iron and steel 4.8 2.9 Chemicals 19.6 7.3 Machinery and transport equipment 187.8 6.1 Textiles and clothing 79.0 13.5 Others

105.8 18.2

Total 437 62 (2003, US$bn)

Source: WTO

Share of World OutputSelect Asian Developing Countries -- 2004

%ChinaIndia

South KoreaIndonesia

TaiwanThailand

PhilippinesMalaysia

Hong KongVietnam

Singapore

0 2 10 12 144 6 8

1982 1992 2004Source: IMF

Female

Main workers

Marginal workersTotal female workers

Rural India91 248

Total female non-workers

36

Total female workers Total female non-workers

121

Total pop. of India

Female non-workers

Urban India

Total female workers

Source: 2001 Census of India (millions)

Comparative Export of High-Technology Manufactured Goods

India

Brazil

China

Egypt

Kenya

Malaysia

Mexico

Poland

Turkey

USA

0 10 20 30 40 50 60

% of High-technology Manufactured Goods

Source: Dun & Bradstreet

Comparative Annual Wages in Manufacturing

India

Brazil

China

Egypt

Malaysia

Mexico

Poland

Thailand

Turkey

USA

0 10 20 30 40

ThousandsSource: Dun & Bradstreet

India’s Share of World Exports% of Global Trade

1

0.8

0.6

0.4

0.2

0

Source: IBRD; WTO

1970197519801985199019951998199920002001200220032004

Comparative Customs Duty Rates India and other Developing Countries

%

India

Pakistan

Brazil

China

Indonesia

Thailand

South Korea

0 10 20 30 40 50

All goods Agriculture ManufacturingSource: IMF

India’s Top Trade Partners - Exports2004-2005

USA 17.5%

UAE 9.4%

Hong Kong 4.8%

UK 4.7%

Germany 3.5%

Japan 2.6%

Belgium 3.2%

Singapore 5.0%Other 44.2%France 2.1%

Italy 2.9%

Source: India Trade promotion Organization

India’s Top Trade Partners - Imports2004-2005

USA 5.9%

UK 3.2%China 6.3%

Germany 3.6%

Australia 3.3%

Switzerland 5.4%

Singapore 2.4%

Belgium 4.3%

Japan 2.8%

Malaysia 2.1%

Other 60.7%

Source: India Trade promotion Organization

Commodity Composition of TradeOthers 25.0%

EU 21.0%

USA 18.0%

Middle East 13.0%

NE 10.0%

China 5.0%

ASEAN 5.0%

Japan 3.0%

Other goods6.0%

Oil6.0%

Commodities4.0%

Agricultural12.0%

Ores4.0%Leather

3.0%Chemicals

10.0%

Engineering18.0%

Textiles10.0% Readymades

10.0%

Gems, jewelry17.0%

Direction of Exports, FY04

Composition of Exports, FY04

Source: DGCI&S

U.S. Business Complaints

Excessive government interference.

High tariffs and excessive indirect taxes

Differential tax rates for foreign companies.

Restrictions on foreign investment.

Substandard infrastructure.

Questions about ‘sanctity of contract.’

Weak enforcement of intellectual property rights.

Estimated Trade Losses Due To Copyright Piracy And Piracy Levels In-Country

Motion Pictures Records & Music Business Software Entertainment Software

Books

Losses Piracy Levels

Losses Piracy Levels

Losses Piracy Levels

Losses Piracy Levels

Losses

Total Losses

Pakistan 12.0 NA 70.0 100% 14.0 82% NA NA 52.0 148.0Indonesia 32.0 92% 27.6 80% 100.0 87% NA NA 32.0 191.6India 360.0 55% 102 50% 520.0 73% 59.5 86% 90.0 483.8Russia 275.0 80% 411.9 66% 800.0 87% 255.8 73% 42.0 1784.7China 280.0 95% 202.9 85% 1488.0 90% 510.0 90% 50.0 2530.0

(Cost in millions of U.S. dollars)

Source: International Intellectual Property Alliance

Principal Products of U.S.-India Merchandise Trade

Top ten products in 2005 -- US $ millions

U.S. Imports from India Amount U.S. Exports to India Amount

Gems and jewelry 4,730 Airplanes/aircraft machinery 467

Womens/girls blouses 336 Fertilizers 413

Mens/boys shirts 294 Ferrous waste/scrap 126

Petroleum oils 303 Bituminous coal 150

Shrimps/prawns 290 Transmission apps 107

Sweaters/pullovers 271 Industrial oils 99

Cashew nuts 261 Almonds 94

Womens/girls skirts 281 Jewelry and parts 101

Industrial oils 249 Digital data processors 87

Toilet/kitchen linen 247 Parts for boring machinery 86

All other 11,447 All other 5,235

Total 18,709 Total 6,965

Source: US International Trade Commission

U.S.-India Trade in Services: 2003US $ millions

Service Type U.S. exports U.S. imports

Education 1,457 3

Travel 1,180 723

Business/prof/technical 353 420

Freight 170 81

Telcom 129 428

Royalties and license fees 115 8

Intra-company services 110 262

Port services 83 66

Financial services 56 19

Passenger fares 26 167

Film/TV/tape rentals 14 0

Insurance 5 5

Other 14 2

Total Services 3,728 2,184

Sources: US International Trade Commission

U.S. - India Trade in Goods20

15

10

5

1992

0

1993199419951996199719981999200020012002200320042005

Source: International Trade Commission

Exports to India

Imports from India

U.S. - India Trade in Services5

4

3

2

1

Source: International Trade Commission

19921993

0

199419951996199719981999200020012002200320042005

Exports to India

Imports from India

Total U.S. Trade with IndiaUS$ billions

20

15

10

5

1992

0

19961997

19931994

1999200020012002200320042005

1995

1998

Total exports to India

Total imports from India

Source: International Trade Commission

Top Ten Reasons Favoring FDI in Retailing

• Experience of other countries shows that retailing has attracted significant FDI.

• FDI would bring technical know-how and skill.

• It would speed up the growth of organized retailing, set up supply chaings and lead to implementation of Information Technology.

• Joint ventures would ease capital constraints of existing organized retailers.

• Domestic retailers would get access to global best management practices.

• Sourcing from India would increase.

• There will be more investment in upstream activities and allied sectors.

• Competition would drive down prices.

• Protection leads to inefficiency.

• FDI would lead to development of different retail formats and modernization of the sector.

Source: FDI in Retail Sector, India 2005

States Attracting Highest FDI Flows in India (2000-2003)

2000 2001 2002 2003 Amount % Share Amount % Share Amount % Share Amount % Share

Delhi 24576 30.6 69183 18.9 29943 18.5 21047 22 Maharashtra 35789 44.5 29917 43.7 48657 30.1 10228 10.7 Karnataka 5826 7.2 13104 8.3 8929 5.5 9991 10.5 Tamil Nadu 5519 6.87 7427 4.7 13412 8.3 8055 8.4 Chandigarh 8426 5.2 Gujurat 10426 10.9 Andra Pradesh 2517 3.13 3398 2.1 (Amount in INR millions)

Source: World Bank

Sectoral FDI Equity CapsSector FDI cap in %

Retailing (single-brand only) 51Real Estate 0

Small Scale Industries 24New print media 26

Insurance 26Defense Industry Sector 26Refining with Public Cos 26Private Sector Banking 74*

Domestic Airlines 49Telecommunications 74

Trading 51Internet service provider 74

Mining 74Oil marketing 100

*Includes FDI and FII

Source: Ministry of Commerce and Industry

More Economic Data and ForecastsA 36% surge in imports at US$106bn resulted in India's trade deficit touching a record high of US$26.5bn in FY05 compared to US$14.3bn in FY04.

The predicted trade deficit for FY06 is US$30.9bn.

Citigroup estimates that the value of Indian currency is expected to decline by 15% over the next 4 years.

India's savings rate has risen to 28.1%, while investments have risen by 26.3%.

Non-agricultural sector growth may trend to 9% in the coming years.

In FY04, India committed more revenue to subsidies (nearly US$1bn) than it did to non-capital defense expenditures.

Almost 55% of India's tax revenue in FY04 was collected from excise duties and customs collections.

India's FY06 budget targets a fiscal deficit of 4.3% of GDP.

In India, services account for nearly 50% of GDP.

Bottlenecks to Growth(Survey responses by country for each

perceived ‘bottleneck’ category)%100

80

60

40

20

0Business Regulation Tax and Customs Corruption

Brazil

China

IndiaSource: World Bank Investment Climate Surveys

Economic Freedom?

Political Freedom

Days taken to start a business

Competitiveness ranking

Corruption ranking

Brazil Free 152 57 59 China Not Free 41 46 77 Egypt Not Free 43 62 102 India Free 89 55 90 Indonesia Partly Free 151 69 133 Malaysia Not Free 30 31 64 Mexico Free 58 48 64 Pakistan Not Free 24 91 39 Philippines Free 50 76 102 Russia Not Free 36 70 71 South Korea Free 22 29 47 Thailand Free 33 34 90

Source: Economic Times

Time Taken to Register Property

Norway

China

Pakistan

S.A. Average

Sri Lanka

India

Malaysia

0 20 40 60 80 100 120 140 160

No. of Days

Source: World Bank

Land Cost Relative to Income Level(Ratio of land cost/sq.m to GDP per capita in 1999, indexed to New Delhi - 100)

120

100

80

60

40

20

Source: World Bank

Kuala LumpurSydneyBangkokTokyoSingaporeJakartaSeoulTaipei

Mumbai

New Delhi

Bangalore

Land Cost

0

Start-up Times for New Businesses

AustraliaUSA

EnglandNepal

PakistanMalaysiaBelgium

BangladeshChina

Sri LankaIndia

0 20 40 60 80 100

Days to Set Up

Source: World Bank

Time to Enforce a Contract

Tunisia

China

Malaysia

Nepal

Bangladesh

S.A. Average

Pakistan

India

Sri Lanka

0 100 200 300 400 500

No. of Days

Source: World Bank

Bankruptcy Recovery Rate(Cents on the Dollar, Recovered From Insolvent Firm)

Best RecoveryJapan

Pakistan

Malaysia

China

Sri Lanka

Nepal

Bangladesh

S.A. Average

India

0 20 40 60 80 100

Recovery Rate

Source: World Bank

Real Interest RatePrime Lending Rate minus WPI

Source: Reserve Bank of India

1991199219931994199519961997199819992000200120022003200420052006

0

2

4

6

8

10

12

14

%

Time To Go Through Insolvency

Shortest TimeIreland

Sri Lanka

Malaysia

China

Pakistan

Bangladesh

S.A. Average

Nepal

India

0 2 4 6 8 10 12

Years

Source: World Bank

Rigidity of Employment Index

Least RigidHong Kong

Malaysia

Bangladesh

China

Sri Lanka

S.A. Average

Nepal

India

Pakistan

0 20 40 60 80 100

Rigidity Index

Source: World Bank

Problem: The Transformed Relationship is incomplete. Solution: Grow the economic and commercial relationship.

Economic Dialogue

Trade Policy Dialogue Commerce: High Tech

Cooperation

Finance Dialogue

Private Sector Involvement

Energy Dialogue

Strategic Trade High Tech

Trade

Financial Intel Unit

WTO and USTR

CEO Forum

EconomicCommercial

Strategy

Standards and Trade Facilitation