India’s Economy: Overview and Issues for Congress

India’s Economy: Overview and Issues for Congress

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January 5, 2024
India’s Economy: Overview and Issues for Congress
India’s economy—its current performance and potential—
of annual GDP growth above 6%-7%, and it has at times
attracts significant U.S. commercial attention. Since 2000,
been the world’s fastest growing major economy. India has
U.S. Administrations and Congresses have sought to
emerged as a destination not only for major foreign firms
deepen U.S. economic ties with India, based on shared
for back-office and information technology (IT) services,
interests between the United States and India, including
but also for research and development. Various trade and
regarding China. During the Biden Administration, such
investment restrictions remain (see below). Poverty also
motivations appear to have become acute, and the partners
remains significant; by one estimate, nearly 12% of the
have pursued new joint activities, including the Indo-Pacific
population was in poverty in 2021, based on a poverty line
Economic Framework for Prosperity (IPEF) and the
of $2.15 per day, at 2017 purchasing power parity. (Data in
initiative for Critical and Emerging Technologies (iCET).
this and the below sections are from the International
Still, the partners continue to have frictions on various trade
Monetary Fund, the World Bank, and the United Nations.)
and economic issues, with efforts to address these issues
Current Economic Performance
also a longtime focal point of U.S. engagement with India.
India overtook the United Kingdom to rank as the world’s
Congress may assess India’s economy and its implications
fifth-largest economy ($3.4 trillion in nominal GDP) in
for U.S.-India trade relations. Should it do so, Congress
2022, and it overtook China to become the world’s most
may examine issues such as whether India can attain the
populous country in 2023. India’s middle class—estimates
economic aspirations set by Indian Prime Minister
of which are difficult to make but could comprise one in
Narendra Modi and whether India can be an alternative to
three Indians, per one analysis—has generally been a driver
the People’s Republic of China (PRC, or China) for supply
of the country’s domestic consumption-led economic
chain diversification and foreign direct investment (FDI).
growth; the middle class was hit hard by the COVID-19
Congress might consider how to respond to changes in
pandemic. India’s real GDP, after contracting by 5.8% in
India’s economy to advance U.S. trade and economic
2020, grew by 9.1% in 2021 and 7.2% in 2022, bolstered by
interests.
government support, domestic demand, and a COVID-19
History of Economic Reforms
vaccine roll-out. India’s real GDP is projected to have
grown by 6.3% in 2023, with the increase in consumption,
In the first three decades after India’s independence in
infrastructure spending, and the establishment of new
1947, its economy grew slowly. India sought self-
businesses driving expectations. Headwinds remain, such as
sufficiency, operating an import-substitution model and
those posed by geopolitical risks and inflationary pressures.
focusing on state-led capital investments. It established an
Economic circumstances vary sub-nationally (see text box).
industrial licensing system, limited imports and FDI, and
India State-Level Economic Activity
maintained high average tariffs relative to other
India’s federal system is composed of 28 states and eight union
industrializing countries. Poverty levels also were high,
territories that have their own sub-national economies and
with India a recipient of considerable foreign aid.
investment climates, and that shape India’s overall economic
performance. The liberalization of India’s economy after 1991
With some trade liberalization and government spending,
coincided with more decentralized economic policy-making and
India’s gross domestic product (GDP) grew in the 1980s; at
states assuming a greater role, such as on public services.
the same time, India experienced a worsening economic
Economic circumstances vary widely across India’s states by
situation that came to a head in 1991. India faced depleted
growth, demography, urbanization, natural resources, and state-
level policies. Modi has advanced a notion of “competitive
foreign exchange reserves (covering less than a month of
federalism” to drive sub-national progress (e.g., cities bidding for
imports), precipitated by rising import costs, and other,
project funding under the digitally focused Smart Cities
arguably longer-running issues, including mounting foreign
initiative).
India’s five largest states, based on state-level real GDP data, are
debt. In 1991, with a balance-of-payments crisis grappling
as fol ows:
the country and the dissolution of the Soviet Union
Maharashtra has a strong services economy and houses
(formerly a key economic benefactor), India launched key
Mumbai, India’s financial capital.
market-opening economic reforms during the government
Gujarat is significant in agricultural and industrial
of Prime Minister PV Narasimha Rao and Finance Minister
production, including pharmaceuticals.
Tamil Nadu is a major industrial base that also houses
Manmohan Singh (later also Prime Minister, 2004-2014).
Chennai, an IT hub.
India reduced tariffs, devalued its currency to make its
Uttar Pradesh has a significant agricultural economy and is
exports more attractive, and dismantled import-blocking
India’s most populous state.
licensing restrictions. It also began privatizing some sectors
Karnataka houses Bengaluru (“the Silicon Valley of India”),
the center of India’s IT sectors and start-up ecosystem.
and removed some domestic investment limits. India joined
Source: GDP data for 2021-2022 from Reserve Bank of India,
the World Trade Organization (WTO) in 1995.
Handbook of Statistics on Indian States 2022-2023.
Since the 1990s, India’s economic performance has
Services (e.g., IT and communications and digital
generally improved. In some years, India has averaged rates
subsectors) are a key part of India’s economy (see Table 1).
https://crsreports.congress.gov

India’s Economy: Overview and Issues for Congress
Agriculture is the top jobs provider, but its share of the
India’s government has opened some politically sensitive
economy has declined—a common shift as countries
sectors to increased FDI levels (e.g., defense, insurance,
advance in economic development. Some analysts assess
and telecommunications). It also has moved to ease some
India’s manufacturing sector as underperforming, yet the
local sourcing requirements for foreign, single-brand
sector has notable activity (e.g., pharmaceuticals,
retailers and allowed them to launch e-commerce platforms
chemicals, textiles, and autos).
before opening physical stores in-country. Other investment
India has demographics that tend to be favorable for
barriers remain, including aspects of India’s trade policies
growth, with a relatively young and sizeable working-age
(see State Department, 2023 Investment Climate Statement).
population, while it also faces unemployment challenges.
India has stepped up efforts to attract FDI, following
While official data are not available, a credible estimate of
vulnerabilities the COVID-19 pandemic and intensified
India’s unemployment rate was 9.2% as of November 2023.
U.S.-China and India-China trade frictions revealed in
Some analysts have questioned whether India can create
global supply chains. The Modi government aims to
enough formal jobs to absorb the millions of new workers
position India as a viable alternative or additional
seeking to join the labor force each year and attain a
destination for companies seeking to diversify their supply
“demographic dividend.” Various private sector projections
chains and manufacturing beyond China. India has targeted
on India’s outlook to reach its economic aspirations (see
sectors such as semiconductors and critical minerals.
below) point to a need for changes such as to reform land
The development and bolstering of infrastructure, both
and labor laws and further reforms to ease doing business.
physical and digital, is a key focus of New Delhi’s 2023/24
Table 1. India’s Economy: Selected Sectors
budget. Modi also has focused on improving daily quality
Share of Value-
Share of
of life, with reforms centered on boosting electrification,
Economic
Added to GDP
Employment
Sector
(2022)
(2021)
public transportation, waste treatment, and digitization of
Agriculture
16.7%
44.0%
services. Observers debate the extent to which such
Services
48.4%
30.7%
measures have boosted the standard of living.
Industry
25.7%
25.3%
Overall, the record on economic reforms is mixed. While
Source: CRS, based on World Bank data.
engaging in market-opening reforms, India has also raised
Notes: For value-added, shares do not sum to the whole due to the
tariffs, adopted data localization requirements, and pursued
exclusion of consumption of financial intermediary services indirectly
other market-limiting measures such as some agricultural
measured. Industry includes manufacturing, mining, and construction.
export restrictions and import regulations for laptops. The
Economic Priorities and Activities
U.S. government and some U.S. companies describe
Prime Minister Modi entered office in 2014 emphasizing
aspects of India’s trade policies as restrictive and/or
market-opening economic reforms. He aspires for India to
discriminatory against foreign firms (see Office of the U.S.
become the world’s third-largest economy, which some
Trade Representative, 2023 National Trade Estimate
international financial institutions and ratings firms estimate
Report on Foreign Trade Barriers). Some moves by India
may happen by the end of the decade. The Modi
of concern to the U.S. government and some in industry
government has undertaken a number of measures and
may be a bid by India to promote “self-reliance” and to
policy initiatives to further open India’s economy and
address its concerns about PRC investments (e.g., in India’s
attract FDI, including as part of its efforts to boost domestic
tech sector) and India’s reliance on imports from China
manufacturing and employment, enhance infrastructure,
(e.g., a key supplier of consumer electronics).
attract supply chains, and support climate and other goals.
Issues for Congress
In 2016, India modified its bankruptcy law to allow for
Questions facing Congress over India’s economy include:
easier resolution of failed businesses. The government has
• To what extent is India a reliable economic partner? As
been contemplating additional changes to the law to further
some firms pursue “China+1” strategies and some
streamline proceedings. Also in 2016, India undertook
“demonetization,” removing 86% of currency by value
governments work to de-risk from dependencies on
China, what is the outlook for India to be an alternative
from circulation; some observers saw this as a largely
for supply chains, investment, and manufacturing? What
unsuccessful effort to address tax evasion and corruption,
challenges and opportunities do U.S. firms face in
and as harmful to India’s poor (e.g., those in the informal
diversifying their operations to India?
sector who relied on cash transactions). In 2017, India
•
established a national sales tax system that some view
What are implications for U.S. trade policy of India’s
positively as streamlining complex state-level tax schemes.
sub-national economic policies and business climates?
State-owned enterprises (SOEs) remain a feature of India’s
• Is India poised to be an economic leader on the world
economy, but the government has focused on privatizing
stage? What further economic reforms by India and U.S.
loss-making SOEs (e.g., public sector banks) and also has
economic engagement with India (e.g., through IPEF)
sought to reduce its shares of certain companies.
could support India’s economic aspirations? What role
could Congress play in overseeing and approving such
India has rolled out various Production Linked Incentives
efforts?
(PLIs), such as tax rebates and license clearances, to
incentivize domestic and foreign investment to boost
See CRS In Focus IF10384, U.S.-India Trade Relations,
manufacturing and exports. The PLIs target various sectors
and CRS Report R47597, India-U.S. Relations: Issues for
(e.g., pharmaceuticals, medical devices, autos, steel,
Congress.
telecom, electronics, food, textiles, solar modules, batteries,
Shayerah I. Akhtar, Specialist in International Trade and
and drones). Some experts question whether the PLIs are
Finance
sufficient to attract additional investment.
https://crsreports.congress.gov

India’s Economy: Overview and Issues for Congress

IF12564

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