Economy

India has one of the largest, most highly diversified economies in the world, but, because of its enormous population, it is—in terms of income and gross national product (GNP) per capita—one of the poorest countries on Earth. Since independence, India has promoted a mixed economic system in which the government, constitutionally defined as “socialist,” plays a major role as central planner, regulator, investor, manager, and producer. Starting in 1951, the government based its economic planning on a series of five-year plans influenced by the Soviet model. Initially, the attempt was to boost the domestic savings rate, which more than doubled in the half century following the First Five-Year Plan (1951–55). With the Second Five-Year Plan (1956–61), the focus began to shift to import-substituting industrialization, with an emphasis on capital goods. A broad and diversified industrial base developed. However, with the collapse of the Soviet system in the early 1990s, India adopted a series of free-market reforms that fueled the growth of its middle class, and its highly educated and well-trained workforce made India one of the global centers of the high-technology boom that began in the late 20th century and produced significant annual growth rates. The agricultural sector remains the country’s main employer (about half of the workforce), though, with about one-fifth of the gross domestic product (GDP), it is no longer the largest contributor to GDP. Manufacturing remains another solid component of GDP. However, the major growth has been in trade, finance, and other services, which, collectively, are by far the largest component of GDP.

Many of the government’s decisions are highly political, especially its attempts to invest equitably among the various states of the union. Despite the government’s pervasive economic role, large corporate undertakings dominate many spheres of modern economic activity, while tens of millions of generally small agricultural holdings and petty commercial, service, and craft enterprises account for the great bulk of employment. The range of technology runs the gamut from the most traditional to the most sophisticated.

There are few things that India cannot produce, though much of what it does manufacture would not be economically competitive without the protection offered by tariffs on imported goods, which have remained high despite liberalization. In absolute terms and in relation to GDP, foreign trade traditionally has been low. Despite continued government regulation (which has remained strong in many sectors), trade expanded greatly beginning in the 1990s.

Probably no more than one-fifth of India’s vast labour force is employed in the so-called “organized” sector of the economy (e.g., mining, plantation agriculture, factory industry, utilities, and modern transportation, commercial, and service enterprises), but that small fraction generates a disproportionate share of GDP, supports most of the middle- and upper-class population, and generates most of the economic growth. It is the organized sector to which most government regulatory activity applies and in which trade unions, chambers of commerce, professional associations, and other institutions of modern capitalist economies play a significant role. Apart from rank-and-file labourers, the organized sector engages most of India’s professionals and virtually all of its vast pool of scientists and technicians.