The Rising: India's tenth largest economy, and growing

HARESH SONEJI AND SHIVOM CHAKRAVARTI

TIMES NEWS NETWORK THURSDAY, JULY 14, 2005 12:27:41 AM

It's official: India has arrived on the global scene. We now live in the world's 10th largest economy in terms of absolute gross domestic product (GDP) size. According to the latest World Bank report, India jumped two places to number 10 in '04 (from number 12 in '03) in GDP terms. India notched up a GDP of $68 plus 12bn, is growing at over 6% annually and can be expected to move further up the rankings.

India comes in just three notches below China and could rise further if the economy continues its 6%-plus growth every year. Economies in the developed world, such as the Euro zone and Japan, have recorded growth rates of less than 2%. GDP is the sum of value added by all resident producers.

Any product taxes (less subsidies) not included in the valuation of output and growth in GDP is calculated from constant price GDP data in local currency. The rapid growth has been made possible by reform-minded governments, revival in the manufacturing sector, the fast pace of the services sector, including IT, and bigger foreign investments.

For years India has been threatening to enter the top 10 chart. In 1999, India occupied the twelfth position and has more or less remained at the same level. For the first time ever, in '04, India has joined the league of the world's biggest 10 economies.

The ascent into the top 10 comes just when Indian stock markets are drawing attention from investors all over the world for their transparency and the gains that can be made through savvy investing.

Foreign direct investment in India is also picking up and many foreign corporations are placing bets on the country due to its faster growth and burgeoning middle clbutt.

Also, save China, there are very few significant emerging economies growing at such a rapid pace. As it stands, Argentina is growing at 8% and Russia at 7%. However, Russia ranks fifteenth and Argentina thirty-fifth according to absolute GDP.

India, therefore, has a good chance to move up the chart in the coming years. Over the past six years, countries such as the US, Japan, Germany, the United Kingdom and France have continued to occupy the top five positions. Other countries like Italy, China, Spain, Canada and India make up the remainder in the top ten list.

India has seen growth in its investment expenditure and demand. The central bank has followed a system of soft interest rates, which has greatly resulted in increasing aggregate investment activity in the economy. According to the economic theory, investment expenditure and demand are considered to be interest rate-sensitive.

A higher interest rate reduces investment demand and expenditure in an economy whereas lower interest rates work to the opposite effect. A soft interest rate regime has resulted in an increases in investment activity in the economy, which has helped raise the absolute value of GDP in India.

India has also been growing fast on account of high consumption demand, which is a very important component in measuring the size and growth of an economy. Over the last six years, India has seen mbuttive increases in job opportunities, which have resulted in greater amounts of disposable income in the economy.

Higher disposable income has led to higher aggregate consumption patterns in the economy. Increases in government expenditure or a deficit budget helps in increasing the levels of aggregate demand and consumption-expenditure in an economy. India has seen consecutive fiscal deficits over the years, which have also helped in increasing the aggregate expenditure in the economy, increasing the absolute value of the country's GDP.