INDIA
16 March 2025
India’s economy is a mixed bag
India’s economy has everything from its world class tech sector to its subsistence agriculture, writes John West.
India has the world’s fastest growing large economy, we were told during a recent study tour in Delhi and Mumbai with the Australian Institute of International Affairs. What’s more, India's total GDP of $4.3 trillion (in market price terms) makes it the world's fifth largest economy – after the US, China, Germany and Japan. In purchasing power parity terms, only China and the US have bigger economies than India. High tech is the leading sector of the Indian economy.
One foundation was the establishment of the Indian Institutes of Technology in the 1950s and 1960s which provided brain power. Economic reforms from 1991 freed up India’s business environment and opened up the economy to the world. Thus, saw the rise of Indian IT companies like Infosys, TCS, and Wipro emerging as leaders in software services. India quickly became known as the world’s outsourcing hub, providing cost-effective IT solutions to companies across the globe.
India has become the world’s largest exporter of IT services, as exports (especially to the US) constitute about 80 percent of the industry's total revenue. India benefited greatly from the US outsourcing wave. India also has an excellent time zone advantage which means that India can work for America, while America is sleeping. Indian-origin CEOs leading some of the world’s most influential tech companies, such as Google, Microsoft, and Adobe, all of which have important operations in Indian tech hubs like Bengaluru, Hyderabad and Chennai. Moreover, Indian talent is driving technological innovation across the globe. Emigration to countries like Australia and Canada is fostering strong tech linkages.
India’s tech industry is not just about IT services anymore. The country has embraced cutting-edge technologies like artificial intelligence (AI), machine learning (ML), blockchain, and the Internet of Things (IoT). Indian tech companies are now creating products and services that cater to both domestic and international markets. But India’s position at the top of the world’s IT industry is not and will never be secure. With the ongoing innovation in IT, especially AI, a large number of India’s current IT jobs will be automated over the coming years.
India’s tech prowess also extends to the pharmaceutical industry.
India gained its foothold on the global scene with its innovatively-engineered generic drugs and active pharmaceutical ingredients. As of 2023, there are about 670 USFDA-approved manufacturing facilities in India, the highest for any country outside the US. Multinational Pharmaceutical Companies ranked as per active presence of sales, marketing and business in India are as follows: Pfizer,GSK,Sanofi, Merck, Johnson & Johnson, Amgen, Novartis, and Roche.
India also has a burgeoning space Industry which in 2023 accounted for $9 billion or 2%-3% of the global space industry and employed more than 45,000 people. Green technology industries are now expanding. And the electric vehicle industry is now taking off.
But one recent promising development is that some of the supply chain for Apple’s iPhone is now being shifted to India. Apple has opened its first physical stores in India, and the country is a growing market with its emerging middle class. Meanwhile, around 14 percent of Apple’s iPhones are now reportedly assembled in India, with the aim of lifting that much further.
Tata Electronics has reportedly acquired 60 percent of the iPhone manufacturing plant in Tamil Nadu through a deal with Pegatron, a traditional iPhone assembler. The development marks Tata's third iPhone production venture in India, following its acquisition of Wistron’s assembly plant in Karnataka and ongoing plans to build a new plant in Hosur. As promising as these developments may be, India is struggling to compete with Vietnam.
India’s high tech economy is also not able to provide jobs for its youthful and energetic population. As it happens, India is in the midst of a major demographic transition, due to the rise in life expectancy and falling fertility. The net effect is that India will see an expansion in its working-age population of 300 million between 2010 and 2040, representing one-quarter of the world population increase for this age group.
But can India reap a large demographic dividend which could boost economic growth? The challenges for achieving this seem immense. Demography is not just a question of quantity. It is also a question of quality. And the quality of India’s human capital is one of the poorest in Asia, despite the brilliance of the country’s elite.
Only three-quarters of the population are literate according to official statistics. And according to deeper analysis by Indian economist Santosh Mehrotra, only half the nation’s population would be “functionally literate”. For those 300 million additions to the Indian jobs market to find work, they will also need practical skills. But Technical and Vocational Education and Training is virtually non-existent in India.
To exploit the potential benefits of a demographic dividend, India also needs an economy that generates lots of jobs in the manufacturing sector, as countries like China have done in the past. While its current growth of 6-8 percent may seem impressive, it really needs 10-12 percent growth rates to create enough jobs and it is quite simply not achieving that.
A key element of this developmental transition is also the movement of people from rural to urban areas. Again, India is a laggard, with only 35 percent of the population now living in urban areas, compared with 66 percent in China, 87 percent in Australia and 92 percent in Japan.
Employment in India is also overwhelmingly “informal”: 90 per cent of all workers are employed under informal arrangements nationally. Workers in the informal sector are also exposed to vulnerability and precarity. The informal sector of the economy is composed of enterprises which are neither registered nor regulated, and whose workers have no contract or rights. Minimum wage laws, collective bargaining, and health and safety standards are unheard of in the informal economy. The informal economy covers work in small factories, backyard mechanics, home-based producers, domestic servants, most agricultural workers, ambulant peddlers, street vendors and hawkers, casual construction workers and so on.
I have been visiting India for 50 years and have witnessed much progress in these areas. But there is very much more than must be done.
But that was not to be. Trump is planning to increase tariffs on India. And India is worried about the future of the H-1B visa, which allows US employers to hire foreign workers temporarily for specialized roles requiring advanced expertise. Indian citizens accounted for 72.3 percent of the 386,000 H-1B visas granted in 2023. The majority of H-1B visa holders worked in science, technology, engineering and mathematics.
There are however some elements which could prove the basis for a deal between India and Trump’s America.
Modi accepted without protest the US deportation of illegal Indian migrants. He also expressed interest in buying F-35 fighter jets. India could open itself for Elon Musk’s satellite services and Tesla EVs. Trump has also declared that he would like the United States to be India’s number one supplier of oil and gas. In recent times, India has taken advantage of Western sanctions on Russian oil to buy crude at lower prices. However, Trump’s tariffs could also backfire, as millions of Americans could see the cost of medicines shoot up if Trump imposes tariffs on Indian drugs.
India’s thriving tech sector
In 2022, India’s IT-BPM (business process management) sector accounted for 7 ½ percent of India’s GDP and employed 5 ½ million people. Where did this tech sector come from?One foundation was the establishment of the Indian Institutes of Technology in the 1950s and 1960s which provided brain power. Economic reforms from 1991 freed up India’s business environment and opened up the economy to the world. Thus, saw the rise of Indian IT companies like Infosys, TCS, and Wipro emerging as leaders in software services. India quickly became known as the world’s outsourcing hub, providing cost-effective IT solutions to companies across the globe.
India has become the world’s largest exporter of IT services, as exports (especially to the US) constitute about 80 percent of the industry's total revenue. India benefited greatly from the US outsourcing wave. India also has an excellent time zone advantage which means that India can work for America, while America is sleeping. Indian-origin CEOs leading some of the world’s most influential tech companies, such as Google, Microsoft, and Adobe, all of which have important operations in Indian tech hubs like Bengaluru, Hyderabad and Chennai. Moreover, Indian talent is driving technological innovation across the globe. Emigration to countries like Australia and Canada is fostering strong tech linkages.
India’s tech industry is not just about IT services anymore. The country has embraced cutting-edge technologies like artificial intelligence (AI), machine learning (ML), blockchain, and the Internet of Things (IoT). Indian tech companies are now creating products and services that cater to both domestic and international markets. But India’s position at the top of the world’s IT industry is not and will never be secure. With the ongoing innovation in IT, especially AI, a large number of India’s current IT jobs will be automated over the coming years.
India’s tech prowess also extends to the pharmaceutical industry.
India, the pharmacy of the world
If there was one thing that we learnt during the COVID pandemic, it was the importance of India to the world’s pharmaceutical industry. As of 2023, the Indian pharmaceutical industry was the world's 13th largest by value and third largest in the world by volume. The country is the largest global supplier of generic medicine. It supplies 40% of the US's demand for generic drugs. India produces more than 50% of the world's vaccines.India gained its foothold on the global scene with its innovatively-engineered generic drugs and active pharmaceutical ingredients. As of 2023, there are about 670 USFDA-approved manufacturing facilities in India, the highest for any country outside the US. Multinational Pharmaceutical Companies ranked as per active presence of sales, marketing and business in India are as follows: Pfizer,GSK,Sanofi, Merck, Johnson & Johnson, Amgen, Novartis, and Roche.
India also has a burgeoning space Industry which in 2023 accounted for $9 billion or 2%-3% of the global space industry and employed more than 45,000 people. Green technology industries are now expanding. And the electric vehicle industry is now taking off.
Advanced manufacturing starting to show promise
One of the great disappointments of the Indian economy, however, has been the inability to develop a manufacturing sector to employ its masses of lower-skilled workers – as China, Vietnam and most other East Asian economies have done. It has suffered from weak skills, poor infrastructure, chronic corruption, and widespread restrictions on foreign investment.But one recent promising development is that some of the supply chain for Apple’s iPhone is now being shifted to India. Apple has opened its first physical stores in India, and the country is a growing market with its emerging middle class. Meanwhile, around 14 percent of Apple’s iPhones are now reportedly assembled in India, with the aim of lifting that much further.
Tata Electronics has reportedly acquired 60 percent of the iPhone manufacturing plant in Tamil Nadu through a deal with Pegatron, a traditional iPhone assembler. The development marks Tata's third iPhone production venture in India, following its acquisition of Wistron’s assembly plant in Karnataka and ongoing plans to build a new plant in Hosur. As promising as these developments may be, India is struggling to compete with Vietnam.
India’s tech industry is not enough
As impressive as India’s tech industries are, they are not yet sufficient to lift the Indian elephant very high. Indeed, they are a mere drop in the ocean of this country with the world’s biggest population, of 1.4 billion. Although India has one of the world’s very biggest economies, its size is due to its enormous population. India has a very low productivity economy, with a GDP per capita in 2023 of only $2563, giving it a ranking of 141st in a world of almost 200 countries. By comparison, Australia’s GDP per capita was $67979, China’s $13,873, Japan’s $35,611 and the US $89,678.India’s high tech economy is also not able to provide jobs for its youthful and energetic population. As it happens, India is in the midst of a major demographic transition, due to the rise in life expectancy and falling fertility. The net effect is that India will see an expansion in its working-age population of 300 million between 2010 and 2040, representing one-quarter of the world population increase for this age group.
But can India reap a large demographic dividend which could boost economic growth? The challenges for achieving this seem immense. Demography is not just a question of quantity. It is also a question of quality. And the quality of India’s human capital is one of the poorest in Asia, despite the brilliance of the country’s elite.
Only three-quarters of the population are literate according to official statistics. And according to deeper analysis by Indian economist Santosh Mehrotra, only half the nation’s population would be “functionally literate”. For those 300 million additions to the Indian jobs market to find work, they will also need practical skills. But Technical and Vocational Education and Training is virtually non-existent in India.
To exploit the potential benefits of a demographic dividend, India also needs an economy that generates lots of jobs in the manufacturing sector, as countries like China have done in the past. While its current growth of 6-8 percent may seem impressive, it really needs 10-12 percent growth rates to create enough jobs and it is quite simply not achieving that.
India’s economic drama
There are several features that highlight the state of India’s economic drama. Close to half of India’s working population are still in the agricultural sector, although it only accounts for around 20 percent of India’s GDP. In other words, India’s agricultural sector has extremely low productivity. Economic development usually involves a transition from an agricultural based economy to manufacturing and services oriented economy. But India is very much less advanced in this transition than China where one-quarter of the working population are in agriculture, or Australia and Japan where agriculture employs only 2-3 percent of the working population.A key element of this developmental transition is also the movement of people from rural to urban areas. Again, India is a laggard, with only 35 percent of the population now living in urban areas, compared with 66 percent in China, 87 percent in Australia and 92 percent in Japan.
Employment in India is also overwhelmingly “informal”: 90 per cent of all workers are employed under informal arrangements nationally. Workers in the informal sector are also exposed to vulnerability and precarity. The informal sector of the economy is composed of enterprises which are neither registered nor regulated, and whose workers have no contract or rights. Minimum wage laws, collective bargaining, and health and safety standards are unheard of in the informal economy. The informal economy covers work in small factories, backyard mechanics, home-based producers, domestic servants, most agricultural workers, ambulant peddlers, street vendors and hawkers, casual construction workers and so on.
How to accelerate India’s economic development?
The cases of economic success in East Asia suggest a simple formula for success. Strong investments in human capital (education, training and health), along with transportation and telecommunications infrastructure. Openness to international trade and investment – India remains a highly protectionist country. Good clean public and corporate governance. Removing discrimination especially that based on gender, caste, and religion.I have been visiting India for 50 years and have witnessed much progress in these areas. But there is very much more than must be done.
India and Donald Trump
India is a prime target for Donald Trump’s tariffs, as the US has a very large trade deficit with India, some $46 billion in 2024, and the US is India’s leading export destination. Indian PM Narendra Modi had been hoping that the bonhomie between him and Trump on the occasion of Modi’s recent visit to the White House might have won him concessions.But that was not to be. Trump is planning to increase tariffs on India. And India is worried about the future of the H-1B visa, which allows US employers to hire foreign workers temporarily for specialized roles requiring advanced expertise. Indian citizens accounted for 72.3 percent of the 386,000 H-1B visas granted in 2023. The majority of H-1B visa holders worked in science, technology, engineering and mathematics.
There are however some elements which could prove the basis for a deal between India and Trump’s America.
Modi accepted without protest the US deportation of illegal Indian migrants. He also expressed interest in buying F-35 fighter jets. India could open itself for Elon Musk’s satellite services and Tesla EVs. Trump has also declared that he would like the United States to be India’s number one supplier of oil and gas. In recent times, India has taken advantage of Western sanctions on Russian oil to buy crude at lower prices. However, Trump’s tariffs could also backfire, as millions of Americans could see the cost of medicines shoot up if Trump imposes tariffs on Indian drugs.