The Fundamentals of How India Makes Its Money

India is one of the fastest-growing economies in the world, driven primarily by its service, industrial, and agricultural sectors. It was projected to be the world’s fifth-largest economy in terms of nominal gross domestic product (GDP) as of May 2024.

India's economy grew at a rate of 8.2% in fiscal year 2023-2024. This growth was primarily due to strong demand for the country's goods and services in addition to a high level of industrial activity. The country was once a supplier of British tea and cotton. It now has a diversified economy with the majority of activity and growth coming from the service industry. India is considered a "global player" in the world of international economics.

India's economy was hard hit by the COVID-19 pandemic in 2020 and 2021. Its second-quarter 2020 GDP came in nearly 24% below the second quarter of 2019 as the pandemic precipitated restrictions on all non-essential businesses, sharply curtailing economic activity. The economy has rebounded in notable ways.

Historical Development of India's Economy

India formed a centrally-planned economy known as a command economy after gaining independence from Britain in 1947. The government makes the majority of economic decisions regarding the manufacturing and distribution of products with a centrally planned economy,

The government focused on developing its heavy industry sector but this emphasis was eventually deemed unsustainable. India began to loosen its economic restrictions in 1991 and an increased level of liberalization led to growth in the country's private sector. India is considered a mixed economy in the 2020s. The private and public sectors co-exist and the country leverages international trade.

Citizens can choose their occupations and start private enterprises but the government maintains a monopoly in certain areas of the economy such as defense, power, and banking. The country’s economy grew exponentially over 20 years from $288 billion in 1992 to $3.42 trillion in 2022.

The Agricultural Sector

Agriculture was once India’s main source of revenue and income but it fell to approximately 17.59% of the country’s GDP by April 2024. Analysts have pointed out that this fall should not be equated with a decrease in production. It reflects the large increases in India’s industrial and service outputs.

The agricultural industry in India faces some problems. It's not as efficient as it could be. Millions of small farmers rely on monsoons for the water necessary for their crop production. Agricultural infrastructure isn't well developed so irrigation is sparse and agricultural production is at risk of spoilage due to a lack of adequate storage facilities and distribution channels.

India is the world's second-largest producer of fruit and the global leading producer of lemons, bananas, mangoes, papayas, and limes. Forestry might be a relatively small contributor to the country's GDP but it's a growing sector. It's responsible for producing fuel, wood-based panels, pulp for paper, paper, and paperboard.

Industrial Production

Chemicals are a big business in India. The petrochemical industry first entered the Indian industrial scene in the 1970s and it experienced rapid growth in the 1980s and 1990s.

India produces a large supply of the world’s pharmaceuticals in addition to chemicals as well as billions of dollars' worth of cars, motorcycles, tools, tractors, machinery, and forged steel.

India also mines a large number of gems and common minerals. These include iron ore, bauxite, and gold along with asbestos, uranium, limestone, and marble. India mined 780 million tons of coal in 2022. Oil and gas were extracted at a rate of 29.69 million metric tons and 34.02 billion cubic meters respectively between 2021 and 2022.

Information Technology (IT) and Business Services Outsourcing

The service industry in India increased from a fraction of the GDP to approximately 48.4% between 1962 and 2022. India is a great place for doing business with its high population of skilled, English-speaking, and educated people.

Telecommunications, IT, and software are among the leading services industries in the country. Its workers are employed by both domestic and international companies including Intel (INTC), Texas Instruments (TXN), Yahoo (YHOO), Meta (META), Google (GOOG), and Microsoft (MSFT).

Business process outsourcing (BPO) is a less significant but more well-known industry in India. It's led by companies like American Express (AXP), IBM (IBM), Hewlett-Packard (HPQ), and Dell. BPO is the fastest-growing segment of the ITES (Information Technology Enabled Services) industry in India thanks to economies of scale, cost advantages, risk mitigation, and competency. BPO started around the mid-90s in India and has grown by leaps and bounds.

Retail Services

The retail sector in India is huge but it's not just apparel, electronics, or traditional consumer retail that are booming. Agricultural retail is important in an inflation-conscious country like India and it's also significant.

The issue of agricultural wastage has come to the forefront, however. It's been estimated that over 400,000 tons of wheat and rice were wasted due to storage and transportation issues from 2018 through 2021. This is enough to feed over 80 million people within the country.

Reports suggest that there's little storage for Indian agricultural products. Experts believe that the solution to the massive waste issue is an urgent issue in need of policy, technological, and infrastructure-based responses. The Indian government is purported to be exploring a range of potential ways to address the issue.

Other Services

Other parts of India’s service industry include electricity production and tourism. The country is largely dependent on fossil fuels oil, gas, and coal but it's increasingly adding capacity to produce hydroelectricity, wind, solar, and nuclear power.

Foreign tourist arrivals increased by 16.8% from November 2022 through November 2023. The estimated foreign exchange earnings from tourism in India was $16.928 billion in 2022. The World Travel and Tourism Council calculated that tourism generated 5.9% of India's GDP in 2022.

Medical tourism to India is also a growing sector. India's market for medical tourism is expected to touch the $13 billion mark by 2026, according to estimates published by the Federation of Indian Chambers of Commerce and Industry (FICCI).

Medical tourism is popular in India because of the low cost of health care and compliance with international standards. Customers come from all over the world for heart, hip, and plastic surgery procedures, and a small number of people take advantage of India’s commercial surrogate facilities.

The Bottom Line

India has become a rising economic power in the 21st century. More than 90 million people in India rose out of extreme poverty from 2011 through 2015, thanks in part to robust economic growth that has improved the overall standards of living in the country.

India experienced a 6.9% GDP expansion in the fiscal year ending in 2023, according to the World Bank. It's expected to moderate to 6.3% in 2024. India is one of the fastest-growing major emerging economies. It's also become a focus of investors across the globe.