India has had an image makeover in the past fifteen years and rightly so. The nation, which was once branded “the land of snake charmers” and “a country of starving millions,” has long shed these none too flattering sobriquets. In the world’s eyes now, the country is an information technology superpower, a giant outsourcing hub, the ‘I’ in the exclusive group of BRIC nations, a trillion dollar economy, and a global mover and shaker.

The South-East Asian country, which was a British colony for close to two centuries, gained independence two years after World War II. Jawaharlal Nehru, its first Prime Minister, ushered in democracy on the eve of August 15, 1947 with these words: “At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.” It’s been more than six decades since that stroke of the midnight hour, but it’s only now that India has truly awakened to life. Today, the nation is one of the globe’s four biggest emerging economies as well as a political and military force to reckon with.

History

Freedom free of violence

India owes its name to Indus, a majestic river that meanders through its northern parts before wandering over to Pakistan and finally flowing into the Arabian Sea. On its banks, around 4,500 years ago, flourished one of the world’s oldest and greatest civilizations. India’s story of evolution began here. In fact, the genesis of the entire Indian Subcontinent - the South-East Asian Peninsula that includes modern-day India, Pakistan, and other countries - lies in the Indus Valley Civilization. All countries of the subcontinent share a common history of dynastic rules, such as those of the Mauryas, Guptas, and Mughals, as well as the shared suffering of loot and plunder by invaders like the Greeks, Persians, Turks, and Huns.

In the 18th Century, the British came to the subcontinent to trade and promptly colonized it. They snatched power from the weak Mughal ruler and created the Indian Empire, which included today’s India, Pakistan, and Bangladesh. That rule lasted nearly 200 years.

British Rule battered India, both socially and economically. However, it was only at the turn of the 20th century that a concerted freedom struggle gained momentum throughout the country under the leadership of M.K. Gandhi, the world’s most enduring symbol of peace and non-violence. Beaten by Gandhi’s non-violent resistance movement, the British left the subcontinent, but not before dividing it into two nations - India, a secular country with a largely Hindu population, and Pakistan, a Muslim state. The partition triggered one of the largest mass displacements in human history. Hundreds of thousands of Muslims fled India to Pakistan and an equal number of Hindus and Sikhs migrated from Pakistan to India. The exodus was marked by riots and bloodshed, which took their toll on the economies of both the infant nations. The bitterness of the separation increased because despite Pakistan’s disapproval, India’s slice of the pie included Kashmir, a state with a largely Muslim population. To this day, this is a sore point between the two countries, which have fought as many as three wars over the issue. Jammu and Kashmir remain troubled states and a hotbed of terrorist activities due to separatists, including Islamic fundamentalists, who want the region to be either merged with Pakistan or given the status of a separate nation.

The largest democracy

Since independence, India has been a democracy, barring a brief period of constitutional emergency during the 1970s. The country is a sovereign, socialist, secular, democratic, and federal republic with 28 states. It has a parliamentary form of government based on the British Westminster system. In other words, many parties contest elections to send their representatives to the nation’s legislature. The president is the formal but nominal head of the state while the prime minister runs the country with the support of a council of ministers.  

An important aspect of India’s social structure is its caste system. Centuries ago, the pecking order in Indian society was based on the importance of a person’s work. People who belong to the highest caste perform the most important work. The caste structure continues, especially among Hindus, though the work a particular caste is allocated is no longer exclusive. Caste plays an important role in the country’s politics and marriage system. Indians typically seek spouses from their own castes and politicians routinely depend on voters of their own castes.

Since the late 1990s, multi-party coalition governments have been the norm in the country as numerous political parties have sprung up.

Culture

One nation, many worlds

India boasts of several thousand ethnic groups, castes, tribes, and communities, and each has its own distinct culture, customs, and traditions. If these were not enough, it has 22 official languages, and 1,576 dialects are classified as “mother tongues.” In fact, the country is so wonderfully diverse that it would not be an exaggeration to proclaim “India is one nation, but many worlds.”

Indians love their dance and music. Some of the country’s popular dance forms are Bharatnatyam, Kuchipudi, Odissi, Kathak, Mohiniattam, Bihu, and Bhangra. The nation patronizes two schools of classical music — Carnatic and Hindustani.

Food has always been an intrinsic part of the “Indian” experience. Indian food, like everything else Indian, varies widely from one region to another. But characteristically, Indian cuisine has many textures, spicy fragrances, and myriad colors. As a CNN foreign correspondent once said in a television program on Indian cuisine, “it always looks as good as it smells!” The western world, seduced as it is by the pungent aroma of Indian curries, the kebabs, and the many choices for vegetarians, seems to be nodding in affirmation.

An Indian’s traditional attire varies from state to state. But one outfit that is truly Pan India is the Saree. Women from almost all parts of India wrap around them this six yards of splendor in styles that are distinct to specific regions. Today, the Saree has conquered the couture crowd and is scorching international ramps, thanks to its growing reputation as a sensuous, versatile garment that’s also happily prêt-a-porter. The country celebrates as many major festivals as there are months in a year. The minor ones are just too many to count.

Four world religions — Hinduism, Buddhism, Jainism, and Sikhism — originated here. Others like Zoroastrianism, Judaism, Islam, and Christianity touched the nation’s shores in the first millennium AD. More than 85% of Indians are Hindus, while 12-15% are Muslims. The rest are Christians, Buddhists, Jains, Sikhs, Parsis, and Jews. 

Unfortunately, diversity is not just the defining quality of India’s culture and traditions. It is also the distinctive feature of the country’s woes. The nation’s difficulties are many and complex. They range from inter-religion, inter-caste, and inter-state conflicts to gender bias. In most parts of rural India, girl-child infanticide and feticide are still a harsh reality.

Economy

Pushed to the brink

Two centuries of colonialism crippled the Indian economy. According to Cambridge historian, Angus Maddison, India’s share of world income stood at a paltry 3.8% in 1952 compared to a mammoth 22.6% in 1700. After independence, the country embraced socialism. The government maintained a strict control over foreign trade, the private sector, and foreign direct investment. First Prime Minister Nehru envisaged a central planned economy that aimed at achieving an unbiased distribution of natural resources and balanced growth. Nehru wished to make India self-sufficient by avoiding foreign intervention. Therefore, he emphasized the building of state-controlled capital and technology-intensive industries as well as subsidized manual, low-skill sectors.

This politico-economic system protected domestic industries but curtailed the country’s growth rate and affected the quality of output. Besides, bureaucracy and red tape held sway. In fact, the period from independence until India’s economic reforms in the early 1990s is called ‘License Raj’ or Rule of the License because entrepreneurs had to acquire a license to expand capacity, start new facilities, lay off workers, shut down enterprises, and just about everything else. The country’s growth rate before the 1990s was woefully insufficient to sustain the world’s second largest population and alleviate extreme poverty. India’s average growth rate during the first four decades of independence was around 3%. This rate was dubbed the Hindu rate of growth as other South-East Asian countries; especially neighbor Pakistan, flaunted better growth rates.

In line with this diktat, Finance Minister Manmohan Singh, who is now Prime Minister, put the country on an aggressive path of reforms. Today, the reforms are seen as a watershed in India’s modern history as they sparked a resurgence that eventually made India the economic power it is today. These reforms did away with the regulations that hindered trade and investment as well as purged the system of quotas and tariffs, which had artificially kept trade at lower levels. A gradual deregulation of industries was started. All government-regulated sectors like infrastructure, telecommunications, and power were opened to private players. Companies were allowed to raise funds at competitive rates abroad. The abolition of the Controller of Capital Issues — an agency which exercised control over the pricing of IPOs — brought in a turnaround in the primary markets. The privatization of state-controlled enterprises was taken up with much fervor, but the process has been rather slow.

Liberalization and after

From a Gross Domestic Product (GDP) of $358.60 billion in March 1992 to $1.16 trillion (Market Exchange Rate) in 2007, the country has indeed taken a giant leap.

In fact, with an average growth rate of around 6% in the ten-year period from 1992-93 to 2001-02, India was among the fastest growing developing countries in the 1990s. It is noteworthy that the nation achieved this pace of growth despite the East Asian currency crisis. The country’s average GDP growth during 2003-2007 was 8.8%, with 2006-07 clocking 9.6%, the highest in 18 years. The domestic demand fueled by rising disposable incomes has been driving growth.

Agriculture contributes 17.5%, industry 27.7 %, and the service sector 54.7% of the nation’s GDP. The Indian economy, which was largely driven by agriculture until the 90s, has witnessed a considerable shift toward services in recent years. To a large extent, the Information Technology (IT) and IT-enabled sectors, which began flourishing in the wake of the offshoring boom in the late 1990s, are responsible for the shift.

Though agriculture accounts for a minor portion of the GDP, it continues to be the main occupation of a majority of the population. Unfortunately, the performance of this sector over the past decade has been erratic and slow. One of the reasons for this slowdown is a decline in public investments, especially in irrigation. Proper irrigation facilities are a prerequisite for good crop output because agriculture in India is largely dependent on seasonal rainfall. Moreover, though lending to the agricultural sector is a priority for banking and other financial bodies, institutional lending to farmers is not adequate. Understandably, a majority of farmers rely on local money lenders who charge exorbitant rates of interest. It is fairly common in many parts of the country for farmers to get bogged down by debt burdens and commit suicide.

Low productivity is another bane for the sector. The shrinking size of individual landholdings and age-old farming methods are the primary cause of the decline in farm output. With other sectors of the economy dazzling, the government is doing all it can to ensure all-inclusive growth. Therefore, private enterprises see a lot of potential in the agriculture sector. Opportunities in food processing, research, contract farming, and cold chain management are increasing by the day.

Industry, which gained special attention in the pre-reform era, too has been impacted by the rising prominence of services. Owing to the IT and IT-enabled service sectors’ dominance in the job market, there is a severe dearth of qualified personnel in the industrial and manufacturing sectors. However, the good news is that this secondary sector is making a comeback. Construction and infrastructure sector initiatives, in particular, have been booming since 2002. In line with the growth in these sectors, the demand for basic and intermediate goods has also seen an uptrend. As well, export-led manufacturing has gotten a boost, but the segment hasn’t grown as much as it could have because of the appreciation of the Indian rupee against the dollar.

Nevertheless, foreign direct investments (FDI) in the sector have surged as many global manufacturing behemoths are beginning to see India’s potential as a global manufacturing hub. India now allows 100% FDI in all arms of the manufacturing sector, barring aerospace and defense equipment production. With costs rising in China’s manufacturing sector, India seems well poised to jump to the number one position in manufacturing. But inadequate infrastructure and low labor productivity remain the holdup.

Infrastructure development in the country is hopelessly inadequate. Although private participation in this sector is allowed, the condition of roads, both inter-city and intra-city, is appalling. The long hours it takes for people to commute and for goods to be transported are a big bottleneck and affect productivity and output. The investment in this sector is only about 0.4% of the GDP.

India is rich in forest, mineral, and power resources. The ample reserves of iron ore and coal provide a good support for heavy industries. Coal is the primary source of electricity generation. Hydroelectricity also accounts for a sizeable proportion of India’s power needs. Though the country has electrified more than 500,000 villages since independence, a lot more needs to be achieved. People in a large number of villages have no access to electricity. Further, households, farmers, commercial establishments, and industries grapple with frequent power cuts, both scheduled and unscheduled. The government is laying special emphasis on the development of this sector by allowing 100% FDI in all segments of the power sector. For instance, it has allowed power trading and has declared a 10-year tax holiday for power generating plants.

The services sector, which is the largest contributor to the GDP, has seen tremendous growth in recent years. It expanded at a scorching pace of 11% in 2006-07. All arms of the sector, such as tourism, telecommunications, trade, financial services, IT, and IT-enabled services, have not only grown domestically but also on the exports front. India’s share in the global trade of services increased from 2% in 2004 to 2.7% in 2006. This sector, especially financial services, IT, and banking services, continues to see substantial FDI investment.

Given the pace of economic growth, the country’s central bank — Reserve Bank of India (RBI) — has the difficult task of maximizing expansion while keeping a check on inflation. And this hasn’t been easy. Owing to skyrocketing prices in the real estate and ancillary sectors, the RBI has had to increase interest rates. However, the move is curtailing growth in other sectors. For example, manufacturing, which needs investment to expand, is seeing a slowdown. On the other hand, inflation has been rising because of the increase in crude oil and food prices in the international market. To make matters worse, the Indian rupee has been appreciating against the dollar because of heavy foreign investment in the Indian stock market and elsewhere. This is hurting export-oriented industries. Thus, the central bank has been struggling to achieve a balance between economic progress and inflation, as well as to maintain the exchange rate at an acceptable level.

The Indian capital market has been growing in line with the economic progress. Since the market has gained depth, regulatory and governance norms have improved. As a result, the market has become more stable and mature. The total portfolio investment in the stock market during 2006-07 was around $7.1 billion. The benchmark BSE Index (Sensex) kissed a new high of 21,000 in January 2008, but started declining due to negative global cues, especially from the U.S. The Indian stock market is mainly driven by investments from abroad, although institutional and retail participation on the domestic front has been improving steadily.

Social development still a far cry

The stellar economic performance notwithstanding, the country needs to pull itself up by its bootstraps with regard to social sector development. India is ranked 126 among 177 nations on the UN Human Development Index. Nearly 25% of its population of 1.1 billion remains below the poverty line. Life expectancy at birth is 63.7. However, the silver lining is that the country has made considerable progress with regard to some human development parameters. For instance, the infant mortality rate has reduced and literacy rate has gone up from 12.2% at independence to 60%. Further, more and more villages are getting electricity, drinking water, and sewage facilities. Inter-state inequality, though, continues to hurt. The income levels of some states have been stagnating. Therefore, inclusive development remains a major concern for the government. Consequently, budgetary allocations for public investments on social sector initiatives have been rising consistently.

Building bridges

India shares borders with China, Pakistan, Nepal, Bhutan, Bangladesh, and Myanmar. Sri Lanka and the Maldives are neighbors in the Indian Ocean. The country’s relations with China and Pakistan have been, at the best of times, civil and, at the worst of times, rocky.

With Pakistan, Kashmir is the barrier to good relations. However, the wars notwithstanding, the countries have participated in several peace talks, which have resulted in various economic pacts. Road links have been opened and train services have been introduced between the two nations. Further, a gas pipeline is being laid between Iran and India, which will eventually pass through Pakistan.

India had peaceful relations with China until the border war between the two in 1962. The next two and half decades saw extreme acrimony. Fortunately, Indian Prime Minister Rajiv Gandhi’s visit to China in 1988 broke the deadlock, and the hostility started thawing. But the countries continue to diverge over issues like Sino-Pakistan military and strategic ties and India’s Tibet policy. Nevertheless, bilateral trade has been booming since 2000 when ancient trade routes, like the one at Nathula Pass, were reopened. These days, the time required for the movement of goods between the two nations has reduced drastically.

The path to 2050 and beyond

The widely read and much hyped Goldman Sachs 1 report — Dreaming With BRICs: The Path to 2050 — predicts that India has the potential to surpass Japan to become the third largest economy after the U.S. and China by 2032. Further, the report states that India will be the only country whose population will grow throughout the next 50 years. Its per capita income has the potential to increase to 35 times its current level by 2032. While there are many caveats attached to this pace of growth, it is not really improbable.

India’s mammoth population, which remained a massive burden on the economy for decades, has turned out to be an advantage. Today, the country has not only a huge pool of skilled and unskilled workers but also the world’s second largest consumer base. However, to really capitalize on this advantage, the government needs to liberalize regulations in the service and product markets, lend a hand to agriculture, reform financial systems by reducing government ownership in the banking system, and enhance infrastructure. A better political environment as well as peaceful relations with neighbors is also important. Nevertheless, the country, which was once known as “the land of levitating yogis,” has only just got its economic growth off the ground.