- Basic data
- Public finances and the state budget
- Banking system
- Tax system
The Indian economy is the 5th largest economy in the world and has a number of prerequisites for further progress on the ranks of the world’s largest economies. In 2021, India’s nominal GDP exceeded the USD 3 trillion mark for the first time – in terms of per capita, it is approximately 7.5 thousand. USD. In 2020, India’s economy experienced its biggest drop in history by a staggering 7% of GDP. The drop in GDP was due to the strict restrictive government measures in the fight against the first wave of the Covid-19 pandemic, especially the drastic nationwide lockdown, and the overall shock of the global economy from the pandemic. In 2021, strong GDP growth of a revived economy of over 9% came. Despite extraordinary pro-growth government measures during the pandemic years, India’s public debt remains relatively low at around 60% of GDP. Check ebizdir for economical facts of India.
India’s economy is expected to make a strong comeback post-pandemic, including solid annual GDP growth of around 7% in 2022. However, challenges to India’s strong economic growth are global market turbulence – disrupted global supply chains and transportation, volatile energy and commodity markets, trade barriers and high levels of geopolitical tension. Inflationary pressures (inflation crossed the 7% mark in April) are already beginning to spill over into the real economy and Indian consumers. In this context, after several years of expansionary monetary policy, the Indian central bank is starting to increase the lending rate and tighten the country’s monetary policy. The Indian government faces a difficult task – it must effectively fight against rising inflation and at the same time not stifle the economic growth that has started, keep consumer prices at a bearable level, commodity and energy prices acceptable to Indian industry and households, while not discouraging foreign investors. The Indian economy will not avoid solving a number of fundamental and long-term structural problems that will require banking, agricultural and labor market reforms. A number of other sectors also show structural deficiencies and weaknesses, e.g. the ossified and over-bureaucratized state sector, which includes e.g. most large banks and insurance companies, but also companies in heavy industry, the energy industry and the defense industry. Narendra Modi’s government has launched numerous reforms aimed at liberalizing and privatizing a number of sectors of the national economy.
In a regional comparison of South Asia, India is the largest economy, with the fourth highest GDP/per capita (after Maldives, Sri Lanka and Bhutan). The agricultural sector still has a strong position in the Indian economy, employing almost half of the working population, but generating only 14% of GDP. Industry contributes approximately 17-18% to GDP, with the government aiming to increase this share to 25% by 2025. Given India’s widespread image as an ICT powerhouse, it is not surprising that the share of services in GDP has been steadily increasing to over 60% of the country’s GDP. The sector employs approximately a third of the country’s working population.
|GDP growth (%)||4.2||-7||9.2||7||5.2|
|Export of goods (billion USD)||330.5||282.8||390.8||444.6||489.6|
|Import of goods (billion USD)||503.4||387.2||575||666.6||741|
|Trade Balance (Billion USD)||-157.7||-95.5||-179.9||-195.7||-205.8|
|Industrial production (% change)||0.7||-11.1||12.7||6.5||6.2|
|OECD export risk||03.VII||03.VII||03.VII||ON||ON|
Source: EIU, OECD, IMD
Public finance and state budget
|State budget balance (% of GDP)||-6.9|
|Public debt (% of GDP)||57.7|
|Current account balance (billion USD)||-18.4|
|AFTER||15% – 22% depending on the type of company|
|F.O||5% – 15% depending on the rate|
|VAT||5%, 12%, 18%, 28% depending on the product/service|
India’s public finances are relatively stable and the country’s overall indebtedness is still relatively low. For many years, the government applied a conservative fiscal policy and tried to keep the budget deficit at around 3% of GDP. However, pro-growth government support packages and capital investment in the economy and public infrastructure in response to the Covid-19 pandemic marked a departure from the long-standing trend of fiscal conservatism. India’s budget deficit in the fiscal year 2021/2022 (in India, the fiscal year begins on April 1 and ends on March 31 of the following year) reached 6.9% of GDP. A deficit of 6.4% is expected in fiscal year 2022/2023. For the years 2022-2025, the EIU expects the budget deficit to fall to the level of 4.5-5.5% of GDP.
Despite higher deficits during the fight against the corona virus, India’s total national debt remains at an acceptable level below 60% of GDP (approx. USD 1,800 billion). However, according to some experts, the government’s current deficit management could catapult the debt to 90% of GDP within a few years. Of the US$1,800 billion of current Indian debt, the country’s external debt in 2020 was about US$570 billion and debt service was US$61 billion. The country’s foreign exchange reserves amounted to USD 586 billion in 2020. In 2021, India’s imports were $579 billion and exports were $402 billion, leaving a negative trade balance of -$177 billion. However, the negative trade balance is somewhat balanced by the inflow of dividends, remittances and other financial transfers from abroad, which as a result ensures a stable growth of foreign exchange reserves. The current account of the balance of payments amounted to 34 billion in 2021.
Since the nineties of the last century, when the process of privatization and liberalization of the banking sector was started in India in the context of the overall liberalization of the economy, in addition to large state and semi-state banks, private banks began to appear on the banking market, and to a greater extent foreign banks also began to establish their branches here, which were the 46th commercial Indian banks in India in 2020 and the influx of foreign banks into India has increased competition in the banking market, thereby improving the quality of services and products offered. Even so, in general, foreign banks are usually able to offer a higher quality of services and technologies (especially mobile banking) than their domestic competitors. However, foreign banks in India in some cases still do not have full-fledged subsidiaries, and their branches can sometimes provide only a limited range of banking services. Domestic Indian banks tend to have stronger ties to state institutions, are extremely well-established and respected in Indian society, and have a dense network of local branches. Therefore, it is worthwhile to do research on the banking market and not to neglect the main Indian banks.
The main regulator of the banking market in India is the Ministry of Finance and the Reserve Bank of India (RBI), which supervises the banking market, shapes monetary policy, manages currency reserves, and is the bank of the central and state governments. The RBI also sets the base lending rate – in May, its Bank Board raised the rate to 4.4%. Among private banks, the top five banks by market capitalization are HDFC Bank Ltd., ICICI Bank Ltd., Kotak Mahindra Bank Ltd., Axis Bank Ltd. and Bandhan Bank Ltd. All these banks offer a broad portfolio of services in the segments of retail and private banking, corporate banking, investment banking and asset management. All of them also provide a wide range of different types of letters of credit and bank guarantees that can be used for international trade purposes. As an interesting and very well-rated alternative to Indian banks, we can mention the HSBC bank, which has a presence in 7 major Indian cities, million clients, 26 branches and almost 200 ATMs. It offers services in the segments of retail and private banking, corporate and investment banking and asset management.
India’s tax system remains quite complex despite efforts to simplify it. In 2017, an extensive tax reform was carried out, which introduced a uniform tax on goods and services (the so-called Goods and Services Tax or GST) with the same rates in all states of the Union. Responsibility for tax collection is shared between the central government, state governments and local bodies. The most important direct taxes from a business perspective in India include corporate tax, income tax, minimum replacement tax (MAT), education tax and withholding taxes on dividends, interest and franchise fees, property transfer tax and provident fund. . Corporate tax was recently reduced to 22%, and companies setting up a manufacturing plant in India by 2023 will be subject to a reduced rate of 15%. Corporate tax is accompanied by education tax (4%) and various other surcharges. In addition, companies with a tax burden of less than 18.5% are required to pay MAT to combat tax evasion. MAT is assessed in the range of 19-21%.
GST, which was introduced on July 1, 2017, replaced some indirect taxes (including VAT, CST and service tax) and removed the differences in rates between states. GST is levied at four rates depending on the type of goods/services – 5%, 12%, 18% and 28%, with some goods being completely exempt from GST (e.g. milk, bread, eggs, yogurt, cereals, newspapers, paper napkins, salt, traditional cane sugar). Basic foodstuffs, such as sugar, tea, coffee, cooking oil, spices, coal, fertilizers and basic medicines, are taxed at a rate of 5%. Basic electronics (including mobile phones) and processed food are taxed at 12%. Cosmetics, soap, pasta, ice cream, mineral waters, leather goods, cutlery, wristwatches, washing powders, furniture, batteries, capital goods, industrial semi-finished products are subject to the 18% rate. Cars are subject to the highest rate of 28%.