India's impact on the world economy

Abstract

The emergence of China and India as major economic players has had an important impact on the last 20 years of globalization, and it is now leading to important structural changes in the balance of power between countries by challenging the domination of the Triad: The United States, the European Union and Japan.
Once two of the most prosperous countries in the world, accounting for more than half of the world GDP during much of the last two millennia, both China and India went through a period of economic stagnation and decline in the 1800s (Department for Business Enterprise & Regulatory Reform (BERR) 2009). India, which will be the focus of this paper, owes its recent success to the reforms that were instituted late, mainly in the 1990s, and that consisted in a reduction of the state intervention, a liberalisation of its domestic economy and an opening to trade and investments from the rest of the world; a phenomenon also known as LPG: liberalization, privatization and globalization (Hill and Hill 2008).

India is without a doubt one of the most rapidly growing and modernising economies in the world, and benefits from a huge development potential. Its average growth rate of around 5.7% (Vanaik 2006) during the last two decades, and its current level at 7.4% in 2009, are the envy of most of the developed and developing countries. Furthermore, it has led India to be the 11th largest economy of the world (US $1.236 trillion GDP in 2009) and the fourth when taking PPP into account (US $3.57 trillion GDP) despite a rather low per capita income (US $3,100, 165th rank) (Central Intelligence Agency (CIA) 2010). The country's growth is moreover forecasted to continue, and although facing a number of downside risks, India is predicted to be the third largest economy in the world in 2050, after overtaking Japan in 2032 (Goldman Sachs 2003).

This tends to confirm the idea that the emergence of India is of high strategic importance for the world's economy and its businesses. Its dynamism notably creates a lot of opportunities for foreign firms, while also bringing fears about the future of jobs and the competitiveness of more developed economies. That is why this paper is going to identify and assess these problems and opportunities in relation to India and to businesses in the rest of the world.

We will start by analysing the attractiveness of India for developed economies and their businesses, by presenting the two main channels with which opportunities can be seized: through trade and through investments. Then, we will think about the threats that India currently represents for those developed economies, by looking at the problems and challenges resulting from their increasing competitiveness and their enlarging place in the world economy.