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1 1 (January 5, 2024)

handle is hein.crs/govenxa0001 and id is 1 raw text is: Congressional Research Serv ce nfo rming Ih Ieg ilive db sin mco 1914 0 January 5, 2024 India's Economy: Overview and Issues for Congress India's economy-its current performance and potential- attracts significant U.S. commercial attention. Since 2000, U.S. Administrations and Congresses have sought to deepen U.S. economic ties with India, based on shared interests between the United States and India, including regarding China. During the Biden Administration, such motivations appear to have become acute, and the partners have pursued new joint activities, including the Indo-Pacific Economic Framework for Prosperity (IPEF) and the initiative for Critical and Emerging Technologies (iCET). Still, the partners continue to have frictions on various trade and economic issues, with efforts to address these issues also a longtime focal point of U.S. engagement with India. Congress may assess India's economy and its implications for U.S.-India trade relations. Should it do so, Congress may examine issues such as whether India can attain the economic aspirations set by Indian Prime Minister Narendra Modi and whether India can be an alternative to the People's Republic of China (PRC, or China) for supply chain diversification and foreign direct investment (FDI). Congress might consider how to respond to changes in India's economy to advance U.S. trade and economic interests. History of Economic Reforms In the first three decades after India's independence in 1947, its economy grew slowly. India sought self- sufficiency, operating an import-substitution model and focusing on state-led capital investments. It established an industrial licensing system, limited imports and FDI, and maintained high average tariffs relative to other industrializing countries. Poverty levels also were high, with India a recipient of considerable foreign aid. With some trade liberalization and government spending, India's gross domestic product (GDP) grew in the 1980s; at the same time, India experienced a worsening economic situation that came to a head in 1991. India faced depleted foreign exchange reserves (covering less than a month of imports), precipitated by rising import costs, and other, arguably longer-running issues, including mounting foreign debt. In 1991, with a balance-of-payments crisis grappling the country and the dissolution of the Soviet Union (formerly a key economic benefactor), India launched key market-opening economic reforms during the government of Prime Minister PV Narasimha Rao and Finance Minister Manmohan Singh (later also Prime Minister, 2004-2014). India reduced tariffs, devalued its currency to make its exports more attractive, and dismantled import-blocking licensing restrictions. It also began privatizing some sectors and removed some domestic investment limits. India joined the World Trade Organization (WTO) in 1995. Since the 1990s, India's economic performance has generally improved. In some years, India has averaged rates of annual GDP growth above 6%-7%, and it has at times been the world's fastest growing major economy. India has emerged as a destination not only for major foreign firms for back-office and information technology (IT) services, but also for research and development. Various trade and investment restrictions remain (see below). Poverty also remains significant; by one estimate, nearly 12% of the population was in poverty in 2021, based on a poverty line of $2.15 per day, at 2017 purchasing power parity. (Data in this and the below sections are from the International Monetary Fund, the World Bank, and the United Nations.) Current Economic Performance India overtook the United Kingdom to rank as the world's fifth-largest economy ($3.4 trillion in nominal GDP) in 2022, and it overtook China to become the world's most populous country in 2023. India's middle class-estimates of which are difficult to make but could comprise one in three Indians, per one analysis-has generally been a driver of the country's domestic consumption-led economic growth; the middle class was hit hard by the COVID-19 pandemic. India's real GDP, after contracting by 5.8% in 2020, grew by 9.1% in 2021 and 7.2% in 2022, bolstered by government support, domestic demand, and a COVID-19 vaccine roll-out. India's real GDP is projected to have grown by 6.3% in 2023, with the increase in consumption, infrastructure spending, and the establishment of new businesses driving expectations. Headwinds remain, such as those posed by geopolitical risks and inflationary pressures. Economic circumstances vary sub-nationally (see text box). India State-Level Economic Activity India's federal system is composed of 28 states and eight union territories that have their own sub-national economies and investment climates, and that shape India's overall economic performance. The liberalization of India's economy after 1991 coincided with more decentralized economic policy-making and states assuming a greater role, such as on public services. Economic circumstances vary widely across India's states by growth, demography, urbanization, natural resources, and state- level policies. Modi has advanced a notion of competitive federalism to drive sub-national progress (e.g., cities bidding for project funding under the digitally focused Smart Cities initiative). India's five largest states, based on state-level real GDP data, are as follows: Maharashtra has a strong services economy and houses Mumbai, India's financial capital. Gujarat is significant in agricultural and industrial production, including pharmaceuticals. Tamil Nadu is a major industrial base that also houses Chennai, an IT hub. Uttar Pradesh has a significant agricultural economy and is India's most populous state. Karnataka houses Bengaluru (the Silicon Valley of India), the center of India's IT sectors and start-up ecosystem. Source: GDP data for 2021-2022 from Reserve Bank of India, Handbook of Statistics on Indian States 2022-2023. Services (e.g., IT and communications and digital subsectors) are a key part of India's economy (see Table 1).

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