Fifth Largest Economy

Recently, India overtook the UK to become the fifth-largest economy in the world. A decade ago, India was 11th, and now it is behind only the US, China, Japan, and Germany. Remarkably, India achieved this feat with major challenges like the COVID-19 pandemic when the entire country was under lockdown.

It is worth mentioning that the initiative of "Make in India" played a major role in making India the fifth-largest economy. It boosted India's manufacturing sector and led to a strong growth rate of 8.2% for the fiscal year 2024, which is higher than the government's earlier estimate of 7.3%. Furthermore, a report by S&P Global suggests that India is expected to become the third-largest economy by 2030-31, with an annual growth rate of 6.7%.

As a market investor, it is important for you to understand the factors that led to this growth. In this article, we will study the 6 major factors that helped India become the fifth-largest economy in the world.

• India became the fifth-largest economy by achieving an average GDP growth of 6.7%.
• In the past decade, India has successfully attracted foreign investments as it witnessed an 82% increase in FDI inflows.
• To achieve this feat, the government initiated several reforms such as privatisation of Air India, consolidation of banks, merging PSUs, and domestic manufacturing of military equipment.
• Also, the Indian stock market experienced substantial growth. This provided more capital to businesses and led to the creation of more jobs.

Below are some major factors that led to India becoming the fifth-largest economy:

1. Robust policies and GDP growth

Over the last decade, the Indian government implemented strong economic policies. Primarily, these policies focused on increasing productivity and improving business conditions. India's GDP (Gross Domestic Product) grew at an average rate of 6.7%, which is faster than many larger economies like the US and China. Also, the government promoted various reforms that improved trade and supported infrastructure development.

2. Foreign investment and increased FDI inflows

During the past 10 years, India attracted a lot of foreign investment. This was mainly due to reforms that made the business environment more welcoming for global companies. Under Prime Minister Modi’s leadership, India saw a significant 82% increase in Foreign Direct Investment (FDI) inflows.

This increase means more international companies are putting their money into Indian businesses which ultimately boosts local industries and creates jobs. Moreover, these investments help in growing sectors like:

• Technology
• Manufacturing
• Services

This further strengthened India's economy and made it the fifth-largest economy in the world.

3. Public sector reforms

India took several steps to improve the “efficiency of its public sector units (PSUs)”. For the unaware, these PSUs are government-owned companies. They operate in sectors like energy, banking, and transportation. By bringing reforms, the Indian government modernised and restructured these companies.

As a result, the profitability of these PSUs increased and they became more competitive. Moreover, some underperforming companies were either privatised or merged. This reduced government costs and led to better budgetary allocations.

4. Growth of stock markets and financial assets

Over the past decade, India’s stock markets experienced significant growth. As of January 1, 2014, Nifty was at Rs. 6,323.8, whereas as of September 28, 2024, it is Rs. 26,178.95. This clearly shows the rapid rise of stock markets. This particularly happened due to more companies going public and investors showing greater confidence in the economy.

This growth has provided capital to businesses and allowed them to expand and create jobs. At the same, it has increased the wealth of investors. Be aware that strong stock markets are a key indicator of a healthy economy.

5. Defence reforms and Indigenous production

India has focused on strengthening its defence sector by “increasing domestic production” of military equipment. For this purpose, the Indian government has promoted “self-reliance” and has:

• Successfully reduced its dependence on foreign military imports
  and
• Increased local manufacturing of weapons and equipment

These reforms have developed industries like “aerospace” and “engineering”. Also, they have enhanced India’s defence capabilities and supported economic growth by expanding the manufacturing sector.

6. Privatisation of Air India and PSU banking consolidations

The privatisation of Air India and the consolidation of public sector banks were also some major reforms that led to India becoming the fifth-largest economy. By selling Air India to private investors, the government reduced its financial burden. Notably, this also allowed the airline to operate more competitively.

Similarly, by merging several public sector banks, the government strengthened their ability to offer loans and services. These changes significantly improved the financial health of both the airline and banking sectors. Now, they are more stable and generating a higher revenue.

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