Indian economy can be broadly divided in three phases namely Pre Colonial, British and independence phase. One can argue that post- independence Indian economy clearly had an influence of colonial period. The economy witnessed government control and intervention in the business, regulated financial services and industrialization as some indicators in support of this argument. The economic reforms in the year 1991 addressed many of these issues and made the country a one of the fastest economies in the world. The reforms indeed underwent some setbacks but overall accelerated the growth of the country by increase in per capita income and living standards.
What is Middle Class:
This is very important here to have a close look to define middle class. It can be defined both as relative and absolute term . Middle Class is defined quite broadly. In many societies it is implied with political, social and historical implications . For the purpose of business and economics, this class would needed to be quantify and represent the information on purchasing power and income. On the basis of various measures, the middle class population in India varies between 30 million and 300 million.
Some researchers classify it between 20th and 80th percentile of the consumption distribution and between 75% and 125% of the median per capita respectively. Other researchers such as Bhalla (2000), adopts an absolute method to illustrate that those whose income exceeds USD3900 in purchase power parity terms. In 2007, Duflo and Banerjee related per day capita expenditure to define middle class. They defined two ranges of USD 2 to USD 4 and USD 6 to USD 10 classify this class. Further, in year 2007 the World Bank also used absolute method for this purpose. It illustrated that those whose incomes on the basis of purchasing power parity range between USD 4000 and USD 17000 should be termed as middle class.
Current Global Middle Class Mix:
American consumption has given a great push to the global economy. Due to long term downwards trend in personal savings rates
the growth of American consumption has been more than that of GDP. Currently, $10 trillion, U.S. private consumption constitutes major component of the global economy . The middle class is a driving force behind massive U.S. consumption. The middle class generally enjoys appropriate housing, healthcare, education and job security, and income that can be used for other activities. In year 2009, the US had 21% share of global middle class spending while India and China together shared only 6% of the pie.
The higher spending power of the middle class in the US was attained primarily by various financial innovations allowing faster growth in consumer credit, mortgages for an ever bigger part of the US population and home equity withdrawals. As household wealth grew faster than that of income, the innovations allowed households to leverage their wealth for consumption and led to a reduction in household saving growth. However the current decline has brought this growth to a standstill. The households save again in an attempt to regain lost wealth. It is not quite clear that how and when the world economy could overcome this gap in global demand influenced by the downtrend in the spending of the American consumer. Now, the expectations are high from Asia, the region which is witnessing high growth. The middle class in India and other countries with large populations are expected to become the next global consumers. Large populations in India have reached a stage will grow into the middle class segment and drive consumption. The policy measures to supplement this movement in India must be focused to increase the pie of household income in GDP ' policies which could make quick and great impacts ' instead of reducing household savings. If this is executed, the world would witness a new global middle class rising from Indian middle class. This indicates that there will be a transformation of the consumption pattern from the West to the East.
India's Role in Global Middle Class Shift:
Large number of population and fast economic growth mean that India will very soon establish herself as the powerhouse of middle class consumerism over the next few decades. It does not mean that India will not be the sole contributors to the global middle class, however Indian contribution is going to be sizable. At present, India's global middle class is quite smaller at around 50 million, nearly 4% of her population. It is expected that the size of this group will grow to 200 million by year 2020.Further, the middle class population is expected to grow to 475 million by year 2030.The concept of a growth 'sweet spot' goes far beyond a natural growth of middle class population and then rapid consumer growth. For economists, the growth means when there is movement of million of people from poverty to the middle class. But the same happens for businesses when a sizable numbers of people start earning more than US$10 per day, and enter global middle-class. At this juncture, the consumption habits must attract the attention of business meant to supply to middle-class markets in the developed economies.
For this economic growth, India experiences many roadblocks such as impact of recent economic crisis, political system and bureaucracy, inefficient judiciary, the middle-income trap, shortage in public infrastructure, social problems such as unemployment, and poverty and an in secure and unstable regional countries.
India has been successfully navigating through these problems since year 1991 when the country kicked off economic reforms. Each emerging country experiences a set of structural roadblocks that can actually hold country's economic growth. If the country is adequately equipped and have will to continue, it can overcome these roadblocks. That is because the track record of continued delivery of economic reforms is so critical in highlighting the chances of continued success.
In spite of the challenges country faces, there are multiple reasons to assert that India is set to accelerate economic growth
' Growth in the region will continue to be more than that of the rest of the world. India has an advantage of benefiting from China's fastest growing market
in the world will be closer to home.
' Because of the structural changes in emerging countries, the world economy could be set for faster long-term growth.
' The country has successfully brought down public sector debt, which reduced the share of interest to GDP and is being supported by self-financed means. This allows more fiscal resources for infrastructure spending.
' The country's urbanization and demographics hold advantage on others
' India's emerging middle class will boost the growth similarly as it did in other countries.
' Service and manufacturing growth supported with good investment have started to rise.
One of the reasons which has slowed the economic growth of India has been relatively average performance of the manufacturing sector and low investment level. Until 2005, manufacturing growth in India did not exceed the growth of manufacturing sector in other developing countries. This is why Indian industry could have only 26% pie of GDP in 2006.This has changed in 2007 which witnessed the growth of manufacturing sector as high as 12.5%. There have multiple dimensions to country's quick manufacturing growth. One school of thought points out reforms and an external focus while others highlights macroeconomic factors namely low inflation, a devalued local currency and moderate interest rates. Beyond this, India needs to focus on improving infrastructure and political will for reforms. All these factors play critical roles. This reflects in India's ability to grow quicker without achieving a robust growth in manufacturing growth.
The Indian approach to grow primarily with service sector gives rise to a traditional development approach in which both industry and services contribute to economic growth. In support of this position, one can review the steep rise in fixed investment in India. As a percentage of GDP this was 22% in the year 1980, rose to 25% in 1990 and jumped to 35% in the recent past. Private sector has been a big contributor in investment rise in the country. Moreover, one can not completely ignore the participation of public sector in it.
The budget deficit had declined to 4% from 6% during the last decades of 20th century. Even with the government investment in infrastructure is limited to 5% of the GDP, India commands fiscal side to invest in the infrastructure. The country also has the formidable association with private companies which help in providing investment and expertise. The government and private companies association has been an incredible success for quick infrastructure development and treated as a role model among various developing economies in the region. India would surely get a great advantage from its extensive and skilled labour market. This is growing at the rate of 1.7% per annum while the population is growing around 1.2% per annum.
It is estimated that nearly 500 million people will be migrated to various cities by the year 2040.This makes India to occupy ten places in top thirty fastest growing urban places in the world. The impact of higher participation of the labour force would further increase the growth of the labour force. The benefits of the growth can been seen the fast reduction of poverty. Also the house hold saving increases and invest in their welfare. This will subsequently enhance the knowledge base and the development of the young population. India is expected to see the growth of middle class from 10% to 90% of its population in next three decade.
By year 2040, the country is expected to have 1.6 million population and nearly 1.0 billion of this population would represent middle class. There are various reports which indicate that rise of middle class in India. McKinsey in its one the reports in 2007 estimated that middle class population would increase to 590 million by the year 2025.This middle class group would constitute people from various segments such as private companies, government organizations, farmers, businessmen and other professionals. The characteristics of this group is that they select that what they need to consume, not driven by forces of life. These discretionary selection, shows the choices with the growing middle class of India, will overpower consumption patterns.
Many researchers define the middle class in terms of income and consumption. In the year 1995, 60% of a sample of 1275 Indian respondents expressed that the economic system run inefficiently in a democracy. Further, in the year 2001, this thinking was changed: 60% of participants of the survey disagreed with this belief. In the year1995, nearly 47% participants expressed that it was important to do an interesting job. They indicated salary and job security as the only two important dimensions of jobs. By 2001, while these two factors still remained critical, 74% showed that job enrichment is also an important dimension. The proportion of participants who highlighted that the opportunity to take initiative at the work was important also increased to 64% from 46% between the year 1995 and 2001. These analysis suggest a change in work outlook. Where job content and initiative are important, it is probable that the productivity of work force and satisfaction from the work will have a higher rating. In other words, the changing perception coupled with middle class income is already visible in the country, and this changed outlook is encouraging to economic development.
In this work, it is analysed that the Indian economy significantly contributes to a massive expansion in the world's middle class group. This is certainly encouraging for the world economy and for the Indian economy, as most of the growth in the world middle class would come from India. India's middle class is expected to grow exponentially if India can accelerate its present pace of economic growth. However, India's middle class is still not big by global standards as the forces to accelerate domestic consumer demand is yet to pick up speed. If growth accelerate, the middle class would grow and sustain, but domestic demand is yet to reach to a situation to boost growth. If India's middle class grows sufficiently, it could encourage a self-sustaining growth for many years. India would be at the leader in one of the great transformations in the global middle class.
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