Last updated: February 2023
India is the world’s fifth largest economy and overtook China as the world’s most populated country in 2023. Growth, creditworthiness and business climate indicators are above the emerging and developing Asian average. But per capita income lags most regional peers.
|The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2023 and 2027. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
India’s economy has outperformed its regional peers over the past couple of years, expanding 8.7% in 2021 and 6.8% in 2022 thanks to resilient domestic demand and robust public infrastructure spending.
The IMF expects India’s economy to expand by 6.1% in 2023 and 6.8% in 2024 on the back of growing investment and household consumption. The recently released 2023 budget will increase government capital expenditure by 33% and cut income taxes for the middle class, which should support the productive capacity of the economy, crowd in private investment, create jobs in the construction industry and boost domestic demand. India is poised to benefit from manufacturers looking to diversify their supply chains from China and other countries given its status as an export hub and investment destination for manufacturing and services. However, as a net importer of commodities, in particular crude oil, still-elevated prices will continue to raise domestic inflation and constrain economic activity.
Downside risks to growth include a sharper than expected slowdown in the global economy, higher energy prices that further raise the import bill and delays in fiscal consolidation that worsen the government’s debt burden.
India’s longer-term outlook remains robust. The IMF projects growth to average more than 6.5% per annum over 2024-27, supported by the government’s reform agenda and ongoing investment in infrastructure that enhances economic development. The government's production-linked incentive scheme offers financial incentives to boost domestic manufacturing, lift foreign direct investment, support labour reform and create a 'bad bank' to manage financial issues. The privatisation of state-owned enterprises through the National Monetisation Pipeline (of public entities) should support the government’s balance sheet while also helping foster higher competitiveness and productivity. In general, India's youthful demographics, burgeoning consumer class, ongoing urbanisation, increasing infrastructure investment and the digitalisation and formalisation of its economy will sustain growth over the longer term.
Robust GDP growth over the past couple of years helped GDP per capita rise to around US$2,500 in 2022. Ongoing solid GDP growth, lower income taxes and increasing infrastructure development should help create jobs and lift incomes to above US$3,500 in 2027, according to IMF projections.
Country risk is low to moderate in India. The OECD country risk grade is 3; comparable with the Philippines, Thailand and Indonesia. This indicates a relatively low to moderate likelihood that India will be unable and/or unwilling to meet its external debt obligations.
The risk of expropriation in India is low to moderate. According to the US investment climate statements, the government does not have expropriation laws in place. But the government has taken several measures, including implementation of transfer pricing, the introduction of a goods and services tax in 2017 and new insolvency and bankruptcy laws to help strengthen business regulations. The Indian government has been divesting from state owned enterprises (SOEs) since 1991, and has committed to continuing to do so, to help raise government revenue without increasing taxes and reduce the role of the government in the economy.
India’s political risk is low to moderate. The ongoing Kashmir conflict between India and Pakistan poses ongoing military risks, while longstanding border issues with China remain prominent. Such disputes, if they escalate, could weigh on business confidence and foreign investment and undermine economic growth.
India scores above the emerging and developing Asian averages on all governance indicators, except for political stability and absence of violence.
India is Australia’s sixth largest trading partner. Total goods and services trade amounted to $34.3 billion in 2021, up from $24.3 billion in 2020. Australian exports of goods and services contributed the lion’s share, at $24.5 billion. Goods exports are dominated by coal, education related travel, gold and copper. Imports from India include refined petroleum, telecom and ICT services, technology and other business services and medicines.
The Australia-India Economic Cooperation and Trade Agreement (ECTA) entered into force in December 2022 will deepen economic and trade links between Australia and India. ECTA will enable Australian goods exporters to obtain preferential access to the large Indian market, as tariffs on 96% of exports to India are reduced. This is commercially significant for up to $14.8 billion worth of Australia’s current merchandise trade destined for India each year.
Education is Australia's largest service export to India, valued at $4.2 billion in 2021. Although Indian enrolments have declined since 2020, early reports for 2023 suggests Australia’s international student enrolments are being dominated by Indian students. This trend likely reflects heavy discounting on school fees over the past year, a lower Australian dollar that makes it cheaper to live and study in Australia for overseas arrivals, a healthy jobs market and perceptions of Australia as a safe country to live in.
India is also an important source of tourists. Tourist arrivals from India have rebounded strongly as international border restrictions have eased. Another year of open international borders, rising Indian incomes, Australia’s geographic proximity, a growing bilateral relationship and close economic and cultural ties with India should support further recovery in tourism ahead.
Indian investment in Australia increased significantly to $27.8 billion in 2021. Indian investment is primarily focused on developing critical minerals (including copper and lithium) to enhance its supply chains for these commodities. The stock of Australian investment in India rose to around $20 billion in 2021 from $15 billion in 2020. Australian mining firms such as BHP Billiton, Rio Tinto, and engineering firms such as Snowy Mountains Engineering and CIMIC Group have large operations in India.
To support more Australian and Indian business partnerships, the Australian Government has launched the Australia India Business Exchange (AIBX) program. AIBX provides a range of services to support Australian businesses to enter and establish in India, from industry specific insights to guidance on doing business with India and entering India's online retail market.