As of 2001, according to World Development Indicators, India had become the world's fourth-largest economy in purchasing power parity (PPP) terms, up from fifth place in 1999. Although in current dollars, India's GDP was only $477.4 billion, in PPP terms, a calculation which takes account of the low price levels for goods and services in India compared to the United States, India's effective GDP equals $2.9 trillion, over six times the nominal level. Annual per capita income, of course, remains very low even in PPP terms—$2,540 (PPP) according to CIA estimates—but its new fourth-place rank does reflect the country's remarkable record of steady growth: an annual average of 6% growth since 1991 with a 10% reduction in the proportion of the population living in poverty. Severe impediments and future challenges remain, however. Over 60% of the labor force is still employed or underemployed in agriculture, which constitutes 25% of the GDP. Industry also contributes about 25% to GDP but employs only 17% of the labor force. Services account for the other 23% of the labor force, and the other half of the GDP, up from a 12.8% share in 1980. India's population growth dropped below 2% for the first time in four decades, but the growth rate for the working-age group 15 to 60 years olds continues to accelerate presenting the government policy makers with the need to accelerate job creation.
India is rich in mineral, forest, and power resources, and its ample reserves of iron ore and coal provide a substantial base for heavy industry. Coal is the principal source for generating electric power although hydroelectric and nuclear installations supply a rising proportion of India's power needs. The government also promotes considerable expansion in oil exploration and production. Anticipating a rapid growth in oil consumption in the near future, the government is actively promoting oil exploration and development. Since 1997, under its New Exploration and Licensing Policy (NELP), foreign companies have been permitted to participate in upstream oil exploration, long restricted to Indian-owned firms.
The Indian economy is a mixture of public and private enterprises. Under a planned development regime since independence, the public sector provided the impetus for industrialization and for absorption of sophisticated technology. Nevertheless, a large proportion of the total manufacturing output continued to be contributed by small, unorganized industries. In recent years, and especially since 1991, the government has placed greater emphasis on private enterprise to stimulate growth and modernization. Reflecting this policy shift, public enterprises accounted for only about 7% of the country's GDP in 1999, down from 23% in the mid-1980s. In December 1999, the government created the Ministry of Disinvestment and announced plans to disinvest in 247 companies owned by the central government down to a 26% share in most companies, excluding only three strategic sectors altogether: railways, defense, and nuclear energy. In its first disinvestment deal, the government sold 51% equity in Bharat Aluminum Corp., Ltd. to the Indian company Sterlite Industries for $118 million despite strong political opposition. In all, about $530 million was received from disinvestment in 2000/01. In 2002/03 total receipts from disinvestment were only about 28% ($717 million) of the Ministry's projected target $2.5 billion Sales included a strategic stake of Videsh Sanchar Nigam Ltd. (VSNL), India's premier international communications and internet service provider (ISP) company to the Tata Group, India's largest conglomerate; a strategic stake in IBP, the national petroleum marketing company, to Indian Oil; a strategic stake in Indian Petrochemical Company Ltd. (IPCL) to the Indian company, Reliance Industries; and a strategic share of Maruti Udyog Ltd. (MUL), India's top car maker with a 60% market share, to Suzuki Maintenance Corporation (SMC) of Japan, which was already MUL's technology provider and owned a 46% share, which it increased to 51% in the deal.
Following the proclamation of a state of emergency in June 1975, a 20-point economic reform program was announced. Price regulations were toughened, and a moratorium on rural debts was declared. A new campaign was mounted against tax evaders, currency speculators, smugglers, and hoarders. This program, which lapsed when Indira Gandhi was out of power (1977–80), was revised and incorporated into the sixth five-year plan (1980–85). The reforms were buttressed by a 30-month arrangement under the IMF's Extended Fund Facility (EFF), which made available SDR 5 million (only SDR 3.9 million actually drawn) 9 November 1981 to 10 May 1984. After the collapse of world oil prices in 1986, India's average annual growth increased to 6.2% on the latter half of the decade. This expansion was accompanied, however, by numerous persistent weaknesses: slow growth in formal sector employment, inefficiency and technological lags in the public sector, and increasing fiscal and balance of payments deficits, which by 1990 had produced double digit inflation. The oil shock accompanying the Gulf War catalyzed an acute balance of payments crisis in early 1991.
Swift stabilization measures taken by the newly elected government, including two stand-by arrangements with the IMF—a short four-month arrangement 18 January to 17 April 1991 with a SDR 551 line of credit, and a larger, 8-month arrangement 31 October 1991 to 30 June 1993 with an SDR 1,6456 million line of credit—proved highly successful. By mid-1992, foreign exchange reserves had recovered to a comfortable margin (equal to five months of imports; a decade later, in 2002, coverage was at 8 months of imports) and inflation declined from 13.1% in 1991–92 to 8.6% in 1993–94. Further reforms focused on trade liberalization, privatization and deregulation helped push GDP growth to an average of 6.5% for the five years 1995 to 1999. Accelerating growth sparked a return of double-digit inflation, reaching 13.1% in 1998/99, but a currency devaluation of almost 12% helped bring inflation down to 3.4% in 1999 (as measured by consumer prices). Economic growth slowed significantly in 2000/01 to around 4% reflecting both the global economic slowdown and also weak agricultural growth in India. The 2000/01 budget included a 30% increase on defense spending because of the conflict with Pakistan, increasing the public debt. The central government's fiscal deficit increased steadily from 1997/98 to 2001/02, from4.9% of GDP to 6.1% of GDP. In 2001/02, however, growth recovered to around 5.5% largely due to a recovery in agriculture. In the more export-sensitive industrial sector, the growth rate was only 2.7%. In 2002/03 industrial growth recovered to an estimated 6.17%, while services increased 7.1%. Overall estimates of real growth for 2002/03 have been scaled back to 4.4%, however, from predictions of over 5%, mainly due to setbacks in agriculture because of a poor monsoon, 19% short in volume, the worst since 1987/88. The shortfall is even more dramatic given that an 8% per year growth target was set for the Tenth Five-Year Plan, 2002–2007. The feasibility of achieving such a high annual growth rate was defended by the government largely in terms the plan's concentration on agriculture where high percent gains seem attainable because of the widespread inefficiency.