From “Fragile Five” to the Fifth-Largest Economy: India’s Economic Transformation
In 2013, India was categorized among the “Fragile Five,” a term coined by Morgan Stanley to describe a group of emerging economies deemed vulnerable due to their heavy reliance on foreign investment and economic instability. This group included Turkey, Brazil, South Africa, Indonesia, and India. Fast forward to 2024, and India has remarkably transformed its economic landscape, With a GDP of $2 trillion in 2014, India nearly doubled its economy over 10 years, reaching $3.9 trillion by 2024 with a 93.1% growth. Now India is the world’s fifth largest economy jumped from number tenth in 2014. This rapid growth was due to its young population, economic reforms, and a growing tech industry, making India a key player in the global economy.
The Fragile Five Era
The designation of India as part of the Fragile Five was a reflection of significant economic challenges. At that time, the country was grappling with high inflation, a depreciating currency, and sluggish growth rates. The UPA government faced criticism for policy paralysis and corruption scandals, which eroded investor confidence and led to a stagnating economy. The situation was so dire that by early 2013, experts were warning of stagflation — a combination of stagnant economic growth and high inflation.
Catalysts for Change
India’s turnaround can be attributed to a series of strategic reforms initiated by the government led by Prime Minister Narendra Modi since 2014.
These reforms focused on:
Economic Liberalization: Opening up various sectors for foreign direct investment (FDI) and simplifying regulations.
Infrastructure Development: Investing heavily in infrastructure projects, including roads, railways, and digital connectivity.
Fiscal Responsibility: Implementing measures to reduce the fiscal deficit and improve overall financial health.
Boosting Manufacturing: Initiatives like “Make in India” aimed at promoting domestic manufacturing and reducing dependence on imports.
These reforms have not only stabilized the economy but also attracted significant foreign investment, leading to improved macroeconomic fundamentals.
FDI Overview (2014–2024)
Total FDI Inflows: From April 2014 to September 2024, India attracted approximately $709.84 billion in FDI inflows. This figure accounts for about 68.69% of the total FDI inflows received over the past 24 years, highlighting a substantial increase in investor confidence and interest during this period.
Comparison with Previous Decade: The FDI inflows from 2014 to 2024 represent a 119% increase over the preceding decade (2004–2014), which saw total inflows of around $304 billion. This growth is indicative of the successful implementation of various reforms and initiatives aimed at enhancing the business environment in India.
Key Sectors Attracting FDI: The services sector emerged as the largest recipient, accounting for about 16% of total FDI inflows, followed by computer software and hardware at 15%, trading at 7%, and telecommunications at 6%. The manufacturing sector also saw a significant rise in investments, increasing from $98 billion in the previous decade to approximately $165 billion from 2014 to 2024.
Major Source Countries: The primary sources of FDI during this period included Mauritius (25%), Singapore (24%), and the United States (10%), among others. This diverse range of source countries reflects India’s strategic importance in the global investment landscape.
Infrastructure Spending Overview
2014: The allocation for infrastructure spending in the interim budget was approximately ₹1.81 lakh crore (about $29 billion at the time), which represented an increase of 8.6% from the previous year. This budget included investments across various sectors such as power, coal, roads, civil aviation, ports, and railways.
The government emphasized public-private partnerships (PPPs) to mobilize additional resources for infrastructure development, highlighting a need for massive investment in this sector.
2024: The budget for capital expenditure (capex) is projected to reach ₹11.11 lakh crore (approximately $134 billion), marking an increase of over 500% from 2014. This expenditure is expected to constitute about 3.4% of GDP.
The significant rise in spending reflects a focused strategy on infrastructure development, with the share of the Centre’s capex in infrastructure increasing from 28% in FY2014 to around 60% in FY2025.
Foreign Exchange Reserves Overview
2014: As of March 2014, India’s foreign exchange reserves were approximately $304.2 billion. This figure represented a modest increase from $292 billion at the end of March 2013, indicating a recovery from previous economic challenges and efforts by the Reserve Bank of India (RBI) to stabilize the rupee and manage volatility in the foreign exchange market.
2024: By late September 2024, India’s foreign exchange reserves had risen significantly to around $704.9 billion. This increase reflects robust economic growth, improved trade balances, and strategic accumulation of reserves by the RBI. The reserves include various components such as foreign currency assets, gold, Special Drawing Rights (SDRs), and reserve positions in the International Monetary Fund (IMF).
R&D Spending Overview
2014: In the financial year 2014–15, India’s Gross Expenditure on Research and Development (GERD) was approximately ₹85,326 crore (around $13.7 billion), which accounted for about 0.7% of the country’s GDP. This period marked a gradual increase in R&D spending, but it was still relatively low compared to global standards, particularly when compared to countries like Israel and South Korea, which spent significantly more as a percentage of their GDP.
2024: By early 2024, India’s R&D expenditure is projected to reach around ₹2.5 lakh crore (approximately $30 billion), representing a substantial increase from 2014. This figure indicates a growing recognition of the importance of R&D in driving economic growth and technological advancement. The GERD as a percentage of GDP is expected to remain around 0.7%, but the absolute spending has increased significantly due to overall economic growth.
Electronics Exports
2014: In the financial year 2014–15, India’s total electronics exports were approximately ₹38,263 crore (around $5.7 billion). This figure reflected the nascent stage of India’s electronics manufacturing capabilities, with a significant portion of electronic goods still being imported.
2024: By the financial year 2023–24, electronics exports surged to about ₹2.41 lakh crore (approximately $29.1 billion). This represents a remarkable compound annual growth rate (CAGR) of 22.7% over the decade. The growth has been particularly pronounced in mobile phone exports, which increased from ₹1,566 crore in 2014–15 to around ₹1.2 lakh crore (approximately $14.1 billion) in 2023–24, marking a 77-fold increase.
Defence Exports
2014: In 2014, India’s defence exports were relatively modest, estimated at around $300 million. The focus at that time was primarily on domestic procurement and modernization of the armed forces.
2024: By 2024, India’s defence exports have seen significant growth, reaching approximately $2 billion. This increase reflects a strategic push towards self-reliance in defence manufacturing under the Atmanirbhar Bharat initiative and various policy measures to promote indigenous production and export of defence equipment.
Current Economic Standing
As of 2024, India boasts a nominal GDP exceeding $3.94 trillion, positioning it as the fifth-largest economy globally. Projections suggest that India is on track to surpass Japan by 2025, potentially becoming the fourth-largest economy in the world with a GDP projected at around $4.34 trillion.
This growth trajectory is supported by:
A Young Workforce: With a median age of around 28 years, India’s demographic advantage contributes to its economic dynamism.
Growing Consumer Market: Rising incomes and a burgeoning middle class are driving consumption across various sectors.
Technological Advancements: Increased focus on technology and innovation is fostering new industries and enhancing productivity.
India’s journey from being labelled as fragile to becoming an economic powerhouse illustrates the resilience and potential of its economy. The ongoing reforms are expected to further bolster its growth prospects. Analysts predict that if current trends continue, India could emerge as the third-largest economy by 2027, overtaking Germany.
The transformation from the Fragile Five to one of the world’s largest economies underscores not just economic recovery but also a shift in global perceptions about India’s stability and growth potential. As Prime Minister Modi highlighted in recent speeches, this evolution reflects a broader narrative about India’s capabilities on the world stage — moving from vulnerability to becoming a key player in global economic discussions.
In conclusion, India’s ascent is not merely an arithmetic inevitability; it is a testament to strategic planning, robust governance, and an unwavering commitment to reform. The future holds promising prospects for India as it continues on this path of growth and development.
GDP Per Capita Comparison
2014: The GDP per capita in India was approximately $1,560. This figure reflected the challenges the country faced at the time, including high inflation and slow economic reforms under the UPA regime.
2024: The GDP per capita is expected to reach about $2,396 by the end of 2024. This projection indicates a substantial increase, reflecting the growth strategies implemented under the NDA regime, which focused on infrastructure development and economic reforms aimed at boosting overall productivity and investment.
This Growth Rate represents a significant improvement in living standards and economic conditions over a decade.
The rise in GDP per capita illustrates India’s transition from a period of economic fragility to becoming one of the fastest-growing major economies globally, showcasing the impact of strategic policy shifts and reforms initiated in recent years.
