The economy of India is the 3rd largest in the world in terms of market exchange rates, and the 12th largest in the world in terms of purchasing power parity, with an estimated gross domestic product (GDP) of US$2.97 trillion. With its increasingly educated workforce and its capitalization on several key industrial and service sector niches, India is also in possession of one of the world’s fastest growing economies, having posted an average growth rate of over 7% per annum over the past decade. In the year 2006, India achieved an even more impressive growth rate of 8.5%. While these economic changes have worked to reduce poverty across the nation by 10% or more during this time period, India continues to struggle with vast differences in household income and quality of life issues.

The economic history of India can be divided into three broad areas: the pre-colonial period (up until roughly the 17th century); the colonial period that accompanied British colonization (lasting from that century until national independence in 1947); and the third period from the late-1940s until the present day. It should be noted, however, that this third period was still highly influenced by India’s colonial history. This translates to an economy with a strong emphasis on import substitution, industrialization, state intervention in labor and financial markets, a large public sector, a high degree of business regulation, and a continued tendency toward central planning. Both India’s first prime minister (Jawaharlal Nehru) and subsequent prime minister Indira Gandhi were largely responsible for determining these economic policies, which were expected to yield favorable outcomes due to the plan’s involvement of both the public and private sectors. This being said, the economic growth rate was actually slow from 1947 to the early 1980s, particularly when compared to the region’s “East Asian Tigers” (e.g., Taiwan, Singapore, Hong Kong, and South Korea).

Major changes were seen in the late 1980s, however, with Prime Minister Rajiv Gandhi easing restrictions on the capacity expansion of incumbents, removing price controls, and reducing corporate taxes. Yet the rapid growth rates these changes spurred also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union (a significant Indian trade partner) as well as ripple effects from the first Gulf War (which caused a massive spike in oil prices), caused India to cascade into a balance-of-payment crisis. Then Prime Minister Narasimha Rao and his finance minister Manmohan Singh (the country’s current prime minister) initiated a wave of economic liberalizations in 1991. These reforms included the abolishment of the Licence Raj (investment, industrial, and import licensing), and the breakup of several public monopolies. These policy changes allowed for the automatic approval of foreign investment in many important industrial sectors.

Today, India has securely established itself as one of the wealthiest economies in the developing world. While the economy does continue its historical combination of socialistic and capitalistic features, it is increasingly shifting toward the latter. In the year 2003, the head of Goldman Sachs (the world’s largest investment bank) predicted that India’s GDP would overtake that of France and Italy by the year 2020; Germany, the United Kingdom, and Russia by 2025; and Japan by the year 2035. Goldman Sachs also predicted that, by 2035, India is likely to be the 3rd largest economy in the world, behind only the United States and China.

The currency of India is the Rupee (INR), which is further broken into 100 Paise. The exchange rate (as of February 2008) was approximately 40INR per US dollar. The tax system in India is three-tiered, with the constitution empowering the union government to levy income taxes, sales tax, service tax, and customs and excise duties; the state governments being empowered to levy sales taxes on the intrastate sale of goods, as well as on entertainments and professions; and local governments being given the power to impose property taxes and charges on the local use of public utilities such as water, sewage services, and electricity.