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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Possibility of India's Continued Economic Growth and Implications for Korean Companies

Possibility of India's Continued Economic Growth and Implications for Korean Companies

CHOI Ho-Sang

June 1, 2007

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After embracing economic liberalization in the early 1990s, India rapidly developed into one of the world's fastest growing economies. India's economy grew over 8% on annual average from fiscal years 2003 to 2005, and growth continued to be strong in 2006, averaging 8.9% for the first three quarters of the fiscal year. The surge has been characterized by robust private-sector consumption and growth in exports that has averaged over 20% annually since 2002.

Services have been India's main economic engine, accounting for more than 50% of the nation's real GDP. Trade, accommodations, transportation, and communications took up 26.6% of real GDP as of the third quarter of 2006, followed by manufacturing, which accounted for 14.6%. This was followed by financial services and real estate at 13.2%. Trade, accommodations, transportation, and communications grew 13.3% in the first nine months of 2006.

Behind India's economic boom is a wave of foreign direct investment. FDI in India rose at an annual average of 24.4% between 2002 and 2004, accounting for 0.5-0.8% of total world FDI for the same period. The surging FDI is largely attributable to special economic zones (SEZ) that provide incentives for foreign investment. The number of SEZs increased to 237 in January 2007, nearly a year after the Special Economic Zone Act took effect. The government also drafted several plans to create a more competitive infrastructure to attract foreign companies to the economic zones.

FDI in India is concentrated mostly in the electric and electronics industries. As of 2005, FDI in those industries was US$1.45 billion, followed by communications at $650 million, and services at $580 million. Electric and electronics accounted for 17.5% of total cumulative FDI from August 1991 to March 2006.

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