Using the data and your economic knowledge, assess the importance to the UK economy
of continued economic growth in India. [25 marks]
Continued economic growth in India, defined as an increase in the capacity of an economy to
produce goods and services over a time period, is likely to have an effect on the UK economy and
this can be measured through the impact on macroeconomic objectives. The main macroeconomic
objectives of most governments, including the UK government, are stable prices (the UK aims for a
2% target inflation), low unemployment, rising economic growth and a sustainable balance of
payments. Continued economic growth in the Indian economy can have significant impacts on all
four of these objectives, and the overall effect is difficult to predict.
The current account is a key determinant of economic growth and comprises of the balance of trade
in goods and services plus net investment incomes from overseas assets and net transfers. As extract
B asserts and as theory suggests, continued economic growth in India is likely to benefit the UK
economy through ‘increased exports’, directly benefiting the balance of trade. This is because as the
Indian economy grows, Indian consumers may increasingly purchase British goods and services,
which will help to promote UK exports. However, the significance of this increase in exports is
difficult to predict. The main determining factor is how much UK-India trade actually takes place,
and as extract B states, ‘currently India accounts for only 1% of UK exports.’ Despite attempts at
creating a trade deal between the two economies over the past few years, trade has remained
relatively low at only $7.4bn in 2013, 1.4% of total UK exports. Furthermore, the actual goods and
services that the UK exports will play an important role in determining how significant the effect on
the UK balance of trade will be. Extract B believes that the UK’s ‘world-class services, for example
financial and legal’ will be demanded by the growing Indian economy. However, this depends on
cultural factors, as well as what stage of development the Indian economy is in – Indians may be
keener to purchase manufactured goods than top-notch financial services. Thus, for Indian economic
growth to have a positive impact on the UK economy, the UK economy needs to be able to adapt to
the changing demand from India. As India is currently such a minor trading partner, it is unlikely that
the UK economy will be very receptive to changes in Indian demands for its exports. As a result, the
effect of Indian growth on the UK balance of trade may be limited by the fact that trade with India is
relatively small, with the EU accounting for roughly 57% of UK exports and almost 55% of imports.
Moreover, Indian growth may also have an impact on UK imports. As the Indian economy grows and
develops, there is a real possibility that, like China, the comparative advantage between the UK and
Indian economy will change. India is likely to become increasingly able in certain industries,
particularly the manufacturing industry which relies on mass semi-skilled labour. As a result of this
shift in comparative advantage, it is likely to increase the long-term deterioration of the UK
manufacturing industry. This will mean that even more manufactured goods will have to be
imported as opposed to being bought domestically, increasing the value of imports and decreasing
UK exports. This is a similar effect as to what has been happening for the past half-century, with
developing economies gaining comparative advantage in manufacturing goods. As a result, the UK
has had to increasingly import manufactured goods, and this accounts for the UK running a current
account deficit for the most part of the last three decades.
Continued economic growth in India is also likely to affect the UK current account in another way –
through net investment incomes. A growing Indian economy is likely to present more opportunities
of continued economic growth in India. [25 marks]
Continued economic growth in India, defined as an increase in the capacity of an economy to
produce goods and services over a time period, is likely to have an effect on the UK economy and
this can be measured through the impact on macroeconomic objectives. The main macroeconomic
objectives of most governments, including the UK government, are stable prices (the UK aims for a
2% target inflation), low unemployment, rising economic growth and a sustainable balance of
payments. Continued economic growth in the Indian economy can have significant impacts on all
four of these objectives, and the overall effect is difficult to predict.
The current account is a key determinant of economic growth and comprises of the balance of trade
in goods and services plus net investment incomes from overseas assets and net transfers. As extract
B asserts and as theory suggests, continued economic growth in India is likely to benefit the UK
economy through ‘increased exports’, directly benefiting the balance of trade. This is because as the
Indian economy grows, Indian consumers may increasingly purchase British goods and services,
which will help to promote UK exports. However, the significance of this increase in exports is
difficult to predict. The main determining factor is how much UK-India trade actually takes place,
and as extract B states, ‘currently India accounts for only 1% of UK exports.’ Despite attempts at
creating a trade deal between the two economies over the past few years, trade has remained
relatively low at only $7.4bn in 2013, 1.4% of total UK exports. Furthermore, the actual goods and
services that the UK exports will play an important role in determining how significant the effect on
the UK balance of trade will be. Extract B believes that the UK’s ‘world-class services, for example
financial and legal’ will be demanded by the growing Indian economy. However, this depends on
cultural factors, as well as what stage of development the Indian economy is in – Indians may be
keener to purchase manufactured goods than top-notch financial services. Thus, for Indian economic
growth to have a positive impact on the UK economy, the UK economy needs to be able to adapt to
the changing demand from India. As India is currently such a minor trading partner, it is unlikely that
the UK economy will be very receptive to changes in Indian demands for its exports. As a result, the
effect of Indian growth on the UK balance of trade may be limited by the fact that trade with India is
relatively small, with the EU accounting for roughly 57% of UK exports and almost 55% of imports.
Moreover, Indian growth may also have an impact on UK imports. As the Indian economy grows and
develops, there is a real possibility that, like China, the comparative advantage between the UK and
Indian economy will change. India is likely to become increasingly able in certain industries,
particularly the manufacturing industry which relies on mass semi-skilled labour. As a result of this
shift in comparative advantage, it is likely to increase the long-term deterioration of the UK
manufacturing industry. This will mean that even more manufactured goods will have to be
imported as opposed to being bought domestically, increasing the value of imports and decreasing
UK exports. This is a similar effect as to what has been happening for the past half-century, with
developing economies gaining comparative advantage in manufacturing goods. As a result, the UK
has had to increasingly import manufactured goods, and this accounts for the UK running a current
account deficit for the most part of the last three decades.
Continued economic growth in India is also likely to affect the UK current account in another way –
through net investment incomes. A growing Indian economy is likely to present more opportunities
