India Vs China: Can India ever come out on top?

Writer: Kavya Reddy 

Editor: Krithi Kankanala

In the 1980s to 1990s, India was poised to become the next Asian superpower, and nothing seemed to be in its way of world domination. India and China had very similar economic sizes and similar per capita incomes in dollar terms. The GDP per capita for China and India in 1985 was approximately $293 per person. But fast forward to today, India’s economy is presently about 4.1 trillion dollars, while China's is 19 trillion, which is five times larger. Why was China able to grow at such a massive rate, while India could not? This article aims to explore why these two countries started at an equal footing but ended up at such different positions. 

China's GDP per capita growth has outpaced India's, World Bank, III Capital Management.

Contrasting Growth Paths

China has managed to consistently maintain a high growth rate for almost three decades, which has allowed its economy to grow to 19 trillion dollars. China’s economy expanded by 51 times over the past 35 years, with a real growth rate of 10 per cent per annum. In contrast, India’s economy has grown at 6.3 per cent per annum from the year 2000 to 2024 in real terms, as per the World Bank. This difference in growth rates has ultimately led to China and India being placed in very different categories. According to the World Bank, a high-income country is classified as one that has a per capita income of above 14,000 dollars. China is close to reaching this category, while India has been firmly entrenched in the middle-income bracket. India would need to maintain an average growth rate of 7.8 percent for the next two decades in order to be classified as a high-income country. 

What this data tells us is that from 1990-2025, differing economic policies and political structures have played a major role in where the two countries have ended up today. But what exactly did China do differently to become the second-largest economy, while India became the fourth-largest economy? 

Politics

India and China have vastly different styles of governance and decision-making, which have a massive impact on how economic policies are planned, implemented and executed. In China, the Chinese Communist Party (CCP) governs the country through authoritarian policies and faces minimal red tape or dissent in decision-making. This allows the government to make decisions quickly and thus makes rapid economic development easier. On the other hand, India is a democracy with a parliamentary system composed of state assemblies and a federal parliament. This system ensures that decisions are not taken by one individual and creates an environment which is more inclusive of all opinions. However, this system of government can make decision-making slow, corrupt and inefficient. 

The Three Gorges Dam, China

The impact of political systems on decision-making can be seen most strongly in the dam construction projects in these countries. The Three Gorges Dam in China took more than a decade to build and is the world’s largest hydropower project. It displaced more than 1.2 million people and flooded 13 cities, 140 towns and 1,350 villages. There have been widespread concerns about the environmental and social cost of these dams, where homes were submerged, communities displaced and led to the functional extinction of species such as the Chinese Paddlefish. However, this dam provided China with hydroelectric power, which enabled it to expand industries and create thousands of jobs in the Chinese interior. 

In contrast to this, the Sardar Sarovar Dam, in Kevadia, Gujarat, took almost 56 years to construct. The foundation stone of the dam was laid on April 5, 1961, by Jawaharlal Lal Nehru, the prime minister at the time, and was inaugurated by Prime Minister Narendra Modi in 2017. This investment of capital in infrastructure, such as electricity, railways, roads, ports and airports, is vital to India’s overall economic growth capacity. Although India has a massive population of young people, the lack of investment in infrastructure has led to a lack of job opportunities. India’s political system is plagued by corruption, which slows down decision-making and eventually affects its economic potential. On the other hand, China has understood that the accumulation of debt to finance infrastructure development has a positive externality, and its boldness has been rewarded by GDP growth. 

Differences in Productivity

China has a higher productivity growth rate than India, and this can help shed light on the increase in the GDP per capita differential between the two countries. Productivity measures how efficiently production inputs, such as labour and capital, are used in an economy to produce a given level of output. Therefore, the quality and quantity of infrastructure in an economy have a big impact on the productivity growth of the economy. China has invested in various energy sources such as coal, solar and hydroelectric power, and ensured the existence of efficient transport systems such as rail and road networks. This allows for the speedy connection between distribution centres and ports, ensuring that time saved is money. By comparison, India is far behind. India needs heavy investments in this infrastructure, which would enable the productivity of whole industries to increase. 

Population Distribution

Data suggests a strong link between GDP per capita growth and the rate of urbanisation. World Bank, III Capital Management

The image above represents a positive relationship between GDP per capita growth and the rate of urbanisation. Increases in urbanisation rates are positively correlated with increases in GDP per capita. In 1969, 17.5% of the population in China lived in cities, compared to 19.5% in India. Today, the urbanisation rate is 58% in China and roughly 37% in India. Both countries have seen a massive influx of people into urban areas, but this process has happened much more rapidly in China. The shift from agricultural to industrial sector increases the growth potential of an economy, because as incomes increase, people will increase their consumption of manufactured goods but not agricultural goods. Hence, manufacturing holds higher economic value than agriculture. India focused on the development of its services sector, which required an overall lesser amount of agrarian-to-urban migration and infrastructure investment. Therefore, China’s aggressive manufacturing investment paid off, and its economic growth overtook that of India. 

India’s Road to Prosperity 

According to the World Bank, in the past fifty years, only 34 countries have been able to transition from the middle-income to the high-income bracket, while the other 108 countries continue to remain in the middle-income classification. The trap involves a stagnating per capita income of about 8,000 dollars in today’s terms. What change can India implement to pull itself out of this trap? 

Research by the World Bank shows that the three I’s, investment, infusion and innovation, are instrumental for an economy looking to transition to the high-income bracket. According to Ajit Ranade, an accomplished Indian Economist, India must focus on inclusive, sustainable growth, which encourages the increase in productive potential of all sectors in the economy.

As part of inclusive growth, investment must increase to 40 per cent of its GDP. This would increase the net injections into the economy, which would have a multiplier effect on the overall GDP of India. He recommends that the labour force participation rate of women should increase from 35 to 50 per cent. The race towards progress cannot happen without the active involvement of women in the workforce, as uplifting women dismantles patriarchal societal norms and leads to inclusive economic growth. 

Ranade also suggests that there should be a greater linkage between India and the rest of the world, as it would enable easier trade, better relations between countries, and encourage foreign direct investment. This would require the adoption of new technologies and the reduction of import tariffs. Finally, an investment in human capital is essential in improving the skills of the Indian working population. India has a large population of young workers, but they do not have access to the skills which would increase their productivity, employability and employment opportunities. By uplifting the Indian population, the government can ensure that balanced economic growth occurs and that the whole of India can reap the benefits of it. 

India has many challenges to tackle, and does not have the benefit of time that China had. It must address its structural issues, such as corruption, inefficient decision-making, and a lack of infrastructure and human capital, if it wishes to ever overtake China. Only with time can we see whether India is up to the challenge.