India’s rise must also spur growth in per capita income

Around 1990, India and China had roughly the same economic size and per capita income in dollar terms. China’s per capita income was lower than that of India. Both were ranked between 140 and 145 out of 190-odd countries. China’s economic reforms had started in 1978, but the real momentum to their growth was yet to kick in. India’s reforms started in the next year i.e. 1991, thirteen years behind that of China. Fast forward to the present. These two are now the second and fourth-largest economies in the world. China became the second-largest economy in 2010. India attained the fourth rank this past week, as per the International Monetary Fund, and this was proudly announced by the Chief Executive of Niti Aayog, on the sidelines of the meeting of the Governing Council of Niti, chaired by the Prime Minister. The CEO was confident that India would overtake Germany to become the third-largest economy in the next three years.

The rise of India and China in the past three decades is nothing short of spectacular. Together, the two giants of Asia represent 40% of humanity. India’s economic size is presently about $4.1 trillion, while China’s is $19 trillion which is five times bigger. India’s economy has grown at 6.3% per annum from the year 2000 until 2024 in real terms, as per the World Bank. This is the fastest growth rate among large economies. In recent years, India’s average rate of growth has gone up to about 7.3%. As compared to 1990, India’s economy is now 11.5 times bigger, while the population is only 1.6 times larger. This means that the per person or the per capita income has grown substantially from about $360 in 1990 to $2,700 in 2025.

The contrast with China is most telling. Back in 1990, both countries had similar per capita incomes, but in 2025, China’s per capita income has raced ahead to $13,000, almost five times that of India. That’s mostly because China’s economy expanded by 51 times over the past 35 years. China was able to maintain a real growth rate of 10% per annum for three decades. The two countries were ranked similarly in 1990 in per capita income. But India is now ranked 141 out of 197 whereas China’s rank is 70. India is now firmly in the middle-income bracket, as defined by the World Bank, whereas China has moved close to being considered a high-income country (which is defined as above $14,000 per capita).

Above that threshold, the World Bank lingo refers to the grouping as developed economies. India is aiming to achieve that status by 2047. For that to happen India’s growth rate has to accelerate and maintain an average of 7.8% in dollar terms for the next twenty years. It is slightly higher than the average that has been achieved in recent years, i.e. 7.3%.

Why did India fare poorly as compared to China over the 1990-2025 period? Is it because of ignoring the potential of export-led growth, dominated by labour-intensive exports? Is it because of low investment in primary health and education? Is it because of the inspector raj which replaced license raj, which was dismantled in 1991? Is it because of India’s three-tiered system of governance, which hinders the ease of doing business? Or is it because India’s democratic system has a cost to pay in terms of slower growth?

What can drive the transition?

There are many questions regarding India’s poor performance when compared to China. But a pursuit of these is fruitless. It is time to focus on what needs to be done to achieve high growth which is sustained for two decades, and also inclusive, so that it leads to growth in per capita incomes as well. This would mean growth of productivity, wages, household incomes, and high-quality jobs. If that is not achieved, India might become the third-largest economy by 2047 but will be stuck in the middle-income trap, and per capita income may stagnate well below $10,000. This has indeed been the fate of most economies in the past fifty years, as documented by the World Bank, whose report shows that only 34 countries have been able to transition from the middle-income to high-income bracket, while 108 countries are stuck in the middle-income trap. The trap is being stuck at a per capita income of about one-tenth of the United States of America or about $8,000 in present terms.

For India, lessons from countries like South Korea (the most impressive transition), Chile, and Poland are probably the most relevant to escape the middle-income trap. But time is running out. As World Bank research shows, it requires a combination of three Is – investment, infusion, and innovation – to ensure that a country transitions from middle-income to high-income.

As the Prime Minister said in the meeting of the Niti Governing Council, all states should strive to attain developed economy status – cities and villages in the states too. This means faster, sustained, and inclusive growth at all levels. It means unshackling the growth potential of small firms (not micro), which contribute to growth in jobs, output, and exports. It also means unshackling the farm sector, predominantly a state subject. India must increase investment to 40% of GDP and increase labour force participation of women from 35 to 50 %. It must fast-track the infusion of new technologies, by linking with global value chains, by trade agreements, and by reducing tariffs and barriers to foreign investment. Innovation means enabling greater investment in research and development, both by the public and private sector, and massive upgradation to human capital with skilling, training, and employability.

India has to achieve this while facing the formidable task of net-zero carbon emissions by 2070, keeping income inequality under control, and strengthening cooperative federalism, in a three-tiered robust democracy.

(The writer is an economist; Syndicate: The Billion Press)