Currently, the Indian economy is growing at the highest rate among the world's larger economies. That has already made India the fourth-largest economy in the world. Critics have every right to say that India is a low-middle-income economy in terms of per capita GDP. However, they should also keep in mind that being the fourth-largest economy (third largest on a PPP basis, according to the World Bank) makes India the fourth-largest market for all goods and services. That should make India a great investment destination for all global conglomerates, thereby increasing the income and prosperity of the country rapidly. The China plus one strategy taken by the major economies can make India a preferred business partner of the major economies. Let us see whether the latest developments in the global economy can make India as prosperous as China. We should also see what comes in the way of India becoming a real economic superpower of the world.

India had been economically among the strongest in the past. 

Ancient Indian Marketplace

If we look at ancient times and also the early part of the medieval times, India contributed a large portion of the global GDP. According to a reliable estimate made by the economic historian Angus Maddison, India’s share of global GDP varied between 25 and 30 percent. Indian spices, textiles, jewels and metalwork were in heavy demand in Asia, Europe, and the Middle East, which brought prosperity to a large section of Indians. During the same period, China’s share of world GDP was also as high as 25%.

Ancient India had excelled not just in agriculture and animal husbandry, which were the primary occupations of many countries now considered as developed and prosperous. India had also been a manufacturing hub at that time. Four Southern states developed expertise in producing fine-quality steel, which was regularly exported to Europe. In Europe, swords used in warfare were produced from Indian steel only. In return, Indian manufacturers used to earn a huge volume of gold from outside. This is one reason why South India, in general and South Indian temples in particular, are still in possession of so much gold! India also developed an elaborate maritime and land-based trade network, which extended well up to the Roman Empire. Delhi, Agra and Surat were major commercial hubs. In South India, the Chola empire was responsible for successful trade with China, Southeast Asia and the Arab world. India had been at an advanced stage of development in comparison to other major economies of those days. Indians were known for excellent town planning, which was possible only because of India’s expertise in the applications of science and technology in various sectors.

The concept of zero, the decimal system, early forms of algebra and trigonometry all originated in India. The credit for many such discoveries is not always given to the ancient Indian scholars. But that is a different story. The westerners do not even want to give credit to the Indians for writing the Vedas and Upanishads, as they think that the Aryans who were responsible for producing such priceless literature came from outside India. The Indian Universities of Nalanda and Takshashila attracted students from all over the world. India excelled in all conceivable walks of life in ancient and early medieval times. The Maurya and Gupta eras saw India attain maximum prosperity.

As mentioned earlier, China prospered too, during the same period. It prospered due to a combination of geographical advantages, effective state governance, innovation, trade and agrarian strength. The Hwang Ho and Yangtze rivers made the Chinese soil very fertile, ideal for extensive rice and millet cultivation. During the rule of the Tang dynasty, land was distributed among the farmers equitably. During the rules of the Han, Tang and Song dynasties, bureaucracies functioned very efficiently in collecting taxes, developing infrastructures necessary for economic development and making planned development of the country.

An increase in the production of foodgrains made the population grow, which in turn, helped many labour-intensive industries to flourish. Key inventions in China were papermaking, printing, gunpowder and the compass. As a result, urban markets and merchant guilds thrived. China was also among the first to use paper currencies, which facilitated long-distance commercial activities.

Above all, the Chinese economic development followed the Confucian principles of order, education and unflinching respect for government authority. There were quite rigid codes of moral conduct in individual and social life. All citizens were expected to follow a uniform pattern of living, to make the state stronger and economically more powerful. This was in stark contrast with the Indian way of life, which had allowed individuals to follow their way of living, without, of course, affecting the interests of fellow citizens.

However, the Chinese economy began to decline in the 15th century for some specific reasons. The Mongol invasion devastated the Chinese farmlands and disrupted the internal trading system, which was a cornerstone of Chinese economic development. Under foreign rule, there was heavy taxation and corruption. The Ming dynasty banned foreign trade and started an isolationist policy. Neo Confucianism discouraged innovation and the entrepreneurial spirit of people was looked down upon. When Europe started to get the benefits of the Industrial Revolution, China began to slow down and its position in the world economy diminished considerably. India did not get the benefit of the Industrial Revolution either, as the British never allowed the Indian economy to develop the way the European industries developed.

While both Indian and Chinese economies declined in the latter part of medieval times and became quite poor towards the middle of the last century, both economies are considered powerful economies today. This has been possible because of some inherent strengths of these two nations. The strengths are somewhat different, but these strengths still matter. No foreign invasion can take away all the strengths of nations that have a history of rich culture, intellectual power and strong moral character. They have the power to bounce back and regain their lost glory.

Economic Reforms initiated by Deng Xiaoping in 1978 transformed China into a market-oriented economy. Agriculture was decollectivized, Special Economic Zones were created to attract foreign investments and private enterprises started to be promoted. World-class infrastructure was created, forming the backbone of the manufacturing and services sector. They also created world-class Universities for the creation of a rich human capital. All this, along with lower labour costs, helped the Chinese economy achieve high export-led economic growth that dazzled the world.

India, on the other hand, started to grow rapidly following the economic liberalisation of 1991. India started late and that is one reason why it is lagging behind China. Post liberalisation engineered by Dr. Manmohan Singh, License Raj was ended, Foreign Direct Investment started pouring in, state-owned enterprises started getting privatised partially and the service-led growth model started giving rich dividends to the economy.

Notwithstanding India’s position in the world as regards per capita GDP, we are considered a strong and aspirational economy. At this moment, the size of India’s middle class is more than 500 million and this is going to become 1 billion plus by 2047 (ICE 3600 estimate). High Net Worth Individuals (HNI) will also increase significantly. People living below the poverty line are already below 5.3%. This number will be negligible in 2047, giving Indians enormous purchasing power.

India’s domestic market has always been very large. With a rise in income and purchasing power, it will only be larger. Favourable demographics (median age being 29 only) will help India to grow rapidly, provided the young generation acquires the necessary skillset and more of them come out of low-productivity occupations like agriculture. Rapid development in infrastructure and digital payment channels is already making business transactions very simple. GST, Insolvency & Bankruptcy Code and Productivity Linked Incentives (PLI) Schemes (for the manufacturing sector) are already making India a better place for the manufacturing sector to flourish. These efforts are starting to yield the desired results for our economy. So, the Indian economy is marching on for a greater glory. Can it match the economic progress of another economic powerhouse, China? Although that appears to be an uphill task right now, India can manage to do so provided certain areas are addressed correctly by the central and state governments. Already, the states of Southern and Western India are developing leaps and bounds. Their best business practices have to be emulated by the states of Northern and Eastern India, as well as the North-East Indian states.

The World has started to recognise India as a safer Business Partner

India is not what it was even two decades ago. This is a new, aspirational India capable of partnering with developed countries on its terms to transform the domestic economy. The developed and emerging economies consider India a profitable business partner for strategic, economic and demographic reasons. Many global companies are even shifting their manufacturing bases to India from China and for more rational reasons. If this becomes a trend, the economic development in India will multiply to such an extent that all classes of Indians will benefit.

Business-Friendly India

India has already started to follow rule-based governance. The business environment is more transparent than ever before. China’s style of governance remains an authoritarian type. There are policy changes quite frequently there. This will be risky for foreign investors who prefer stable government policies.

Top global companies are actively looking for alternatives to China to reduce their overdependence on China as a partner in the global supply chain. India becomes the obvious “+1” choice as their destination. India has lower-cost labour, and that means a reduction in operational costs for manufacturers. India is a firm believer in democratic principles. Moreover, India has a tradition of treating the guests as Gods (Atithi Devo Bhava).

India is a younger country than China, as India’s median age is 28 as against China’s 39. This implies, there is a larger volume of the working population in India than in China. That also means there is a bigger market in India for consumer goods, healthcare products and financial products. As the rate of direct taxation is quite low for most of the working population, the size of the market will only increase with the increase in income and employment opportunities.

Government initiatives, such as Digital India, UPI, and Aadhaar, are already making India a top digital society quite amenable to global digital and Fintech collaborations. On the other hand, foreign digital firms face barriers to operation in China. There are very strict Data Localisation laws in China. Licenses are given to the global players only if they partner with local companies. There are content restrictions in media, cloud computing, gaming and AI content. The legal system favours local firms more and foreign companies much less. The globally acclaimed platforms like Google, Facebook, X and WhatsApp are totally blocked all over China. On top of it, the foreign firms have to deal with a totally different kind of censorship policy than what they handle in their home countries. Moreover, there is fear that innovative products brought by the foreign firms can be copied by local companies with regulatory favour. Foreign companies complain that there is hardly any level playing field for them as local tech majors like Alibaba, Tencent and Huawei continue to operate with heavy government subsidies.

Culture and consumer behaviour are quite different in China from Western countries. Since most frontline foreign companies are either US-based or Europe-based, they often find it very difficult to localise user experiences. This is hardly a problem in India. Foreign companies find Indian customers, in general, culturally more adaptable. As a large number of customers are English-speaking in India, it becomes easier for foreign partners to communicate with their customers. The employees are found to be extremely skilled in China, but they are heavily influenced by their government. The Indian employees, even when they are less skilled, have a more globalised mindset and this suits the business needs of the foreign partners more, in transacting day-to-day business. Indians are more aligned with Western values than the Chinese.

For all these reasons, doing business in India by partnering with Indians is being preferred by many top companies of the world today. These differences are likely to persist because they are deep-rooted. The government plays a significant role in how business is transacted in China. While the government plays a significant role in India too, in designing rules, procedures, and legal provisions, the strong democratic set-up of the country ensures that no ruling political party can take decisions by ignoring the dissenting voices. No wonder Apple, Amazon, and Tesla find Indian customers and employees much easier to work with at this moment. While China has always been found to be an attractive business destination, India is now found to be more attractive from a long-term point of view.

What weaknesses of the Indian economy continue to exist even today?

While the world is ready to embrace India as a long-term business partner, some old ailments still come in the way of India becoming a much stronger nation economically. The following measures should immediately be taken by the Indian government to leapfrog into a high-productivity, high-per-capita-GDP country, capable of being called a “Developed” and not “Developing” or “Emerging”.

1. India has to focus more on manufacturing and less on agriculture if it wants to match China’s economic progress. In recent years, India has shifted its focus to 'Make in India' and become more export-oriented in the area of manufacturing goods. There has to be more encouragement for domestic and foreign investments in this area. Production-linked Incentives (PLI) in the areas of Electronics and Semiconductors are a step in the right direction. In addition to this, there should be even more production of Electric Vehicles and Batteries. In Pharmaceuticals, India must reduce dependence on China for getting key drug ingredients. White goods have tremendous export potential. Skill India initiative should bring more youths out of agriculture, which has 75% lower productivity than in industry.
2. Since 1991, much of India’s prosperity has come through the Services sector. Given India’s rich talent pool in the IT and BPO sectors, the Services sector will continue to contribute heavily to the GDP growth of the country. Given India’s somewhat lopsided emphasis on STEM education and global demand for English-speaking graduates, the Indian youth are heavily engaged in the areas of software, analytics, fintech and general digital services. But, to bring prosperity to the larger number of youths (especially engaged in the agricultural sector), what India needs is vocational education, which can quickly make them job-ready in the manufacturing sector. China became developed by providing basic education and vocational training to all children. India must steadfastly follow that path and make people earn more by way of getting employed in the manufacturing sector. Excessive dependence on agriculture has to go. China has just 25% of its population engaged in agriculture against India’s 40%. The result is, China gets 27% of its GDP from Manufacturing while India gets just 15%.
3. India needs to grant subsidies and freebies more rationally. If only 5.3% of Indians now live below the poverty line (according to recent World Bank estimates), what is the rationale for granting food subsidies to 80 crores of Indians? This subsidy may be reserved for the bottom 5.3% only. May be some poor people who are marginally above the poverty line still need government support. But, many of them can be given Food Coupons instead of free staples. This will enable many poor Indians to buy more nutritious food from select stores. That will improve the health condition of the poorer Indians, so very important for raising their productivity and incomes. China is more prosperous than India is also because they spend generously on the health of the people. If children grow up with better health, they can be more productive for the economy. Similarly, instead of giving lakhs of crores on fertiliser subsidies, coupons can be given to some farmers to buy bio-fertilisers, which can help in natural farming.
4. India must get a better-functioning bureaucracy. Since India can never be a country ruled by a one-party system, its bureaucracy has to be capable of implementing policy decisions faster in a fair and transparent way. Its law-enforcing machinery (Police, paramilitary force) has to work more independently. The legal disputes have to be settled more expeditiously. India can not work in an authoritarian way like China. Its Constitution is different. Indian Executive, Legislature and Judiciary have to function in the spirit of our Constitution.
5. Indian exports have to contribute much more to the prosperity of the nation. The population sizes of India and China are the same. Yet, China gets 14% of its GDP from exports as against India’s 2%. Although India has a large domestic market, it has to earn a lot more from exports if it wants to catch up China. India has to be an active part of global value chain. India can earn more export income from labour intensive sectors like textile, footwear, furniture and toys. It should focus on component level exports like chip design, auto parts and intermediate goods and should not just rely on exporting finished products. More OEMs (Original Equipment Manufacturers) should be attracted to set up their production bases in India via joint ventures. FTAs should be finalised with the EU and UK immediately. India has some FTAs with a few ASEAN countries, but it should keep on trying to persuade them to lower tariffs.

DNAs are different, but capabilities are in equal measures

From the analysis made in the preceding sections, we find that both India and China have the capabilities to become developed countries of the world. China is almost there, while India still has a long way to go. DNAs of these two countries are different as the people of these two countries have developed different skillsets and different attitudes towards the government, work ethics and life. The Indian way of life is never opposed to progress. We have seen that India and China were once leading economies in terms of material prosperity. Both countries became impoverished for a few centuries in the medieval era for somewhat similar reasons. China is back on its feet now and it is poised to regain its lost glory. India can match the economic progress of China, provided it takes certain right steps towards attaining prosperity.

India aspires to rise higher and higher

India was a prosperous economy in ancient and early medieval times. Repeated foreign invasions broke the backbone of the Indian economy. India is now fast-growing and is set to be among the best-functioning economies of the world. Since the rules of the game have changed, the skillset that made India a leading economy in the ancient past is not fully relevant today. For a democratic country like India, the executive and the law-enforcing agencies have to deliver the goods. To shine brightly in the new globalised world, India has to equip its youth with skills that matter in the modern era. The education system has to change. The standard of higher education has to improve a lot. It is not enough to build some Institutions of Eminence. The private educational institutions have not yet brought desired results in the fields of higher education. Emphasis should be more on critical thinking and problem solving rather than rote learning and acquiring fancy degrees. Life skills should be incorporated into the curriculum at both school and university levels. Teachers should be allowed to remain teachers only if they upgrade their skills and become change agents in students’ academic development.

Education has to be broad-based at all levels. Students should be made to understand what the nation expects from them in the coming years. The students, alongside getting degrees or vocational training, should learn how to manage their finances, keep the environment clean and hygienic, elect the right people to form the governments and raise voices against injustice and deprivation in a constitution-approved way.

India is changing. It is no longer a typical agricultural surplus country, depending on the services sector for prosperity. India is now ranked 5th in global manufacturing (in terms of value of output), behind China, the US, Japan and Germany. The moods of the people are now different both in rural and urban areas. They no longer want to cling to the past. They are open to new ideas and will change their destiny with some necessary support from the government and the private sector.

We can hope that the current generation has the necessary aspiration and intelligence to take the country to greater heights and build a more inclusive Indian society again.

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