India Must Focus On Rapid 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 for 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 back in 2010. India has attained the fourth rank just 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, historic and unprecedented. Together the two giants of Asia represent forty per cent of humanity. India’s economic size is, currently, about $4.1 trillion, while China is $19 trillion, which is five times bigger. India’s economy has grown at 6.3 per cent per annum from the year 2000 till 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 per cent. 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 per capita, income has grown substantially from about $360 in 1990 to $2700 dollars 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 $13000, 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 cent per annum for three decades. Today, India is 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 $14000 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 per cent 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 period 1990 to 2025? 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?

There are many more questions regarding India’s poor performance when compared to China, but pursuit of these is fruitless for now. It is time to focus on what needs to be done to achieve high growth, which is sustained for two decades and is 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, then India might very well 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 the 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 $8000 in present terms.

For India, lessons from countries like South Korea (the most impressive transition), Chile and Poland are probably most relevant to escape the middle-income trap. But time is running out. As World Bank research shows, it requires a combination of 3 I’s, called investment, infusion and innovation, to ensure that a country transitions from middle income to high income.

As the Prime Minister said and urged in the meeting of the Governing Council of Niti, all states should strive to attain a developed economy status, nay all 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. The first “I” of World Bank stands for investment, which India must increase to 40 per cent of the GDP. It must also increase labour force participation of women from 35 to 50 per cent. The second “I” refers to the infusion of new technologies by linking with global value chains, trade agreements, and reducing tariffs and barriers to foreign investment. The third “I” is innovation, meaning enabling greater investment in research and development, both by the public and private sectors, and massive upgradation to human capital with skilling, training and employability. India must 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.

Dr Ajit Ranade is a noted Pune-based economist. Syndicate: The Billion Press (email: editor@thebillionpress.org)