Why India will continue to lag behind China as a global economic power

Unlike China, India failed to succumb to a Marxist revolution: its old power structures and vested interests continue to shackle economic change
This, plus a lack of investment in education, health, social welfare and other key infrastructure, means India’s progress will be slow

David Dodwell

Published: 6:15am, 27 May 2023

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Over a 40-year career trying to understand the dynamics behind the extraordinary emergence of Asia’s economies, perhaps only one question has attracted more debate than whether or when mainland China will attack Taiwan: why has India always lagged behind China, and is that about to change?

The issue has erupted afresh in part because the United Nations says India last month overtook China as the world’s most populous nation. It has also been driven by India’s strong recent economic growth, and Prime Minister Narendra Modi’s efforts to project India as a leader of the Global South. India’s chairmanship of the Group of 20 this year, and its hosting of the G20 summit in New Delhi in September, has also prompted chatter about India’s rise.

But a further factor has been America’s remorseless efforts to slow China’s rise, and to reduce the ever-widening range of Chinese goods on which US manufacturers and consumers have come to rely. Every attempt to devise a credible decoupling, diversification or derisking strategy points Joe Biden’s team inevitably to India – the only economy with a big enough market and workforce to develop the economies of scale needed to have a hope of competing against China.

But India, for more than 40 years, has remained a miracle about to happen. Back in the 1980s, along with thousands of other Western companies, my then-employer the Financial Times was wrestling with how best to focus its Asian expansion plans: prioritise Hong Kong, focused on the China market, or in Mumbai, focused on India?

For FT bosses, the answer was obvious: India was the world’s largest English-speaking market, the world’s most populous democracy, and home to one of the world’s largest equity markets. It also had long-standing links with Britain.

Arguments that China’s leadership was far more pragmatic and seriously committed to opening up to international trade and investment, with the foundations of an urban-industrial psychology that contrasted with India’s profoundly rural-agrarian mindset, were brushed aside. To the best of my knowledge, the FT is still battling to publish in India.

My deep doubt that India can become a top-table power that might serve as a democratic counterweight to China was forged in the 1970s by social scientist Barrington Moore’s Social Origins of Dictatorship and Democracy.

In asking why India failed to succumb to a Marxist revolution after independence in 1947, while China emerged under Mao Zedong as a radically transformed Marxist power, Moore identified a wide range of powerful inertial forces in India that prevented revolution and shackled economic change – and continue to do so even today.

Perhaps most important were the rural power structures cemented around caste, which still exert more influence over social and economic development than most economists recognise.

In China, revolution swept away ancient power structures, entrenched corrupt networks and ossified vested interests. Corrupt networks could regrow but the inertial undergrowth that had for a century choked change in China had been cleared, opening the country to a potential for change.

The absence of revolution in India left in place existing power structures and long-standing vested interests, along with the corruption they nurtured, blocking the radical political or economic changes that turbocharged China’s economic growth from the late 1970s. Corruption remains a scourge in India and a nagging obstacle to growth.

03:13

Narendra Modi vows on Independence Day to turn India into a developed country within 25 years

There is magical thinking among forecasters who talk of an “Indian century”, with Modi’s India set to overtake China, not simply in population but as a dynamo for global growth.

Alok Sheel, a former secretary of India’s Economic Advisory Council, injected some much-needed realism: “If India were to grow at the very optimistic, and currently unlikely, rate of 9 per cent going forward, and China were to slow down to 4 per cent, the Indian economy would be 70 per cent of China’s size by mid-century.”

So many factors sit in the way of sustainable strong growth in India. Nearly 43 per cent of the population works in the farming sector, compared to 25 per cent in China. Underemployment, much of it informal and undocumented, hampers any pathway to higher productivity.

India is far from ready to take China’s place in the global economy

While India’s education spending is higher than in China (as a percentage of government expenditure), literacy remains at 74 per cent, compared with 97 per cent in China, with almost 27 per cent of India’s population lacking any formal education. Women account for a large share of the illiterate, contributing to the reality that just 19 per cent of women participate in the workforce, compared with 61 per cent in China.

A failure to spend adequately on education, health, social welfare and other key infrastructure also shackles progress. Just 46 per cent of Indians have access to safe sanitation (compared with 70 per cent in China), and only 43 per cent have access to the internet (70 per cent in China).

One can juggle data ad nauseam, but the reality of the past 40 years remains unchanged: Indian progress is welcome but slow, and the country will continue to lag behind China.

The rising economic heft of the Global South will give India a seat at top tables like the G20, but there is no way Biden can magically think away the reality of China as a global economic force. The 21st century may not be India’s century, but it is almost certainly Asia’s century, and Washington needs to come to terms with that.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades