There’s a whole gigafactory of opinions that try to make sense of China’s economic trajectory. Pick any industrial sector—from agriculture to technology and space to electric vehicles—and you have expert opinions on how specific policy moves and political foresight of national leaders made China a powerhouse. This thinking leads us to believe a few national policies and programmes driven from the top can also change India’s economic fortunes.
Over the last decade, we even have a government with a strong political mandate that’s tried reforming land, labour, capital, agriculture, and taxation. Yet, India’s economy hasn’t taken off the way that China’s did. China had a per capita growth rate of more than eight per cent a year for over three decades. On the other hand, India’s economic trajectory seems to be struggling to grow beyond six per cent even though it’s at a much smaller base.
What are we getting wrong? Sector-specific policies partly explain the differences in trajectories. But they do not explain how or why China could make growth-enhancing choices in so many sectors at once. For that, we need to understand the initial conditions that produced long-term momentum in China.
One such leverage point that underlies China’s growth trajectory is bureaucratic decentralisation. While the industrial successes we often hear about are attributed to China’s top leadership, they are really the result of local governments’ fail-fast approach, investments, and capabilities.
Our root cause analysis of China’s economic growth is wrong. Even though China is a one-party authoritarian State, it is far more decentralised than India. While India’s city-level governments account for less than three per cent of total government spending, nearly 51 per cent of government spending in China happens at sub-provincial levels. Local governments also have a much broader qualitative mandate. For instance, they are almost exclusively responsible for unemployment insurance and pensions.
Also read: India needs a new decentralisation—let politicians manage people, experts handle policies
The ‘appointocracy’
The credit for this goes to Deng Xiaoping, who created a mechanism for accountability and bureaucratic performance measurement within the confines of one-party rule. This ‘appointocracy’ allowed local leaders to move up the chain provided they demonstrated local economic growth. Political science professor Yuen Yuen Ang explains in her terrific book How China Escaped the Poverty Trap that the central directives were broad enough for local governments to try different ways to achieve growth or reform goals. This “directed improvisation” led to institutional diversity, where local officials interpreted reforms differently—some tried township and village enterprises (TVEs) while others attracted foreign investment in special economic zones.
The net result was that Chinese cities competed vigorously with each other and the world. Don’t take my word for it. Just go visit the websites of the municipalities of Chongqing or Shanghai and compare their plans with those of cities like Mumbai and Bengaluru. You will notice that China’s cities have far more economic agency than India’s metros.
Let me illustrate with a couple of examples. The Shanghai government has a status equal to a province. Its 2035 master plan has clearly identified three leading industries (chips, biopharmaceuticals, and AI). After determining these focus areas, the city-level government—not the central government—has funded companies in these domains. For instance, the Shanghai government launched a $1.4 billion fund in 2024 to nurture cutting-edge industries. China’s largest automaker SAIC Motor Corp. Ltd. (SAIC owns the MG brand) is a state-owned company, not of the central government but of the Shanghai municipal government. SMIC, China’s semiconductor manufacturing national champion, has also received investment from the Shanghai municipal government. Another major city, Chongqing, has its own foreign affairs office to deal with economic diplomacy matters, and a science and technology bureau to help on emerging technology matters.
This is not to say that the Chinese method of decentralisation doesn’t have any problems. This investment-centric model has also led to financial repression and overcapacity. In recent times, central directives have become narrower, reducing the scope for experimentation at the local government level. The desire for self-sufficiency has resulted in local governments pouring money into areas where China doesn’t enjoy a comparative advantage. The Economist reported that 30 per cent of all industrial firms were making losses by the end of June 2024.
Also read: To let China invest in India or not—an old economic problem has struck policymakers again
Our cities have no capacity
Notwithstanding the limitations, Indian cities have a lot to do to compete with their Chinese counterparts. RBI’s latest annual report on municipal finances makes four points that are of relevance here.
One, even though urban areas contribute 60 per cent of India’s GDP, the total self-generated revenue of all municipal corporations combined is merely 0.4 per cent of GDP.
Two, even in an urbanised state like Tamil Nadu, which has several mid-sized cities, the ratio of the tax revenue raised by all municipal corporations to the tax revenue raised by the state government is an abysmal 1.8 per cent.
Three, of the large states, only in Maharashtra is the ratio of Municipal Corporations’ revenue to state government revenue greater than 10 per cent.
And four, municipal corporations’ dependence on transfers from higher levels of government has increased in the post-GST period. These transfers are now the largest source of revenue for cities.
With this hand-to-mouth subsistence, our cities have no capacity for the kinds of things that Chinese cities are able to accomplish.
This difference suggests that we need to think about competitiveness not just at the national level but also at the city level. Unless our 250+ cities are enabled to experiment and compete with each other, we run the risk of economic stagnation.
Also read: China’s 2025 economic agenda – boost domestic consumption, create buffer against Trump
Learn from China
A ground-up review of municipal government structures is perhaps the most underrated leverage point for India’s economic trajectory. Unlike in China, where Deng Xiaoping was able to drastically change the incentives of local governments, our cities are stuck at a low equilibrium.
State governments continue to complain about unfair treatment by the union government even as they gleefully strangle city governments. Union governments, on the other hand, haven’t been able to think beyond grant-making for city development.
In its latest effort, the Union government is creating a model Municipal Act under the aegis of the Ministry of Housing and Urban Affairs to resolve some of the core urban governance issues. This effort is on the right track.
However, all that the Union government can do is produce a “model” Act, as city-level governance changes are ultimately the constitutional domain of the states.
Thus it is equally important for the union government to bring all state governments on board to learn from the Chinese experience of decentralisation. For there will be no Viksit Bharat without empowered, livable, and well-governed cities.
Pranay Kotasthane is deputy director, Takshashila Institution and co-author of ‘Missing in Action: Why You Should Care About Public Policy’. Views are personal.
(Edited by Theres Sudeep)
Biggest problem is democracy. Politicians have to first protect their chair before welfare of citizens. In china they don’t have to deal with it.