As India marks its emergence as the world’s fourth-largest economy, the country’s ascent to upper middle-income status is likely to be influenced by a slew of interacting forces: political governance, institutional independence, and the rights of economic agents. As an agglomeration of diverse regional political economies shaped by equally divergent talents, resources, and aspirations, India’s transition into an economic powerhouse is predicated on the collective wellbeing of these constituent units. In a federated structure built on the twin pillars of democracy and the distribution of power, the rise of an aspirational economy driven by its people’s discretionary spending cannot be overemphasised. In that sense, India’s evolution on the global stage is not strictly comparable to that of the world’s second-largest economy, China.
Even though India and China gained independence around the same time, the political economies that have come to shape these two giant South Asian nations as we know them today are vastly different. While China pursued economic reforms with a razor-tight grip on political freedoms, India followed a socialist economic path founded on political freedoms, enshrined as fundamental rights in the country’s Constitution. This distinction assumes significance, as any meaningful comparison between the two nations, sans consideration of their political economies, is destined to generate flawed assertions. Peter Rosendorff highlights this point by showing that power structures sympathetic towards authoritarianism tend to produce flatter incomes, depleting capital stock, and a decrease in the relative size of the workforce. It is therefore unsurprising that, on the World Bank’s consumption-based Gini measure for comparable years, India (25.5) records lower inequality than China (35.7), though cross-country comparisons remain sensitive to underlying methodology.
As China transitions from a middle-income economy to an aspirational society seeking to emulate standards of living seen in the West, its growth model has remained largely concentrated on export-led manufacturing, even as sectoral imbalances persist, exacerbated by real estate woes. Jeffrey Sachs, an eminent economist, has underscored the critical role of finance and investment in driving economic development.
Consider financial intermediation in China. While the country has traditionally relied on lending institutions, limited borrowing avenues for individuals have contributed to the proliferation of shadow banking activities, often circumventing regulatory strictures. Worryingly, bad loans arising from high levels of non-performing assets (NPAs) directly impair the quality of bank balance sheets. This, in turn, creates systemic risks for the broader economy. Amid continuing geoeconomic pressures in the form of tariffs and trade barriers that continue to dent growth forecasts, compounded further by global uncertainty, the IMF expects China’s growth rate to decline from 5 percent in 2025 to 4.5 percent in 2026. The Bank has advocated a structural shift from export- and investment-led growth towards greater consumption.
The provision of socio-economic benefits afforded by a democratic set-up such as India’s cannot be readily compared with China’s state-capitalist political economy under single-party rule. The liberty available to private enterprise to challenge the state before an independent judiciary constitutes a significant non-pecuniary reward congruous with democracy. The landmark verdict of the Indian judiciary setting aside the retrospective tax demand on Vodafone illustrates the capacity of institutional checks and balances to restrain executive overreach. Such checks and balances remain imperative for private enterprises to bolster country-specific investments and encourage country-specific, long-term capital formation. India’s burgeoning middle class, in turn, stands to benefit directly from sustained private-sector investment and growth.
The middle class is defined as a household earning between INR 5 lakh and INR 30 lakh annually and is projected to reach 715 million people by 2030 — an increase from 14 percent of the population in 2004-05 to 46 percent in 2030. While some economists caution against comparing income levels in non-dollar terms, it is worth noting that, from a purchasing power parity perspective, measurement in local currency offers greater precision in capturing economic wellbeing.
Equally, a country the size of India can ill afford to neglect the economic wellbeing of its citizens at the bottom of the pyramid. The government bears a moral obligation to enforce the social contract through the sustained provision of welfare measures aimed at improving their living standards. Even during a once-in-a-century event such as the COVID-19 pandemic, the government largely relied on in-kind welfare support rather than inflation-inducing cash transfers, thereby averting the inflationary shocks that affected many Western economies.
Finally, the role of India’s private sector in bolstering the economy cannot be overstated. As India remains relatively well insulated from ongoing geopolitical gyrations, the timing could not be more propitious for the private sector to unleash its animal spirits and adopt a risk-on approach. There is only so much the public sector can achieve in stimulating investment and consumption without incurring the costs associated with crowding out. The reformed Indian labour codes also represent a step in the right direction, seeking to balance the divergent interests of employers and employees. While India may still be some distance from matching higher per capita income levels, the country’s progress as a vibrant democracy remains sustainable and better suited to delivering results over the long haul. After all, a nation’s progress is not a 100-metre sprint but, verily, a marathon.
Ullas Rao is a Finance faculty affiliated with the Manipal Business School (MBS), Manipal Academy of Higher Education (MAHE), Dubai.
This article was originally published on the Observer Research Foundation website.