Can India Replicate China’s Economic Miracle?

In the 1980s, India and China began their economic journeys from roughly the same starting point. Today, China’s economy is five times larger than India’s, thanks to what has been termed as China’s growth miracle. This extraordinary transformation was driven by targeted strategies, systemic changes, and a laser focus on economic growth. As India eyes its own potential to become an economic powerhouse, the question arises: can India replicate this success, or does it need to forge its own path?

China's success is often attributed to its investment-led growth model, a framework that prioritizes rapid investments in infrastructure, productive assets, and technology. In the 1980s and 1990s, this model addressed China's underinvestment problem, enabling it to transition from an agricultural economy to a manufacturing powerhouse. China achieved this by directing credit from its state-owned banks into infrastructure and factories, creating jobs, increasing productivity, and boosting exports. India also attempted to follow this model by liberalizing its economy in the 1990s and encouraging corporate investments. However, its efforts were hindered by mismanagement, inefficiencies, and corruption. Many Indian tycoons who received government loans failed to invest productively, leading to high levels of debt and a struggling banking sector by 2013.

A key pillar of China’s economic miracle was its ability to attract massive Foreign Direct Investment (FDI). Foreign factories brought not just capital but also the knowledge required to run efficient manufacturing operations—skills that Chinese workers later used to establish their own businesses. Additionally, FDI helped China access foreign currencies, like U.S. dollars, needed to import advanced machinery. India, despite its liberalization efforts, struggled to attract FDI on the same scale. Its complex regulations, bureaucratic hurdles, and inconsistent support from local governments created an environment less conducive to foreign investment.

Education also played a pivotal role in China’s rise. By the late 1970s, Chinese workers were better educated than their Indian counterparts, particularly in foundational skills like literacy and numeracy. This enabled them to efficiently adapt to factory jobs, follow instructions, and even take on roles requiring basic technical expertise. The ripple effect of this better-educated workforce was seen in the early 2000s, as many workers transitioned to entrepreneurship, driving China’s next phase of growth. While India has made significant strides in education over the years, the gaps in access and quality remain substantial.

Local governance was another decisive factor in the divergent paths of China and India. In China, local governments were incentivized to prioritize economic growth. Local officials were rewarded or penalized based on their ability to attract investments and increase GDP. This structure motivated them to build infrastructure, streamline processes, and facilitate business operations. For example, foreign investors in China often received expedited approvals, site visits, and direct assistance from local officials. In contrast, India’s decentralized democracy created a fragmented approach to governance. Local governments, often understaffed and under-resourced, struggled to implement central policies effectively. Furthermore, the influence of India's caste system exacerbated governance challenges by fostering biases and resistance to progressive policies.

India’s democracy, while a cornerstone of its identity, has also posed unique challenges. As a "precocious democracy," India adopted democratic governance before its institutions were fully developed. This has led to inefficiencies in public services, a reluctance to raise taxes for funding essential services, and a focus on short-term, visible projects over long-term investments in education and healthcare. Unlike China’s centralized system, where decisions could be implemented swiftly, India’s democratic setup often slows progress due to competing interests and political divisions.

Despite these challenges, there are reasons for optimism about India’s economic future. Over the past few decades, India has significantly improved its digital and financial infrastructure. Initiatives like expanding access to bank accounts, introducing digital payment systems, and improving road and rail networks are gradually transforming the landscape. Moreover, as global companies look for alternatives to China due to rising costs and geopolitical tensions, India is uniquely positioned to attract foreign investment. However, to capitalize on this opportunity, India must address its regulatory hurdles and improve the capacity and incentives of its local governments.

India’s economic path may never mirror China’s rapid, centralized growth. Instead, it could chart its own course—one that aligns with its democratic values, addresses its unique challenges, and leverages its strengths. By focusing on inclusive development, fostering cooperation between central and local governments, and improving access to education and infrastructure, India can achieve sustainable growth. This journey may be slower and messier, but it could ultimately result in a more resilient and equitable economic transformation.

So, can India replicate China’s economic miracle? The answer is not straightforward. India must not seek to imitate China but rather create a model tailored to its own strengths and challenges. With the right strategies and reforms, India could pave the way for its own unique growth story, one that stands as a testament to its democratic spirit and potential.