Why China Pulled Ahead—and What India Can Still Do

China surged ahead of India by reforming earlier, backing manufacturing, new private entrants, local governments, and R&D investment. Manufacturing scale drove incomes higher. India liberalised later, favoured incumbents, centralised policy, and underinvested in innovation, tilting growth to services. The lessons: empower states and cities, support startups, expand manufacturing, boost R&D and education, and cut red tape—without copying China’s authoritarian model.

Over the past four decades, China and India have taken markedly different economic paths, producing one of the most striking development divergences in modern history. Both began as low-income, highly regulated economies, yet China surged ahead while India’s progress, though significant, has been more gradual. Understanding why this happened is essential—not to copy China wholesale, but to draw realistic lessons suited to India’s democratic and federal structure.

Reform Timing and Direction

China’s economic transformation began in 1978 under Deng Xiaoping, when it decisively pivoted away from rigid central planning toward market-oriented reforms. The country opened itself to foreign investment, encouraged private enterprise, and oriented growth around exports and manufacturing. India, by contrast, launched its major liberalisation only in 1991. While these reforms dismantled licensing controls, liberalised finance, and integrated India more deeply with the global economy, they came more than a decade later and were implemented more cautiously.

This difference in timing and intensity mattered enormously.

A Widening Income Gap

Until the late 1970s, China was poorer than India on a per capita basis. That changed rapidly. By 1992, China’s per capita GDP had already doubled India’s. The gap continued to expand relentlessly—three times by 2000, four times by 2007, five times by 2012, and roughly five-and-a-half times by 2024. This divergence was not accidental; it reflected deep structural differences in how growth was generated.

Manufacturing as the Engine

Manufacturing lies at the heart of China’s rise. By 2023, China accounted for roughly 28–30% of global manufacturing output, an unprecedented concentration in a single country. India’s share, in contrast, has remained around 3%. This imbalance explains much of the income gap. Manufacturing created scale, exports, productivity gains, and technological learning in China, while India’s growth leaned more heavily on services.

How China Built a Private Sector from Scratch

Before 1978, China had virtually no private enterprises. Yet most of its post-reform growth came not from state behemoths, but from entirely new private firms. These companies were often founded by technically skilled individuals and flourished with the active backing of local governments. Crucially, this support was not the result of central planning; it was driven by competition among provinces and cities to attract entrepreneurs. Unsurprisingly, most of China’s major private firms emerged only after the mid-1990s.

India’s Different Private-Sector Trajectory

India entered liberalisation with a very different starting point. Large private conglomerates already dominated the economy. While these firms benefited from deregulation, their presence also limited space for new manufacturing entrants. As a result, India’s entrepreneurial energy flowed disproportionately into services—especially information technology. Today, India’s service exports rival China’s, but its manufacturing exports are only about one-tenth as large.

Lesson One: Back New Entrants

One clear lesson is that growth is best catalysed by supporting new firms rather than reinforcing established conglomerates. Startups and first-generation entrepreneurs are more likely to experiment, innovate, and expand into new sectors. Government policy, finance, and regulation should therefore be designed to favour newcomers, not just incumbents.

The Scale of Government Support

Public investment choices further explain the divergence. India’s flagship manufacturing initiatives—such as the Production-Linked Incentive schemes and electronics and semiconductor programmes—amount to roughly $36 billion. China’s comparable “Make in China” push involved funding closer to $330 billion. This near ten-fold difference in scale goes a long way toward explaining differences in outcomes. For India, the implication is not merely to spend more, but to deploy resources more strategically, with a focus on new manufacturing firms rather than entrenched players.

Lesson Two: Empower Local Governments

China’s local governments played a pivotal role in nurturing entrepreneurs. Provincial and city authorities actively provided land, infrastructure, finance, and regulatory support—often shaping entire ecosystems, including in emerging industries like electric vehicles. In India, by contrast, financial and policy authority is heavily concentrated at the Union level. This centralisation tends to favour large firms that can navigate national bureaucracies, leaving small and medium enterprises and local startups at a disadvantage. Shifting more responsibility to states and empowering municipalities could unlock more decentralised, competitive growth.

The R&D Divide

Innovation has been another decisive factor. Until the late 1990s, China and India spent similar shares of GDP on research and development—around 0.7%. After that, their paths diverged sharply. By 2020, China was investing about 2.4% of GDP in R&D, while India’s share had fallen to roughly 0.64%. In absolute terms, China now spends about twenty times more on R&D than India.

Building an Innovation Ecosystem

China paired higher spending with institutional reform, strengthening links between universities, research institutes, and industry. As a result, 8–10 Chinese universities now rank among the world’s top 100, feeding talent and research into the private sector. India has not yet achieved comparable outcomes, despite pockets of excellence.

Lesson Three: Invest in Knowledge

For India, raising R&D spending is unavoidable. Equally important is improving collaboration between public research institutions, enterprises, IITs, and universities. Recent initiatives such as the Anusandhan National Research Foundation and the RDI scheme point in the right direction, but their success will depend on scale, execution, and sustained commitment. None of this will work without serious improvements in school and college education quality.

Knowing What Cannot Be Copied

India cannot—and should not—replicate China’s authoritarian governance model or regionally selective policies. As a democracy and a federation, India operates under different institutional constraints. The challenge is to adapt the underlying economic lessons without compromising political principles.

A Pragmatic Way Forward

India’s future growth strategy should focus on encouraging new startups, cutting bureaucratic red tape, and giving states and cities greater economic agency. Public-sector R&D must be accelerated, while private firms—especially large conglomerates—should be pushed to invest more in innovation rather than rely on protected markets. China’s experience does not offer a blueprint, but it does offer a clear message: scale, decentralisation, and sustained investment in knowledge are indispensable for long-term prosperity.