Why is it in the news ?
1.The Union Budget 2025-26, comprises total expenditure of ₹50.65 Lakh crore. The capital expenditure constitutes ₹11.21 lakh crore, while revenue expenditure includes ₹39.44 lakh crore. The revenue expenditure encompasses the operational expenses of the government including salaries, subsidies, interest payment and other routine expenditures. These are consumption expenditures of the government. In the 2025-26 budget, the government extended the threshold tax free income to ₹12 lakh. In addition, the salaried class would get ₹75 thousand standard deductions. Thus, those individuals who are earning ₹12 lakh 75 thousand annually would get a tax benefit of ₹80 thousand. Similarly, those who are earning ₹24 lakh, they will get the tax benefit of ₹1 lakh 10 thousand. These tax rebates on personal income tax are intended to boost private consumption and increase the disposable income of 30 million individuals to create demands in the economy. In the process, the government lost 1 lakh crore rupees as tax revenue.
2.There are four sources of expenditures that increase demand in the economy. These are private consumption, private investment, government expenditure for consumption and investment and finally net exports of goods and services. It is to be noted that compared to investment the multiplier effect rising from increased consumption is much weaker. For example, if income increases, the consumption also increases but it is not sure that the more the increase in consumption would lead to increases in income. Thus, it is imperative that our approach should be on investment led growth rather than on consumption led growth.
Status of the economies of India and China between 1960 to 2023
1.According to the World Bank, in 1964, the GDP of China was $59 billion followed by $56 billion of India. In 2023, India’s GDP was $3.5 trillion, while Chinese GDP went to $17 trillion. Between 1960 to 1980, the per capita income of India was bigger than that of China, while India had $271 per capita income, China had only $194 per capita income.
India is set to achieve an addition of $383 billion in 2025 in its GDP while China in spite of the low growth of 4.5% is to add $1.26 trillion dollar to its GDP during the same period because of the big scale of its economy. It is expected by the IMF that by 2029. The GDP of China would cross $24.6 trillion while India would achieve $6.3 trillion, thereby, the Chinese economy becoming almost 4 times larger than the Indian economy. In the early 90s, the per capita income of India and China were almost the same, the average per capita income of Indian and Chinese was 1.5% of the average income of an American. In 2023, the per capita income of China has grown 5 times as high as Indians. In PPP terms, it was 2.4 times more for Chinese. So, GDP per capita in 2023 was $2481 for average Indians and $12614 for average Chinese.
How China surpassed India ahead?
1.China came under communist rule in 1949. It patterned its economy on the Soviet model. It laid stress upon heavy industries and collectivisation under the central command. After getting independence in 1947, India embarked upon a mixed economy whereby the public sector enterprises were to achieve the commanding heights of the economy. The economy was regulated so much so that license-permit-quota raj pervaded all the economic activities. This stifled the growth of the economy. Most of the public sector enterprises started incurring losses in 1980’s.
2.In 1978, Deng-Xiao-Ping initiated economic reforms in China whereby foreign companies and firms were permitted to operate in China. Thus, the Chinese economy opened up. China was converted from a socialist controlled economy to socialist market economy. Huge amount of foreign direct investment came into China. By 1994 nearly $100 billion reached China as FDI and it was 18% of the total fixed investment. This foreign money built factories, created jobs, linked China to international markets and led to important transfers of technology. Economic liberalisation boosted exports. The export rose to 19% a year during 1981-94. Strong export growth in turn fuelled productivity growth in domestic industries. Thus, strong productive growth spurred by market oriented reforms was the leading cause of China’s unprecedented economic performances.
The productivity of the agriculture sector further increased. For example, the yield of rice was 7.15 tons per hectare, wheat was 5.91 tons per hectare, cotton was 2154 tons per hectare against India’s 4.12 tons per hectare for rice, 3.56 tons per hectare for wheat, 499 kg per hectare for cotton.
3. De-collectivisation was started whereby farmers were given autonomy to sell their produce in the market. Special economic zones were created to boost exports. This zone enjoyed tax breaks, less regulation, better infrastructure, and huge foreign direct investment flowed into China.
4.In 1991, India opened its economy. License-permit- quota raj ended. The policy of liberalisation and privatisation started. An effort was made to integrate the Indian economy with the global economy. Custom duties were reduced from 80% to 25% on goods and services imported from foreign countries. China focused upon export led growth. There was less hurdle to pursue economic reforms on account of one party rule.
5.On the other hand India suffered because of bureaucratic hurdles, coalition governments and different parties pulling in different directions.
The export-led growth supported by huge amounts of foreign direct investments made China a world factory. This is why manufacturing constitutes 30% of the GDP of China. India could not advance in the manufacturing sector like China in spite of its efforts to Make in India initiative and production linked initiatives. Manufacturing only constitutes 17% to the GDP of India. It not only creates jobs but also facilitates the transfer of technology, boosts exports, raises the standard of living and absorbs skilled and semi skilled labourers on a huge scale.
6.China has over 44.3% saving rates of GDP in 2023. This higher saving rate allowed China to invest in businesses, industries, agriculture and infrastructure. Compared to China, the gross savings rates of India as of March 2023 was 30.2% of GDP. Infrastructure in India also lagged behind China. This puts a high cost on logistics in India.
7.This abrupt rise in the per capita income of the Chinese became possible because of huge investments. For example, in 1992, investment as a share of GDP was 39.1% in China, in India, it was 27.4%.
8. By 2014, the investment rate rose to 45% to GDP in China but for India it was only 31.3%. In 2023, the investment rates were 42.3 % and 30.8% respectively for China and India.
9. In contrast in 2023, consumption as a share of GDP was 60.3% in India compared to 39.1% in China. This is because the shares of government investments and consumption expenditure are relatively low. Moreover, India has always had a deficit in trade, having more imports of goods and services than exports, thereby causing reduction in domestic demands. Economic growth led by consumption is not only slower than investment led growth but it also aggravates inequalities causing joblessness among people.
10. According to the International Labour Organisation, China has consistently maintained a high labour force participation rate at 73%, in contrast to India’s 50% in 2022. Low labour participation is on account of decreased female labour participation in India which accounted for 24% in 2022.
11. While India has always had a deficit trade whereby India imports more than it exports. India exported $770 billion and imported $890 billion in 2022-23, China exported $1.2 trillion and imported $950 billion. Thus, it always has a surplus trade.
12.The twin deficits of current account and fiscal makes imports costlier, weakens the value of rupee and thus, creates less demand in the Indian economy.
What are ways out? What measures India can adopt to overtake the Chinese economy in the coming years?
1. Increasing investments in the economy.
2. Reducing rate of consumption.
3. Boosting exports
4. Enhancing female labour force participation
5. Generating employment opportunity in manufacturing
6.Strengthening infrastructure to reduce the cost of logistics.
7. Fostering regional and international cooperation by expanding market access not only domestically but in the international arena.
8. Emphasising education and skill development.
9. Encouraging private businesses to invest more in the economy.
Conclusion
India has vast potential to become the world power and surpass China in economic growth if it harnesses the cheap abundant labour force, incomes of the rising middle class, transfer of technology , improves domestic institutional investments, increases wages and enhances competitiveness of the goods and services in the foreign market. To sum up, huge investments, not consumptions would lead India to make it a superpower and would surpass China in coming years.
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