India wants to be a developed country by 2047. Using the World Bank’s definition of a high-income country, this requires India’s per capita Gross National Income (GNI) to cross a threshold, which is currently $14,375. India’s per capita GNI was $2,760 as of 2025. The required threshold will be higher in nominal terms by 2047. China, with a per capita GNI of $14,230 in 2025 will perhaps cross this threshold this year.
India can reach this milestone in various ways.
Reforms worsened India’s merchandise trade deficit
Reforms worsened India’s merchandise trade deficit
This is the most important fact to keep in mind for India. A country’s growth is subject to two key constraints: keeping inflation in check and maintaining balance of payments. For a country running a merchandise trade deficit, the balance of payments dynamic must use either invisibles (services, remittances etc.) or capital flow as a cushion.
In India, capital flows have always had to play a role despite remarkable success on the invisibles. This often requires offering concessional terms to foreign capital, as was recently seen in recent RBI measures. China runs a merchandise trade surplus and does not face this constraint. A key factor in India’s worsening trade balance story post-reform is the primacy of non-petroleum trade which cannot be attributed to a lack of resource endowments like crude oil.
India’s manufacturing has veered away from value addition and towards trading
Why did reforms not help contain India’s trade deficit? Regulations and restrictions were removed and business should have thrived. The data shows something deeply troubling. Reforms led to a much larger freedom to trade than to produce in the country. India’s merchandise imports, as a share of its manufacturing value added have increased sharply between 2004 and 2025. The trend is the opposite for China, the world’s second largest economy and the only country comparable to India in population. While the magnitude is smaller, India has seen an increase in exports as a share of manufacturing value added, unlike China. The takeaway is simple: China has moved towards greater value addition in its economy and India has gone the other way.
Industrial productivity is the biggest reason for the Sino-Indian economic divergence
China’s GDP per capita, in 2025, was 5.5 times India’s. This number was just 1.9 times in 1991. What explains this growing Sino-Indian economic divergence? A basic sector-wise comparison shows Chinese workers are more productive than their Indian counterparts in all three sectors: agriculture, industry and services. However, the sector where the divergence has been the greatest between 1991 and 2025, and where India actually had an advantage vis-à-vis China until 1991, is industry.
As the data shown above suggests, manufacturing is not just a sector essential for generating non-farm jobs in India. It is an area essential for India’s macroeconomic balance, ensuring the country can fulfill its growing economy’s requirements without incurring an unmanageable trade deficit or offering concessions to foreign capital during external account crises. The correct way to think about this is not the cliched question of reforms – everybody will agree that India has progressed rather than regressed on the reform front since 1991 – but to think about labour productivity and trade becoming a facilitator rather than a depressant for domestic value added in manufacturing. What really explains India’s inability to crack these questions unlike China despite having a large pool of cheap labour? This is what the second part of this data-journalism series will answer.
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