India and China continue to follow contrasting economic paths in 2025. India struggles to ignite private investment despite government incentives. China remains heavily reliant on investment and exports, with limited focus on boosting domestic consumption. This divergence reflects deeper structural challenges and political choices shaping their growth models.
India’s Investment and Manufacturing Challenges
India aims to increase manufacturing and investment to boost economic growth. Various policies like production-linked incentives and lower taxes for new factories have been introduced. Yet, private corporate investment remains weak. Manufacturing is concentrated in just four states – Gujarat, Maharashtra, Tamil Nadu and Karnataka. The share of manufacturing in GDP has stagnated around 17-18 per cent, far below the 25 per cent target set by successive governments. Domestic private capital is also flowing out, indicating investor caution.
Shift Towards Consumption in India
With investment growth subdued, India has pivoted towards stimulating consumption. Tax cuts on personal income and plans to reduce GST rates aim to increase household spending. This approach risks limiting government revenue and constraining public investment in infrastructure and services. Cash transfers and welfare schemes have expanded, accounting for nearly 1 per cent of GDP. However, these populist measures may not address the root causes of low investment and job creation.
China’s Investment-Export Model
China continues to prioritise investment and exports over domestic consumption. Its investment to GDP ratio stands at around 40 per cent, driving growth in manufacturing and infrastructure. Exports reached $3.58 trillion in 2024, with a trade surplus nearing $1 trillion. President Xi Jinping focuses on advancing high-tech industries alongside traditional sectors. Efforts to boost consumption remain modest and secondary to maintaining export competitiveness.
Currency and Exchange Rate Policies
India’s Reserve Bank of India (RBI) follows a stabilised arrangement to manage the rupee’s value. This soft peg curbs excessive depreciation, supporting household purchasing power but reducing export competitiveness. In contrast, China historically maintained an undervalued yuan to promote exports and limit imports. This policy supports its export-led growth but suppresses domestic consumption by lowering household purchasing power.
Structural Economic Challenges
China faces issues of overinvestment, excess capacity, ageing population, and high debt. Low household consumption and high savings rates limit domestic demand. India struggles with low private investment, high informality, low productivity, and inadequate non-farm job creation despite a growing workforce. Both countries require structural reforms to address these problems, but political and economic constraints hinder decisive action.
Political Economy and Growth Priorities
China’s authoritarian political system allows continuation of a debt-fuelled investment-export model despite growing risks. India’s democratic system pressures policymakers to balance economic reforms with populist measures to maintain electoral support. This dynamic leads India to rely on consumption-driven growth supported by tax incentives and welfare, while China focuses on investment-led expansion with limited welfare emphasis.
Future Prospects and Policy Dilemmas
Both economies face the risk of path dependency, where past policies limit new directions. India’s challenge is to revive private investment and manufacturing to create jobs and increase productivity. China must manage the transition from investment-led growth to a more consumption-driven economy amid demographic and debt pressures. The success of either depends on bold reforms and political will.
Questions for UPSC:
- Critically discuss the impact of investment and consumption balance on economic growth in emerging economies.
- Analyse the role of currency management in shaping export competitiveness and domestic consumption in India and China.
- Examine the challenges of structural reforms in large economies with contrasting political systems and demographic profiles.
- Estimate the effects of demographic changes on economic growth models and social welfare policies in India and China.
