In 2022, India overtook China to become the world’s most populous country, with more than 1.43 billion people. With its large and relatively young population, unique political system, and deep cultural history, more focus has turned to India as one of the world’s largest economies and a major contributor to global economic growth.

While these factors may allow India to stand alone as an economic powerhouse, some experts believe it still has untapped economic potential.

In a recent episode of William Blair Investment Management’s podcast, The Active Share, this topic was discussed with William Blair’s Hugo Scott-Gall, partner, portfolio manager, and co-director of research for the global equity team, and Dr. Raghuram Rajan, professor of finance at the University of Chicago Booth School of Business.

Hugo Scott-Gall, partner, portoflio manager, co-director of research for global equity team, and Dr. Raghuram Rajan, professor of finance at the University of Chicago Booth School of Business

Multi-Fold Path for Growth

In the 20th century, many East Asian countries followed a tried-and-true path to grow their economies. This included a focus on low-skilled manufacturing (often via assembly lines) with the intent of exporting goods, using global markets to keep scale, and greater work to move up the production chain to add higher value-added items for consumers.

Rajan explained that countries like Japan, Korea, and China took that path. India, however, has taken a different approach, a more multi-fold path, with less focus on manufacturing and more on the services sector.

"What’s really grown is services,” Rajan said. “This is not just information technology services that everybody is familiar with, but also the usual services that countries use, such as retail, logistics, and security.”

Without a strong manufacturing sector, the Indian government has been building out its infrastructure system while focusing on improving the manufacturers whose sites are in India—often by subsidizing them. To Rajan, this means the avenue for growth in India is much more complex today.

“When these East Asian countries started,” Rajan said, “they were competing with the West, with rich industrial country workers. Now, those workers have been displaced. What’s left to compete with are other emerging markets with cheap labor, such as Bangladesh and Vietnam. If you move up the value chain, you encounter China.”

Importance of Strong Institutions

Rajan also focuses on manufacturing protectionism, which is when governments create policies to restrict international trade to aid domestic industries. With growing protectionism in the West, India needs to remain alert if it expects to have a manufacturing sector like China's.

One way China has successfully created a strong manufacturing base is through the decentralization of control, which moves economic power to local governments and authorities to strengthen communities.

“While Chinese rules and regulations are as bureaucratic as India’s,” Rajan said, “municipalities had the ability to redefine the rules for local firms to succeed. They were rewarded on the issue of growth they produced locally.”

Additionally, China has created a solid higher education system; Rajan believes that some of their universities are “second to none in the world.” India has the potential to stay competitive in a global landscape by building and growing its educational systems.

Creating institutions is important to enhance the capabilities of your population. It gives them room to be creative, to innovate, and to inspire trust in other countries.


Many people in India enter the agricultural industry for work but find it has low productivity and pay; Rajan explained that agricultural wages haven’t increased by more than 1% in the last decade. One way to leave agriculture to pursue better opportunities is through education. However, the quality across institutions is not consistent.

“India needs far better educated and trained people across the board,” Rajan said. “Quality is emerging very slowly, but we need far more universities of high quality.”

Further Growth of India’s Economy and Investments

While strengthening local institutions can aid India’s effort to produce world-class services, Rajan sees major importance in community independence and self-sufficiency.

With a focus on making its institutions more independent, expansion will follow as people can demand better quality than what they’re currently getting—whether that’s regarding their health, education, or jobs.

“Creating institutions is important to enhance the capabilities of your population,” Rajan said. “It gives them room to be creative, to innovate, and to inspire trust in other countries.”

Increased infrastructure spending, domestic manufacturing, and gross exports are ways to grow communities on a greater scale. These initiatives, combined with India’s ongoing structural reforms, may lead to further economic growth and increased foreign direct investment. But it won’t come easily.

“India is capable of a lot,” Rajan said, “but it needs to recognize that it needs to do its homework.”