India’s growth paradox: Big economy, low per capita income

India’s GDP per capita remains low primarily because of its massive population, which dilutes total output when divided among a large number of people. Other contributing factors include significant income inequality, low productivity in sectors dominated by low-skilled labour, inadequate investment in human capital such as education and healthcare, a large informal economy, and structural challenges like poor infrastructure and insufficient job creation. This is despite India being one of the world’s largest economies in absolute terms.

India is the second most populous country in the world, and its economy continues to be shaped by marginalisation and exclusion arising from social inequalities. Low female participation in the labour force has further constrained economic growth.

The majority of businesses in India are small-scale enterprises (SSEs), and the country faces a shortage of adequately skilled workers. The vocational training system is not sufficiently tailored to meet the needs of the informal or casual labour force, which accounts for nearly 90% of total employment.

State governments play a crucial role in resource allocation, accounting for about 57% of total public expenditure. Most Indian firms depend heavily on politicians and public officials for access to government-supplied resources that facilitate business operations.

Agriculture, manufacturing and services remain the backbone of the Indian economy and offer key indicators of its overall economic health.

India has one of the largest service sectors globally and is a major export hub for software services, accounting for roughly 55% of the global outsourcing market. The country’s middle class is expected to expand rapidly, potentially accounting for 17% of global consumption, making it the second largest consumer base in the world.

The growing young working population is also expected to support future expansion in manufacturing. India is the seventh-largest economy globally in nominal GDP terms and the third-largest in purchasing power parity (PPP).

However, this economic size does not translate into high individual prosperity, as India’s per capita income remains lower than that of countries such as Argentina, Malaysia, Mexico and Nigeria.

To increase per capita income, a country must grow its total GDP at a faster pace than its population. This requires sustained economic growth driven by investments in infrastructure, education and innovation, while ensuring that growth is inclusive and generates employment.

Policies that support MSMEs, improve agricultural productivity and enhance resource efficiency are essential. The focus must shift from headline GDP numbers to sustainable and broad-based prosperity, as highlighted by analyses from The Borgen Project and Morningstar India.

Large economies such as China and India have achieved GDP per capita growth rates above the global average in the 21st century despite their massive populations. This progress can be attributed to financial and structural reforms—China’s beginning in the late 1970s and India’s in the mid-1990s.

The International Monetary Fund expects global GDP growth of 3.3% in 2025 and 2026, driven largely by stronger-than-expected performance in the U.S. economy, moderating inflation and uneven recoveries across major regions.

India is witnessing steady income growth alongside changing household consumption patterns. Market estimates suggest that India’s per capita income reached around US$2,600 in FY 2024–25 and could approach US$5,000 by 2030, a level often associated with a gradual shift from essential to discretionary spending.

According to Franklin Templeton’s report, ‘Beyond Necessities: India’s Affluence-Driven Growth’, the share of upper-middle-income and affluent households is projected to rise from 11.1% in 2010 to nearly 24% by 2035. The report notes that one in four Indian households is expected to have meaningful discretionary spending power within the next decade.

This shift is being reinforced by rising equity markets and increased household investment in gold, contributing to a stronger wealth effect and higher consumer confidence. GDP per capita remains a widely used indicator of average prosperity and living standards.

By accounting for population size, it allows for more meaningful comparisons across countries and highlights the challenge India faces in converting economic scale into widespread individual prosperity.