India Is Ill Positioned to Harness a Demographic Dividend

It'll have to boost literacy, female labor participation and urbanization rates just to maintain steady growth let alone surpass China's record

T. Nagar market in Chennai, India. 2008.

Wikipedia, Creative Commons. McKay Savage.

Last month, the United Nation’s Population Division projected that India will overtake China to become the world’s most-populous country by the middle of this year. That would mark the first time since 1950, when the U.N. began keeping global population records, that China was knocked out of the top spot. India is already the third-largest economy in the world by GDP adjusted for purchasing power parity, and it was among the 10 fastest-growing large economies last year.

The U.N. population estimate renewed discussion about India’s economic potential, including whether its swelling population could create a major “demographic dividend” that, in turbocharging its economy, would allow India to surpass China on that front as well. But India has a lot of ground to cover if it is to meet those expectations.

One reason for the optimism about India’s economic prospects is that its current economic outlook is virtually identical to what China’s looked like when it began its rapid economic rise more than 20 years ago, in 2000. At the time, China’s GDP stood at $2.77 trillion and its GDP per capita at $2,193 in constant 2015 dollars, while 36 percent of its population lived in urban areas. In 2021, India’s GDP was $2.73 trillion and its GDP per capita $1,937, and its urbanization rate was 35 percent. Over the next 20 years, China’s GDP soared to $14.6 trillion—overtaking Japan in 2010 as the world’s second-largest economy along the way—as its GDP per capita nearly quintupled to $10,358.

Another is that China now faces a rapidly aging population that registered its first decline last year, following decades of Beijing’s one-child policy. By contrast, India’s population is younger and still growing. As a result of India’s large and growing youth bulge, many now expect India’s economy to experience the same kind of dramatic growth over the next 20 years that China’s did in the last 20.

But a closer look at critical features of China’s historical growth and India’s recent economic trajectory suggests that those expectations might be too optimistic. By 2000, China had already laid the foundation for an economic takeoff by revamping its labor force. Its working-age population—namely, people aged 15-59—was 65 percent of the total population in 2000, and increased to nearly 70 percent of the total population a decade after. More importantly, China’s literacy rate stood at 91 percent, and its female labor force participation was 71 percent, putting it in pole position to take advantage of a “demographic dividend.”

India’s trajectory is quite different, and that makes it unlikely that it will be able to match—much less surpass—China’s demographic dividend. To begin with, India’s fertility rate has been steadily falling for decades, despite lacking a policy similar to China’s one-child policy—it currently stands at 2 children per woman, down from 4 in 1990. Although India’s current working-age population is approximately 64 percent of the total population, that figure will see only a modest increase to 65 percent by 2030 and is projected to dip to 61 percent by 2050. More importantly, India’s literacy rate today stands at 78 percent, and its female labor force participation is a lowly 24 percent. Labor force participation in both China and India has been falling since the 1990s, as more young people stay in school and more seniors head for retirement. But this development has been more drastic in India, where male labor force participation stood at 73 percent in 2021, compared to 83 percent in China in 2000.

The overall impact of these numbers is straightforward: India is seeking to jumpstart rapid economic growth with less favorable demographics and economic fundamentals. In 2000, 70 percent of China’s total population was made up of literate, working-age people who participated in the labor force. In India today, its proportion of literate, working-age people in the labor market—nearly 40 percent of its population—is so much smaller that it cannot realistically hope to match China’s economic miracle in the coming two decades.

To be sure, India can still reap the benefits of a demographic dividend if it steps up efforts to increase literacy rates and female labor-force participation. But it will likely face additional obstacles even if it begins those efforts immediately. Chinese policymakers were able to invest in the country’s labor force and infrastructure in part because the state faced only a modest fiscal burden with regard to care for the elderly. From 1990 to 2010, during China’s period of peak growth, the country’s working-age population increased by 200 million, while its retirement-age population—those 60 or older—increased by just 78.3 million. In other words, China added 255 new people of working age to the labor market for every 100 new retirees.

In India, 111 million new seniors aged 60 or older are projected to exit from the labor force between this year and 2040, but the country’s working-age population will grow by only 104 million—creating a labor force deficit of 7 million people. This trend will only get worse from 2040, as India’s working-age population is projected to begin to decline thereafter, while an additional 83 million Indians will reach age 60. By 2060, a quarter of India’s total population will be 60 years or older. The upshot is that while China is likely to grow old before it becomes rich, India may grow old before it ceases to be poor.

India must also start to move workers out of agriculture and into other economic sectors at a much more rapid pace than it has in the past decade. From 2002 to 2019, China reduced the share of its labor force that was employed in agriculture from half of all workers to a quarter. By 2012, India still had 47 percent of its workforce employed in agriculture, but the pace of decline since that time—to 43 percent by 2019—has been modest in comparison. At that rate, it would take until 2054 for India to match the 25 percent labor force employment in agriculture that China attained in 2019.

More broadly, the circumstances of China’s economic rise may have been unique, in that it was boosted by global dynamics that no longer exist today. When China’s takeoff began, it was gaining a near-monopoly on low-wage production for international markets, as the only developing country to combine a literate and disciplined labor force with the physical infrastructure needed to efficiently move goods to foreign markets. Today, the low-wage manufacturing market is far more competitive, with Bangladesh, Mauritius, Indonesia, Vietnam and other countries capable of meeting that demand for a skilled workforce and efficient logistics network.

Moreover, as China’s economy grew, global supply chains reached peak globalization. Going forward, however, they will likely be limited by local content rules and a growing preference among manufacturers for reliability over cost. Given those conditions, the sustained double-digit growth rates of “peak China” may not be attainable by India and other countries in the future.

Even some of India’s competitive advantages over China in 2000 might be less significant than many assume. For instance, the country produces thousands of new engineers every year, and it is possible that high technology will provide a major boost to the productivity of Indian workers. But it is also possible that generative AI tools will replace the call centers and software coding services that have been the bedrock of India’s services sector for several decades. While the long-term impact of technology on jobs in India is still uncertain, India will clearly need to rapidly boost the education and female-participation rate of its workforce if it is to make advances in the increasingly competitive space of low-income countries seeking to move up the middle- and higher-income ladder.

It is important for Indian policymakers not to get carried away by the mere fact that the country has overtaken China to become the world’s most-populous country. A large population counts for little unless it is educated, employed and productive. Today, even with its larger population, India’s GDP is less than a fifth of China’s. And despite the impending shrinking of China’s labor force, India’s economy will take decades to catch up to China.

But India does not necessarily have to replicate China’s remarkable growth over the past 20 years to improve the lives of its people and make an impact on the global economy. Countries can get rich by growing their economies by 5-7 percent per year for decades, if they consistently implement the right set of policies, much like South Korea did after the Korean War. Growth rates in that range could potentially make India the third-largest economy in the world, even if does not overtake China as the second-largest. As the country with the world’s largest population and its third-largest economy, India will rightfully command a place at the decision-making table in global affairs.

But even that kind of economic growth will depend on India making forward leaps in education and female labor force participation, if the country is to reap the “demographic dividend” of a large, youthful population. For all the international attention given to India’s population, the country’s future rests on three pillars: quality universal education, boosting women’s employment and moving large numbers of its labor force out of agriculture into more productive pursuits. If India is to move out of China’s economic shadow, those pillars must be solidified. Otherwise, the opportunity of a century may be lost.

This piece has been reprinted from the World Politics Review where it was originally published.