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Can India reap the demographic dividend?

India’s economy lags China’s in many areas, but in one crucial respect it has the edge: its favourable demographic profile. But will India be able to capitalise on this advantage?

3 minute read

India’s development in the 70 years since independence has been impressive. The country’s per-capita income (adjusted for inflation) has grown fivefold and life expectancy has more than doubled, from 32 years to 68 years.1  

Yet India’s gains look meagre when compared with progress in China, which has overtaken India over the past 30 years to challenge the US as the world’s dominant economic power. India’s GDP per capita in the early 1980s was higher than China’s, but now China’s citizens earn on average $8,123, far higher than India’s figure of $1,709.And China has also leapfrogged India on such key measures as literacy rates, healthcare provision and overall life expectancy.

However, India has one notable advantage that will work in its favour over the next half century: demography. China has a rapidly-growing population of elderly people and falling numbers of working-age citizens to support them, partly as a result of the One Child Policy (which is being phased out); India, on the other hand, has a young and growing workforce (see charts).

So does this mean India is set for its own China-like growth spurt? In this Q&A, Will Ballard, Head of Emerging Market Equities at Aviva Investors, explores whether India will be able to capitalise on its favourable demographic profile to catch up with its Asian rival.

Does India’s demography give it the edge over China?

In theory, India should be able to sustain higher GDP growth than China over the medium term, if you simply look at demographic factors as the driver. Part of the reason for China’s rapid economic growth since the late 1970s was the ‘demographic dividend’. China experienced a baby boom in the 1960s and 1970s and citizens born in these decades were reaching working age just as China’s economy began to open up under Deng Xiaoping. The demographic dividend is estimated to have accounted for 15 to 25 per cent of China’s economic growth between 1980 and 2000, according to research from the Brookings Institution.3

India is now set for its own demographic boom. India’s labour pool could expand by 54 per cent over the next 50 years as China’s shrinks by one-fifth.4 By 2020, India’s average age will be 29; China’s will be 37.5However, demographics are not sufficient in isolation to boost growth, and India faces big challenges if it is to capitalise on this trend.

What are those challenges?

India has not benefited from the same industrialisation or empowerment of the rural workforce as has been the case in China, and its GDP per capita still lags far behind. Far fewer Indians live in cities (about 32 per cent) than do Chinese (55 per cent).6 India’s urbanisation process is being undermined by issues such as patchy power-distribution networks.

What can the government do to ensure India capitalises on its demographic dividend?

India’s policymakers will have to shrewdly manage the economy to ensure there are enough jobs for the growing workforce and that there is sufficient training and education. Research from Ernst & Young shows India is currently neither creating enough jobs nor providing enough training.7

India’s private sector is still hampered by regulation, which is constraining employment growth. According to surveys from India’s Labour Bureau, the country’s labour market created fewer than two million jobs each year between 2010 and 2017; despite average annual GDP growth of more than seven per cent over that period. This is clearly insufficient when the population is growing by around 16 million people every year.8 Prime Minister Narendra Modi has made some progress in reforming the economy and cutting red tape, but more needs to be done.

Are there lessons India can learn from China about sustaining economic growth?

There is a question mark over how much India can learn from China, whose economic growth derived in part from its ability to harness migrant labour to develop a massive urban workforce that propelled a manufacturing boom. That path may not be open to India, as there is no longer such a huge need for another country in the world to produce cheap widgets. Labour cost arbitrage is no longer the be all and end all of a nation’s competitive advantage.

However, there are certain lessons that India can learn from the policy decisions taken in China that facilitated its strong and sustained growth, including its decision to invest in training and education for its young and growing workforce. India’s record on education is comparatively woeful. Its literacy rate of just over 71 per cent lags well behind China’s 96 per cent; in fact, India’s literacy rate now is lower than China’s was in 1990.9 Most schooling in India remains poor and this is a big problem.

Where else should the Indian government be investing?

India needs to invest in infrastructure to build capacity for its growing population. The government recognises this. Central government spending on infrastructure rose 55 per cent between 2014 and 2017 – total spending over that period stands at 2.9 trillion rupees ($46 billion)10 – and this extra spending is helping to boost employment. McKinsey estimates that central government spending could create employment opportunities for 6.6 million workers this year, mostly in the construction sector.

Which sectors in India stand to benefit from the growing population of young consumers in the country?

Consumer-staples companies look set to benefit. Manpasand Beverages is well placed, for example; the company offers its products – such as fruit juices and carbonated drinks – in smaller quantities and at lower prices than Western competitors such as Coca-Cola, which means they are more affordable for young Indians. This is important in a country where per capita GDP is still relatively low. Increasing GDP per head will be crucial if India is to develop other sectors such as technology and IT, which Modi has identified as a priority.

Figure 1: Projected population changes in India 1980-2050
population by age bar graph India

Figure 2: Projected population changes in China 1980-2050
population by bar graph China


World Bank

World Bank

3  ‘China’s population destiny: the looming crisis,’ Brookings Institution, 2010

4 Global growth: can productivity save the day in an aging world?, McKinsey, 2015

5 Reaping India’s promised demographic dividend, Ernst & Young, 2013

6 United Nations

7 Ernst & Young, 2013

8 India’s labour market: a new emphasis on gainful employment, McKinsey, 2017

9 CIA World Factbook, 2015 figures

10 McKinsey, 2017


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