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

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 meager 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 $1,709.2 And China has also leapfrogged India on such key measures as literacy rates, resources allocated to healthcare  and overall life expectancy.

 However, India has one notable advantage that will work in its favor 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 capitalize on its favorable 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 look solely 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 15-25% of China’s economic growth between 1980 and 2000, according to research from the Brookings Institution.3

India is now poised for its own demographic boom. India’s labor pool could expand by 54% over the next 50 years as China’s shrinks by one-fifth.⁴

By 2020, India’s average age is estimated to be 29; China’s is estimated to be 37.⁵ However, demographics are not sufficient in isolation to boost growth, and India faces big challenges if it is to capitalize on this trend.

What are those challenges?

India has not benefited from the same industrialization 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%) than do Chinese (55%).⁶ India’s urbanization process is being undermined by issues such as patchy power distribution networks. 

What can the government do to ensure India capitalizes 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 Labor Bureau, the country’s labor market created fewer than two million jobs each year between 2010 and 2017; this is despite average annual GDP growth of more than 7% 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 labor 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. Labor 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% lags well behind China’s 96%; 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 recognizes this. Central government spending on infrastructure rose 55% 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. For example, one well-placed company, an Indian fruit juice manufacturer, offers its juices and carbonated drinks in smaller quantities and at lower prices than some Western competitors. This is an instance of how local companies with more affordable products can compete for young Indian consumers ― an important factor in a country where per capita GDP is still relatively low.  Overall we believe 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

Figure 2: Projected population changes in China 1980-2050

Sources:

[1]  World Bank

[2]  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 labor market: a new emphasis on gainful employment, McKinsey, 2017

 [9] CIA World Factbook, 2015 figures

 [10] McKinsey, 2017

* Investment professionals are members of AIA/AIC's Participating Affiliate, Aviva Investors Global Services Limited ("AIGSL").

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