2023 saw India overtake China as the most populous country in the world. With favourable demographics, one of the highest GDP growth rates for a major economy and a geopolitical shift away from China by the west, India faces an unprecedented window of opportunity. However, challenges that include high unemployment rates, an economy still heavily reliant on agriculture and an underdeveloped manufacturing sector may prohibit the country from seizing the opportunities available.
Since 1990, India’s share of global economic output has more than doubled, with it riding high at 7.3% currently. While this is lower than China, it signifies a considerable advance. This surge has translated into improved living standards with per capita PPP-weighted GDP rising from 4.6%, versus the US equivalent, in 1990 to 11% today. With India’s per capita GDP positioned at just one-tenth of US per capita GDP, there looks to be plenty of scope for growth to catch-up.
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More than half of India’s population is under 30, a demographic prospect that should bode well as it looks to further increase its share of global economic output. This is because a country’s long-term productive capacity ultimately relies on two key factors: the size of its workforce and the productivity of each worker. India and China are broadly comparable in terms of their working-age populations, defined as those aged between 15 and 64. However, their trajectories are set to diverge. While China’s working-age population is anticipated to decline notably in the future, India’s is projected to grow until the mid-2050s. This growth could potentially result in India’s working-age population being more than twice the size of China’s by the end of the century.
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However, a large working-age population will be ineffective if those people do not participate in the labour market. While India’s total population surpassed China’s last year, its active labour force, which constitutes all who are either in employment or those who are available to work and are actively seeking employment falls significantly behind. In 2022, India’s labour force stood at just 524 million, in contrast to China’s 782 million.
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The difference in India’s labour force is largely due to the low rate of female labour participation. In 2021, only 25% of working-age women were recorded as economically active, compared to 71% in China. Meanwhile, the disparity in male participation rates was relatively minor, with 76% of working-age men in India considered economically active in 2021, versus 81% in China. Were India to elevate its female labour force participation rate to match China’s, an additional 210 million women would enter its workforce, which could increase GDP by over 40% in the long run.
While many successful Asian economies, such as China and South Korea, based their development strategies on shifting away from agriculture and towards industry, India still heavily depends on informal employment and a less productive agricultural sector. Indeed, India is considered an ‘agrarian’ economy with over 60% of people living in rural areas. In 2021, despite being on a downward trend, agriculture represented 44% of India’s total employment while contributing only 17% of GDP. However, India does appear to be following a path similar to China’s, in terms of the relationship between agriculture employment and GDP per capita.
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Just a decade ago Prime Minister Modi launched his flagship ‘Make in India’ strategy, with the aim of increasing manufacturing as a share of the economy. However, manufacturing value added (a measure of output) actually fell from 15.1% of India’s GDP in 2014 to 13.3% in 2022. As a share of global manufacturing value added, India has remained stagnant at around 2% while China has seen a remarkable rise, now accounting for almost one-third of global value added in 2022.
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In what will be welcome news to Mr Modi, in this an election year, one sector that has seen improvement is electronics. Recent data highlights the nation’s rapid growing importance as an exporter of electronic goods, particularly to the US and UK. With growing interest from overseas investors, India looks to be in a unique position to benefit from ‘China plus one’ supply chain strategies. However, whether India can seize this opportunity remains to be seen.
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The views expressed in this article are the views of the author, not necessarily those of LSEG.
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