India: Economic Growth, Demographics and Domestic Issues

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 ECONOMIC DEVELOPMENT AND GROWTH

Like China, India's projection of influence and power may partly depend on domestic economic development and growth. India may be increasingly seen by countries and multinational companies as an alternative to investing in or trading with China. 


India's economic development was retarded after independence by a socialist government that favored state-owned companies and a few very large private companies in key sectors. Private manufacturing enterprise was not encouraged but heavily regulated, especially by labor and tax laws. Foreign investment was also discouraged.


The problem in India is not only that firms are small, but that productive ones failed to grow. Rules from past governments rewarded firms for staying small. Tax systems offered preferential rates to tiny businesses; larger companies faced higher rates. A recent study estimates that if India removed such distortions—which Narendra Modi’s government is trying to do—it could raise productivity by as much as 60%. Increased productivity growth could be a major driver of economic growth.


India began to change policies in the 1990s, becoming more open to domestic manufacturing investment, foreign investment, and trade. India is now on a path to become the third largest economy in the world, passing Germany and Japan. In 2025, India’s GDP was $4.1 trillion compared to Japan’s $4.3 trillion and Germany’s $5.0 trillion. India could pass Japan as soon as 2027 and Germany in 2028 if current growth rates continue. Some Indian commentators have wryly noted that India now has a larger economy than its former colonial master, England.

 

A comment about compound growth rates. India has been growing at 7% per year. If it can continue this growth rate, its economy will double in 10 years and be four times larger in 20 years. In 20 years, India’s economy could be as big as China’s is now, which is about $19 trillion. Japan and Germany are growing at 1-2% per year. If this continues, they will double in size in 35-70 years.


India recently held a huge exposition to attract AI investment and promote deals with Indian companies. The highlight was a picture of Modi raising hands with the founders of OpenAI and Anthropic.


India is building new data centers to handle AI platforms. But India does not produce the latest, most powerful chips nor has it developed foundational models. India does have a large tech labor force and digital infrastructure. The stated goal of India's AI companies is to apply AI to particular problems and opportunities in India, such as telemedicine. There is a large potential market; the country has 900 million internet users.


India is at the beginning of a data center building boom. Although the country's installed capacity is much lower than that of the United States or China, there are plans to greatly increase the number of data centers. Like China, the government is offering financial incentives. Also like China, state (provincial) governments are competing to attract new centers. Large local companies, Google, and Microsoft are all spending or intend to spend large amounts on data centers. American companies are using Indian data centers for training and running AI models. India offers lower costs and a technical labor force.

 

India continues to liberalize its internal laws and regulations left over from the early decades of independence of socialism and pervasive regulations. Manufacturing, especially electronics, is growing rapidly. India has a "digital ID" system that connects all its population with digital payments, banking and government services. This should encourage Indian businesses to expand and promote global trade and investment. 

 

As multinational companies redirect trade and investment away from China, India should benefit. India might be seen as an alternative manufacturing base to China for multinational companies. In 2025,

Apple assembled 53% of its iPhones in India, up from one-fourth the year before. 


President Modi has eliminated many of the barriers against foreign investment in India. This is important; except for a few family-dominated huge conglomerates, India has an underdeveloped manufacturing sectors of small firms.

 

India has just concluded a comprehensive trade treaty with the European Union. Canada and India are talking about a major trade deal. A consequence of these trends is that the Indian Ocean will become a more important shipping route for global trade.


DEMOGRAPHICS

 

Of the five largest economies in the world, India’s birth rate is the highest. It has fallen to replacement level, compared to very low birth rates in China, Japan, and Germany. Population in China, Japan, and Germany is beginning to fall; yearly decreases in population will accelerate.

 

As a result, India has a younger population with 40% under the age of 25. It will be facing the problems and costs of a rapidly-increasing older population later than the other four countries. On the other hand, India, like China, has high youth unemployment.


Both India and China have populations of 1.4 billion. China’s population is starting to decrease slowly but India’s population is expected to grow another 200 million until reaching a maximum of around 1.6 billion people in the late 2040s. India is in a race between continued economic growth and demographic forces.

 

India has a young population without the large percent of older citizens that China has. There may be geopolitical consequences as China’s population decreases and ages while India’s population increases and is relatively younger. China may have to divert more of its resources to pensions and healthcare for the elderly, although this has not happened yet.

 

DOMESTIC PROBLEMS AND OPPORTUNITIES

 

Much depends on India’s domestic policies. The current government is promoting Hindu nationalism and discriminating against India’s large Muslim minority. This could hurt India in the future as it reaches out to the Muslim nations of Malaysia and Indonesia.

 

India needs to achieve high economic growth rates to absorb its large numbers of unemployed and underemployed young citizens and its increasing future population. Like in China, there are high rates of unemployment among young workers. Also like China, many find employment in the “gig” economy, especially as part-time delivery workers and ride-hailing drivers. It is hard to estimate the economic impact of this since India already has a large “informal” economy.

 

India has a serious problem with air pollution. The air quality of Delhi is so bad that there are seldom days with blue skies and its airport sometimes must close because of poor visibility. Air pollution has worsen in other cities, caused by a big increase in the number of motor vehicles, industrial pollution, farmers burning agricultural waste, and the burning of coal. This is also a major health hazard.


Like many other countries, India does not have the urban infrastructure to handle it large and growing urban population.


There is a difference between real income and quality of life. While many Indians are experiencing rising real income, urban Indians still have to contend with bad air quality, terrible traffic congestion, sometimes sewage in the drinking water, and piles of garbage in the streets. 

 

Related, India’s coal producers form a powerful political group.  But India, it would seem, should have a strong interest in rapidly moving towards electric vehicles and renewable energy. This would reduce large imports of oil and natural gas from the Persian Gulf. Terrible air pollution scares away tourists, adversely affects the economy, and the health of Indians. One study estimates that air pollution contributes to 1.7 million deaths per year.

 

India, in the past, has had strong internal regional cultures and languages, and resistance to a national government in the north. Economic development in the south and central regions, especially the area around the tech centers of Bangalore and Hyderabad, may mitigate historical opposition to Delhi. There has been a large internal migration of workers from the poor north to the richer south, maybe as many as 100 million people. This might create a political benefit as India makes a concerted effort to modernize and join the global economy.


DOMESTIC POLITICAL ISSUES


An internal problem India has, and has always had, is that the South Asia area is incredibly diverse, fragmented, and difficult to rule from a central government. Central control was almost always in the past been imposed from outside - Muslim invaders from central Asia or Christian invaders from England. The difference is that the central government now is domestic and Hindu. Political power is in the populous north; economic growth from information technology and advanced manufacturing is mostly in the south. 


The current government seems intent on making non-Hindus second-class citizens. Besides Muslims, that includes "tribal" areas.


A companion essay focusing on India's foreign relations and geopolitical opportunities is


India and the Geopolitics of the Indian Ocean

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