India: Economic Growth, Demographics and Domestic Issues

By

INTRODUCTION

India is emerging as a major economic and geopolitical power. Its successful long-term transformation will depend on whether economic modernization can overcome demographic, political, environmental, and institutional constraints.

For decades after independence, economic growth was constrained by socialism, state controls, restrictive laws and regulations, and limited integration into the global economy. Since the liberalization reforms of the 1990s, however, India has increasingly opened up to foreign investment, manufacturing, trade, and technological development.

Today, multinational companies and governments are beginning to view India not only as a possible alternative to China for investment, manufacturing, digital infrastructure, and artificial intelligence applications. If current growth trends continue, India could become the world’s third-largest economy within a few years and eventually one of the economic powers of the twenty-first century.

Yet India’s rise is not guaranteed. The country faces enormous domestic challenges: unemployment especially among young adults and college graduates, weak urban infrastructure, pollution, political and religious tensions, uneven regional development, and the difficulty of governing a vast and diverse population of more than 1.4 billion people. India is engaged in a race between rapid economic modernization and the pressures created by demographics, urbanization, environmental degradation, and internal political divisions.

This essay examines India’s economic transformation, demographic advantages, domestic weaknesses, and the broader implications for global trade, technology, and geopolitics.


ECONOMIC DEVELOPMENT AND GROWTH:  OVERVIEW

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 corporations 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 fail 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 global 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 grows at the current rate of 5%, its economy will double in 14 years and be four times larger in 28 years. In 28 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.


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 sector 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.


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. A long way from Gandhi and Nehru.


AI AND DIGITAL INFRASTRUCTURE


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 good 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 almost one billion smartphone users tied to the Internet, compared to 100 million a decade ago. A rapidly rising number, especially young people and students, are using ChatGPT.


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.


ENERGY


India has heavily depended on Gulf States for oil, natural gas and nitrogen fertilizer. India is also a major user of domestic coal reserves; members of the coal industry have political power. But the Indian government has a New and Renewable Energy Minister. He has stated that India has added 276 gigawatts of renewable energy generation over the last decade. Renewables are now more than half of installed generating capacity. India produces its own solar modules. The minister also emphasizes that AI and digital twins run at data centers - virtual models of power networks - are being used to manage the system.


The recent events in the Persian Gulf will probably accelerate Indian's attempts to switch to domestically-produced renewable energy.


DEMOGRAPHICS

 

In 1950, just after independence, India's population was approximately 360 million people. The average woman had six children. Now (2025) India's population is approximately one billion, 450 million people. Despite widespread poverty, high rates of marriage and relatively young mothers, the fertility rate is falling fast.

 

India's total fertility rate (tfr), the number of births a typical woman has over her lifetime, has fallen to 1.9, below the 2.1 level needed to keep the population stable in the long run. It is likely to keep falling.  

 

The average for urban India is 1.5. In Delhi, the tfr is 1.2. Fertility has fallen much further and faster than expected.  In both Tamil Nadu, a state of roughly 77m, and West Bengal (100m) the tfr stands at 1.3.

 

If the birth rate continues to fall to 1.5 or slightly below in the near future, India’s population might top out at about 1.6 billion sometime in the 2050s and then decline to about 1 billion by 2100. This assumes that Indian couples do not defer having children.


The size of India's labor force may top out in about one generation, making economic growth even more dependent on innovation and productivity growth. 


Of the five largest economies in the world, India’s birth rate is the highest. It has fallen to just below 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 young population with a median age (half above, half below) of approximately 29 years. Only 7% of the population is 65 and older. It will be facing the problems and costs of a rapidly-increasing older population later than the other four countries.

 

There may be geopolitical consequences as China’s population decreases and ages while India’s population increases and is younger. China may have to divert a higher percent of its resources to pensions and healthcare for the elderly.


In summary, India possesses a major demographic advantage compared to China, Japan, and Germany. Its population remains relatively young and its labor force continues to expand. India may benefit from its "demographic dividend." It will face the fiscal pressures of an aging population later than many advanced economies.

 

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.

 

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.


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.


Using Census definitions, India's urban population is about 530 million, approximately 37% of the total population. Thus, India's rural population is around 900 million, 63% of the total. This number probably includes small towns and villages.


India's middle class can be approximated by the number of households that pay income taxes. Along with their billionaire compatriots, they make up the 28 million people who paid personal income tax in 2024, the last year for which data are available. That is 2% of the population, 5% of the labour force and 10% of households. Since India has widespread government corruption and tax evasion, these numbers may not mean much.


Like many other countries, India does not have the urban infrastructure to handle its large and growing urban population. One reason is that political power is distributed between the national and state governments. Cities are underrepresented at both levels. In addition, municipal governments have little power; their budgets are determined by state governments dominated by representatives from rural areas.

What do these people get for their money? Not health or education. No one from this class would dream of sending their children to a state school (nor would their cooks and drivers). Not decent public transport. Not even clean air. 

(The Economist, "Narendra Modi gives India's elite a taste of the bad old days," May 24, 2026.)

SUMMARY

Economic liberalization, expanding manufacturing, growing digital infrastructure, foreign investment, and participation in AI-related industries are accelerating growth and increasing India’s role in the global economy. As multinational firms diversify away from China, India may become an increasingly important manufacturing, technology, and data-center hub.

India also possesses a major demographic advantage compared to China, Japan, and Germany. Its population remains relatively young and its labor force continues to expand. India may benefit from its "demographic dividend." It will face the fiscal pressures of an aging population later than many advanced economies. If sustained economic growth continues, India could become one of the dominant economies of the twenty-first century.

However, India’s rise faces significant internal constraints. Weak infrastructure, environmental deterioration, unemployment especially among young adults, urban overcrowding, political fragmentation, religious nationalism, and unequal regional development could undermine long-term stability and growth. India’s democratic system and federal structure may complicate efforts to modernize infrastructure and implement coherent national policies.

The outcome of these competing forces will shape not only India’s future, but also the future balance of economic and geopolitical power in Asia and the Indian Ocean region.

==================================================

A companion essay focusing on India's geopolitics and foreign relations with neighboring states and China is:


India and the Geopolitics of the Indian Ocean

Comments

Post a Comment

Most Popular Posts

Adam Smith's Pin Factory

By
Image
Adam Smith - Our Founding Father INTRODUCTION   This essay on Adam Smith and his famous example of a pin factory also serves as an introduction to some of the themes in the over 100 essays in this blog.   Adam Smith wrote the  Wealth of Nations  during the beginning of the Industrial Revolution. It was published in 1776. The dynamics of the Industrial Revolution continue to be a disruptive force; because of AI, it might be even more disruptive in the future.   ADAM SMITH’S PIN FACTORY   Adam Smith’s description of a pin factory is on the first page of  The Wealth of Nations .  (Chapter 1 – “Of the Division of Labour”)  Drawings of pin factories of this period show workers using hand tools. Smith says the process can be broken down into 18 distinct steps, including packaging the pins. Smith mentions that pin factory workers were poorly paid, despite their high productivity.    Adam Smith says he visited a pin factory empl...
Read more

The Stock Market Crash of 1929 and the Beginning of the Great Depression

By
Image
Famous Headline Before You Begin If you don't know the background of this complicated story, you might want to first read a shorter version that introduces some of the key factors explaining the Crash and the Depression. See, Introduction to the Stock Market Crash of 1929 and the Beginning of the Great Depression Before reading this essay, I strongly recommend you see the PBS video on YouTube. Type in Stock Market Crash 1929. Look for: US – The Crash of 1929 (PBS), ALLHISTORIES – PLAYLIST.  The documentary is broken into 6 parts to show commercials. Or buy the video on Amazon Prime. Great documentary with wonderful photos, videos, and scenes from movies of the 1920s and the crash. Shows what a crazy time it was. The video is also a great introduction to Andrew Ross Sorkin's recent best-seller  1929:  Inside the Greatest Crash in Wall Street History - and How It Shattered a Nation.  This book concentrates on the roles played by a small number of key men; the v...
Read more

The English East India Company (EIC): Trade with India and Asia

By
Image
The Mughal emperor Shah Alam hands a scroll to Robert Clive, the governor of Bengal, which transferred tax collecting rights in Bengal, Bihar and Orissa to the East India Company.  Illustration: Benjamin West (1738–1820)/British Library INTRODUCTION   Founded in 1600, the English East India Company (EIC), like its Dutch equivalent the United Netherlands East India Company (VOC, from the Dutch initials) was an innovative new type of corporation. It was a model for the limited-liability, stockholder-owned and funded modern corporation. The EIC was an early prototype for the modern multinational corporation. Originally created as a company to develop profitable long-distance trade, it evolved into a political organization that controlled or dominated about two-thirds of the Indian subcontinent by the early 1800s. The EIC and the Navigation Acts were the starting points for England's naval dominance and colonial empire. The EIC can be seen as an early example of state capitalism. ...
Read more

Bilateral Oligopoly

By
Image
The best movie about the Gunfight at the O.K. Corral is titled My Darling Clementine. A great western - great cast, great photography.  DEFINITION OF A BILATERAL OLIGOPOLY Models of market structure assume that the demand side is represented by a large number of buyers.  The structure of the market, and the assumed market outcomes, depends on the number of suppliers and how they compete.  Suppliers either post one price or exploit their knowledge of buyer categories by using price discrimination.  Despite the comments about the key role of consumers in determining economic performance, consumers are fairly passive when the discussion focuses on imperfectly-competitive industries.  But many markets are not structured this way; the buyers are not passive consumers but large corporations that do not passively accept suppliers’ prices.  Net prices are actively negotiated.  These markets are often bilateral oligopolies. In a bilateral oligo...
Read more

Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution in England

By
Image
Wedgwood Anti-Slavery Cameo A better introduction to the beginning of the Industrial Revolution than Adam Smith is the history of Josiah Wedgwood and the Wedgwood Pottery Company. This is how one company actually ushered in the Industrial Revolution. The revolutionary generation that first adopted steam engines saw the following trends and changes: Manufacturing was being modernized by a small group of entrepreneurs. Much of the new raw material processing and manufacturing was concentrated in a small area in the middle of England, away from London. These modernizing entrepreneurs formed a new economic, intellectual and social network. Modernizing entrepreneurs like Wedgwood tended to be members of Dissenting sects (like Quakers) or Nonconformist churches (not members of the Church of England), Whigs (liberals) in politics, and believers in “progress.” They were optimistic about the future, influenced by the ideas of Hume, Rousseau, Locke and Adam Smith. They believed...
Read more

List of Posts By Topic

By
Image
FIND POSTS BY CATEGORY The Beginning of the Modern Global Economy:  The Economic Rise of England Before the Industrial Revolution The Beginning of the Industrial Revolution in England and America The theme of the following five sections of the blog is that innovation and information, not price competition, are the main factors for understanding economic growth, competition, market structure and analysis. Basic Concepts and Theory Corporate Strategies And Management Market Behavior and Structure Market Dynamics and Information:  How Markets Work Economic Theory and Markets There is beginning a historic change in future populations and their demographics. This will interact with other variables and have a serious, maybe profound, effect on future economic growth. Demographics, Population Projections and Economics American History American Economic History Politics of the United States The Roman Republic and America - Differences and Some Possible Parallels China India Niger...
Read more

Government Finance 101. Fiscal Policy: Welcome to Alice in Wonderland

By
Image
Secretary of the Treasury UPDATE (8/2026) The expected yearly deficit for fiscal year 2026, ending September 30, 2026, is $2.1 trillion. This is higher than the deficit of $1.9 trillion in fiscal year 2025. One reason is that the expected $200 billion increase in government revenue from increased tariffs has to be refunded to importers and American companies because the Supreme Court declared the tariffs unconstitutional. The national debt will be around $40 trillion by the end of this fiscal year. Total interest expense will be around $1.1 trillion, with the interest rate a little under 3%. Thus interest expense is now half of the total yearly deficit. Another way of looking at this is that half of the yearly deficit goes to paying interest on the national debt. Projections are that the national debt will be around $50 trillion in five years (FY 2031). Yearly interest expense might be between $1.5 trillion and $2.0 trillion, which assumes an interest rate of 3% to 4%. Thes...
Read more

Explaining Derivatives - An Analogy

By
Image
You go around to farmers with cows. You buy all the cows and pay the farmers a small fee to milk the cows and sell the milk. You pay for the cows with ass(et)-backed securities called MBSs (Milked Bovine Securities) that you tell investors are udderly safe. But some of the cows don't give enough milk (cow flow problems) or give no milk at all. You take some of the asset-backed securities, say they're backed by the subprime cows, and use them as collateral to sell another set of securities called CMOs (Cow Milk Obligations). Then you buy CDSs (Cow Dried-up Swaps) from AIG (Angus Insurance Company) to insure the CMOs when the cows stopped giving milk. If you work it right, you collect more on the CDSs than you pay out to retire the CMOs. The money you get from selling the dead cows go to pay the CLOs (cow leather obligations). You could also sell CDOs (cow dung obligations) that depend on how much cow dung is produced. This is a typical Wall Street product - turning s...
Read more

John von Neumann Sees the Future

By
Image
John von Neumann JOHN VON NEUMANN CREATES THE FUTURE If you want to understand the world we live in, you have to know about the thinking of three men – Alan Turing, Claude Shannon and John von Neumann.   I’ve talked a little about Alan Turing in an earlier essay.   All three men knew each other, discussed their thinking with each other, and promoted each other’s ideas. John von Neumann has been called the smartest individual of the 20 th Century (by his brother-in-law, who won a Nobel Prize in Physics).   A n outline of von Neumann's accomplishments, which you can read about in  Wikipedia, is hard to believe.   He invented game theory, which I discussed in two earlier posts.   He belonged to a group of mathematicians who invented new statistical techniques at Los Alamos that made the atomic bomb possible. He invented game theory. In 1944, he wrote a memo that outlined the structure of the modern computer.   He then managed the design a...
Read more

The Roman Republic Commits Suicide: A Cautionary Tale for America

By
Image
Roman Legion Why Study Rome? Americans have focused on comparisons between Rome and America twice in American history.  The first time was during the period from before the Revolution to after the ratification of the Constitution and Bill of Rights, when the founding fathers and others looked to the Roman Republic for ideas and inspiration on how to structure the new government. After the American Revolution, the founding fathers, having read the Roman authors detailing the collapse of the Roman republic, worried about internal threats to the survival of their new republic.   The second time was when the United States became a superpower, especially after WWII, and then again after the collapse of the Soviet Union in 1991. Commentators compared America to the Roman Empire at the height of its power. There was some discussion about how America became a permanent warfare state and how it affected domestic democracy and civil society. ...
Read more