Commentary: Smaller populations need not shrink China and India’s growth

ANN ARBOR, Michigan: Fifty years ago, most governments worried about having too many people. Now many worry about having too few. A shrinking workforce can slow growth, but population size alone does not determine an economy’s prospects.

Few comparisons make this point clearer than China and India, the world’s two most populous countries.

China’s population has been shrinking since 2022. India’s 2026 fertility rate is below replacement level – the level of childbearing needed for each generation to replace itself, in the absence of migration – and it retains a larger share of working age population.

The International Monetary Fund projects economic growth of 4.6 per cent and 6.4 per cent in China and India for 2026 respectively. Both are above the projected global rate of 3 per cent. A shrinking population can still generate high output if workers are healthy, productive and employed for longer periods.

In China, workers’ average earnings rise after labour force entry, peaking around age 40. Indian workers’ average earnings have a lower peak but are spread more evenly across a longer working life.

These patterns point to different demographic sources of growth. India’s growth comes from more people entering the labour force, while China must offset a shrinking workforce through higher productivity. For countries facing shrinking populations, improving productivity may matter as much as increasing birth rates.

TURNING EDUCATIONAL GAINS INTO PRODUCTIVE JOBS

China has made a striking educational expansion. Its tertiary enrolment rate more than doubled from 29 per cent in 2012 to 77 per cent in 2024, while around half of people aged 20 to 24 attend university or vocational college. This expands the supply of highly educated workers. The harder question is whether those educational gains translate into productive jobs.

The increase in graduates will raise productivity only when firms can use their skills to produce the goods and services customers want. A degree adds little to output if its holder cannot find suitable work or spends years competing for a narrow range of coveted positions.

The popular term “involution” captures this intensifying competition where greater effort produces diminishing returns. This feeling of frustration is especially visible among China’s younger generation who compete intensively for education, jobs, housing and social mobility.

China’s challenge is to shift from just producing more college graduates to using their skills more effectively.

This is partly a question of where capital goes. Years of state-directed investment have left debt and excess capacity in some sectors, while potentially more productive businesses need room to expand. Reducing barriers in services and providing a more level playing field for firms would allow investment and workers to move towards activities with higher returns.

Expanding services can also employ graduates and meet rising domestic demand. It also means allowing successful businesses to grow rather than keeping finance and workers tied to projects with weak returns.

It is also a question of demand. When households are reluctant to spend, firms have less reason to hire and innovate for the domestic market – and exports alone cannot absorb every new graduate or sustain China’s growth indefinitely.

Stronger social protection and household consumption would create markets for better services, while more open competition would reward firms that use skilled workers effectively.

China’s successes in advanced manufacturing show that its trained workforce can support innovation. The challenge is to spread those gains across more firms and sectors rather than assuming that a few leading industries can employ all its graduates.

STUCK IN LOW-PRODUCTIVITY WORK

India faces a different bottleneck. Its large working-age population is an opportunity, but much of the labour force remains in low-productivity work. Between July 2023 and June 2024, 46.1 per cent of workers were in the agriculture sector while only 11 per cent worked in manufacturing.

Firms must be able to hire at scale to move workers into better-paying jobs, yet new jobs are concentrated in small and informal businesses or low-productivity sectors.

India has historically underinvested in education and continues to spend a relatively low share of its GDP on this sector compared with many other countries. Though educational spending has increased over the last two decades, it remains modest at 4.1 per cent of GDP in 2025.

More education alone will not increase productivity. Though university graduate numbers continue to grow, college-educated youth struggle to find jobs that match their qualifications and expectations.

Some graduates do not acquire the skills employers need because of weaknesses in education quality and skill development. India’s Periodic Labour Force Survey estimated 22.3 per cent unemployment among Indian graduates aged 15-29 in 2025.

India also loses productive capacity when women are unable to take paid jobs. Indian women’s labour force participation remains among the lowest in the world, which reduces productive capacity.

Many women are held back by domestic care responsibilities, unsafe or difficult commutes and limited access to formal credit, especially when seeking non-agricultural paid work. Better transportation, childcare and access to finance would help women enter and remain in paid work, expanding the effective workforce without more births.

A favourable age structure creates growth opportunities, but more is needed. A young age structure accounted for about one third of East Asia’s per capita GDP growth during 1965 to 1990.

Yet changes in India’s age structure accounted for roughly one sixth of per capita GDP growth during 1997 to 2023. India’s growing working-age population has supported growth, but further improvements depend on whether workers can move into productive employment.

For both India and China, the central issue is not the number of workers alone but how productively they can be employed.

China needs to connect its increasingly educated workforce to expanding firms and stronger domestic demand. India needs firms that can grow and hire, alongside training and practical support that enable more people, especially women, to take those jobs.

Fertility matters, but stronger growth will not come simply from having more babies. The more durable path is to make better use of the people and skills each country already has by creating opportunities for productive, well-paid work.

Xueqing (Zoey) Wang is Research Fellow at University of Michigan. KS James is Visiting Scholar at the Center for Health and Well-Being, Princeton University. Lex Rieffel is former economist at the United States Treasury Department. This commentary first appeared on East Asia Forum.