China’s Demographic Realities and Economic Slowdown: Opportunities and Challenges for India

-Dr Reeta Kumari (Researcher)

Abstract

China, once greeted as the engine of global economic growth, is now dealing with profound demographic shifts and a slowing economy. The nation’s declining fertility rates, shrinking workforce, and rapidly aging population pose significant long-term challenges to its economic vitality. Concurrently, structural inefficiencies, real estate crises, and dwindling export growth have exacerbated the slowdown. These realities present a dual-edged scenario for India, offering both opportunities and challenges. On the one hand, China’s economic deceleration opens avenues for India to position itself as an alternative manufacturing hub and attract foreign investments seeking to diversify from China. India’s demographic advantage, with a burgeoning young workforce, aligns with this potential. Enhanced global interest in India’s market, driven by geopolitical shifts, such as the US-China trade tensions, further strengthens its prospects. However, India faces its own set of challenges, including infrastructure gaps, skill deficits, and bureaucratic inefficiencies, which must be addressed to capitalize on these opportunities effectively. Additionally, the global economic slowdown, coupled with China’s influence in regional trade networks, could impact India’s trade aspirations and growth trajectory.

Keywords: India, China, Trade relations, Demography. Economic slowdown

Introduction

China’s sudden rise as an economic superpower over the past four decades has profoundly shaped global trade and geopolitics. However, recent trends indicate a slowdown in China’s economic growth, compounded by significant demographic challenges, including a rapidly aging population and a shrinking workforce. These developments have far-reaching implications for the global economy and particularly for India, which is positioned as an emerging economic powerhouse. While China’s difficulties present opportunities for India to enhance its economic standing, they also bring challenges that must be strategically navigated.

This comprehensive analysis examines China’s demographic realities and economic slowdown, exploring the opportunities they present for India and the associated challenges. It concludes with recommendations for how India can position itself to capitalize on these developments effectively.

China’s Demographic Realities

1. Aging Population and Workforce Decline

China is experiencing one of the most dramatic demographic transitions in modern history. The effects of the one-child policy, implemented in 1979. “The ‘One Child Policy’ has changed the concept of childbearing for several generations in China, resulting in the lack of willingness to have children among the young generation in China”, Yi Fuxian told, who is a demographer and expert on Chinese population.  This policy was relaxed only in 2016 and introduced “Two Child Policy”, are now evident. According to the United Nations, China’s population began declining in 2022, with projections indicating a loss of nearly half its population by 2100. China has one of the fastest growing aging population in the world. Concurrently, the proportion of elderly citizens (aged 65 and above) is rising rapidly expected to reach nearly twenty-eight (402 million) in 2040 and thirty percent of the population by 2050. However, in May 2021, China has introduced “Three Child Policy” as a further attempt to address the issue. Long working hours and low wages is also a reason for people, such as factory workers, make hard to raise children (China Labour Bulletin).

A shrinking workforce is a direct consequence of these demographic shifts. The working-age population (15-64 years) peaked in 2010 and has been declining since. This decline places immense pressure on China’s labour-intensive industries, increases dependency ratios, and threatens long-term economic growth.

2. Fertility and Replacement Rates

The fertility rate of China has continuously declined over the past decades. The ‘Total Fertility Rate’ (TFR) decreased from 5.81 in 1970 to 2.75 in 1979. In the 1980s, the TFR fluctuated above the replacement level and from 1990, the fertility has declined to below the replacement level. The 2010 and 2020 census, China’s TFRs were 1.18 and 1.30. In 2021, the fertility rate was 1.16 births per women which is far below the replacement level of 2.1. Key reasons of fertility rates imbalances in China are: declining overall fertility, regional disparities, impact of the ‘One Child Policy’, urbanization and lifestyle changes, economic factors etc. Government efforts to encourage higher birth rates through policy incentives, such as financial subsidies and extended maternity leave, have met with limited success. Urbanization, high living costs, and changing social norms are deterring young couples from having larger families.

3. Regional Imbalances

China is facing a significant population imbalance across its, primarily characterized by a massive concentration of people in the eastern coastal areas, leaving the western regions. There is also a large-scale migration from rural areas to urban. Demographic challenges are not evenly distributed across China. Rural areas, in particular, face severe population decline as younger generations migrate to urban centers in search of better opportunities. It resulting in a growing urban rural divide and several socio-economic challenges. Key reasons of population imbalance in China are: East-West divide, urbanization and rural exodus, hukou system, economic disparity etc. Major impacts of population imbalance in China are: labour shortage in rural areas, urban overcrowding, environmental concerns, social and cultural disruption etc. This exacerbates inequality and creates governance challenges in ensuring balanced development.

China’s Economic Slowdown

1. Structural Issues in the Economy

China’s economy, which grew at an average annual rate of nearly 10% from 1978 to 2010, has slowed considerably. Growth in 2023 was around 5%, marking a significant departure from its previous trajectory. This slowdown is driven by several structural issues:

• Real Estate Sector Crisis: The real estate sector, which contributes nearly 30% of China’s GDP, is grappling with overleveraging and declining demand. High-profile defaults, such as those of Evergrande, have underscored systemic risks.
• Export Dependence: China’s economy majorly promotes exports and is often described as “export based” economy.  As global demand for Chinese exports weakens and countries adopt strategies to diversify supply chains, China’s export-driven growth model faces challenges.
• Rising Debt Levels: the rising local government debt and corporate debt are at unprecedented levels in China. It is limiting fiscal flexibility and also increasing financial instability risks across the country.

2. Impact of Geopolitical Tensions

Geopolitical tensions particularly the trade war with US are playing a significant role in China’s economic slowdown. This trade war is creating uncertainty in the global market, deterring foreign investment, disrupting supply chains and causing increased restrictions on technology transfer. All this combinedly impacting China’s export-oriented economy and reducing overall economic growth. China and other major economies, have further strained China’s economic prospects. Major aspects of geopolitical tensions which are affecting China’s economy are: trade disputes, technology restrictions, investment uncertainty, de-risking strategies, South China sea and Taiwan tensions etc. The key issues are contributing in China’s slower GDP growth, currency fluctuation and domestic market pressure. The global shift toward “friend-shoring” and “near-shoring” to reduce dependence on China has prompted multinational corporations to seek alternatives, including India.

3. Innovation and Productivity Challenges

China have a significant gap in basic research compared to applied research and many more. Major are: low basic research investment, talent shortage, uneven Research and Development (R&D) distribution, foreign technology dependence, market distortions, intellectual property concern, environmental impact etc. While China has made significant investments in technology and innovation, productivity growth has slowed. Demographic constraints, coupled with a rigid regulatory environment, are impeding the country’s ability to transition to a more consumption-driven and innovation-led economy. Although China is trying to address these challenges e.g. it is focusing on ‘new quality productive forces’, strengthening university-industry collaboration, talent development initiatives and increasing international collaborations.

Opportunities for India

1. Manufacturing and Supply Chain Diversification

The slowdown in China’s economy and its rising labour costs present a golden opportunity for India to position itself as an attractive alternative for global manufacturing. Initiatives such as “Make in India” and Production-Linked Incentive (PLI) schemes aim to capitalize on this shift by encouraging domestic and foreign investment in manufacturing sectors such as electronics, pharmaceuticals, and textiles. India’s large and youthful workforce, combined with its competitive labour costs, enhances its appeal as a manufacturing hub. Major opportunities for India are: ‘China Plus One’ strategy of MNCs, market diversification, booting domestic production, focus on key sector, innovation and technology adoption. Companies such as Apple and Samsung have already begun expanding their operations in India, symbolizes MNCs “China Plus One” strategy, where these MNCs are diversifying their sourcing by investing in other countries including China during COVID-19 and after. In these countries India becomes their first preference for investment. For these MNCs India’s huge market offer possibilities of larger profit and easy investment policies encourage them for doing the same.

2. Demographic Dividend

Demographic dividend means the economic growth which occurs when the working-age population is larger than non-working population. This situation includes the fall of fertility rate and decrease of mortality and the working-age population grows relative to the dependent population. India become an appropriate example of this. Unlike China, India enjoys a demographic dividend, with a median age of twenty-eight. The working-age population is expected to grow until 2050, providing a robust labour force that can drive economic growth. The benefits of demographic dividend are: expanded workforce, increased savings, increased human capital etc. This demographic advantage positions India to fill the labour supply gap emerging in China and other aging economies. A large workforce presents a significant opportunity for economic growth, allowing India to potentially fill the gap left by China’s declining working-age population and become a major manufacturing hub on the global stage.

3. Attracting Foreign Investment

As global investors seek to reduce exposure to China, India has emerged as a preferred destination. India is actively trying to attract foreign investment through positioning itself as a more appropriate alternative. India is giving leverage to its large market, young workforce, and government initiative to entice companies and looking to diversify away from China in several sectors, particularly, in manufacturing, technology, and renewable energy. Through offering a stable business environment, streamlined regulations etc. is playing major role in it. Favourable government policies, a large consumer market, and the ease of doing business have bolstered India’s investment appeal. India’s is also focusing to improve technology and innovation to attract foreign investment. The establishment of bilateral agreements and participation in regional trade partnerships further enhances this potential. Meanwhile, India can also attract foreign companies in the sector like, electronic manufacturing, textile industry, pharmaceuticals etc.

4. Strengthening Soft Power and Regional Influence

The five pillars of India’s soft power are: dignity, dialogue, shared prosperity, regional and global security, and cultural and civilizational links. India is using these pillars strategically to enhance its global influence. In Many 2021, the Indian Council for Cultural Relations (ICCR) announced plans to use Indian cuisine as a form of soft power which will enhance India’s cultural heritage. China’s economic slowdown and demographic challenges weaken its influence in Asia and beyond, creating space for India to strengthen its leadership role. Through initiatives such as the “International Solar Alliance” and its active participation in the Quad, India can bolster its strategic and soft power footprint. “Vasudhaiva Kutumbakam” was among the first precursors of ‘Global Citizenship’ as it is understood today. This concept means that all individuals are collectively responsible towards each other and their shared future. It also forms the foundation of UNESCO’s ongoing dialogue between cultures and civilizational heritage. India through its diaspora spread worldwide serves as a powerful reminder that its values of secularism, tolerance, inclusiveness and fertilizations of cultures which is an integral part of our civilization, are more relevant than before in the uncertain international scenario of today.

5. Digital Economy and Innovation

India’s booming digital economy, supported by initiatives like “Digital India” and “Aadhaar”, presents opportunities to leapfrog traditional growth models. With increasing global interest in India’s tech ecosystem, India is well-positioned to become a leader in innovation and technology-driven growth. In 2023, in a report titled “China Slows India Grows”, S&P (Standard and Poor) Global an America based company that provides financial intelligence, including credit ratings, indices and market analysis said it expects growth engine to shift from to south and Southeast Asia. India has been started several start-up support programs, incubator support programs, research and development support programs, science, technology, and innovation policy etc. to fill that vacuum which emerged due to China’s economic slowdown. India is also focusing on Fifth-generation (5G) technology standard for celluar networks, “Ayushman Bharat Digital Mission”, “Ayushman Bharat Health Account (ABHA)” etc. to promote the concept of digital economy. Along this, “National Initiative for Developing and Harnessing innovations (NIDHI)” is an umbrella programme which is developed by the Technology Translation and Innovation (TTI) Division, Department of Science and Technology, Government of India is also another initiative in this regard.

Challenges for India

1. Infrastructure and Policy Gaps

India is facing significant infrastructure gaps, specifically in areas like transportation, powers generation, urban development, water sanitation which are all due to insufficient funding, complex and acquisition processes, regulatory hurdles, and a lack of robust public-private partnership (PPPs). These are hindering the development of necessary infrastructure project. The measures reasons of infrastructure and policy gaps in India are: funding deficit, land acquisition issues, regulatory barriers, sector-specific challenges, weak PPP model, policy inconsistencies etc. India’s ambition is immense in terms of make its economy 30 trillion $ by 2047, built hundred smart cities, and guaranteeing seamless connectivity. Although, these goals are constrained by a significant infrastructure financing gap which is beyond 5% of its GDP. The National Bank for Financing Infrastructure and Development (NaBFID) of India was established in 2021 in Mumbai was created to tackle its infrastructure financing challenges. To fully capitalize on opportunities presented by China’s slowdown, India must address critical
infrastructure bottlenecks, poor transport and logistics networks, unreliable power supply, and bureaucratic red tape deter potential investors and impede economic growth.

2. Skill Development and Education

While India has a large workforce, the skill levels of this workforce often do not meet the demands of modern industries. Significant investment in education and vocational training is needed to enhance productivity and employability. In India, there is a significant shortage of skilled workers, poor quality training, inadequate infrastructure, lack of industry-relevant curriculum, a cultural bias against vocational training, high dropout rates, gender disparities, large number of unemployed graduates etc. India is facing a very serious problem of shortage of skilled workers compared to developed nations. The reason behind this is a small percentage of its workforce is receiving skill training. Lack of awareness between people regarding skill development programs and several government initiatives regarding skill and education policy are another reason for the above problems in India. The Indian education system is not aligned with the modern MNCs requirements due to its age-old syllabus. Although government of India is trying to address these problems through several initiatives and education programs like free education policy etc.

3. Global Economic Slowdown

The global economic slowdown, exacerbated by the COVID-19 pandemic and geopolitical uncertainties, limits demand for exports and foreign investment. India must navigate these external challenges carefully while building resilience in its domestic economy. Global economic slowdown is reducing India’s exports as major trading partners are experiencing downturns. It is impacting sectors like, leather goods, textile and IT services. It is also leading to production cuts and job losses within the country. The global slowdown is caused the slower growth in GDP in India. Reason behind this is lower export earnings translate into reduced economic activity. Currency fluctuation is also increased due to global slowdown. Because during the global slowdown, the value of Indian rupee often decreased against major currencies. It makes imports costlier. Capital outflows is increase in India due to global slowdown due to the pull-out money of major investors and it leads potential liquidity crunch in the financial markets. Global slowdown also impacts on employment within the country because thousands of workforce loss their job due to reduced production and low exports.

4. Competition from Other Economies

India is not the only country competing to replace China as a global manufacturing hub. Southeast Asian nations like Vietnam, Indonesia, and Thailand, as well as Mexico, offer competitive advantages and pose challenges to India’s ambitions. India is competing with these countries in areas like manufacturing, technology, export markets etc. The “China Plus One” strategy of MNCs are diversifying their investment due to geopolitical tensions and labour costs, trade tensions, COVID-19, supply chain vulnerabilities etc. But for becoming first preference of these MNCs India is competing with countries like, Vietnam, Thailand, and Malaysia. Vietnam is considered a strong contender of India specifically in the sector of electronics and garment manufacturing due to its lower price and established infrastructure. Along this, Mexico is also seen as a good option for MNCs which are looking to manufacture closer to the US market particularly in the automotive sector. Other ASEAN countries including Thailand, Malaysia, and Indonesia are also actively trying to attract foreign investments in manufacturing because of their geographical proximity and competitive labour costs.

5. Dependence on Chinese Imports

Despite its desire to reduce reliance on China, India remains heavily dependent on Chinese imports for critical sectors such as electronics, pharmaceuticals, and renewable energy. Diversifying supply chains and building domestic capabilities in these sectors is crucial. India has a significant dependence on Chinese exports. China is the largest trading partner of India and in the financing year of 2023-24, the bilateral trade crossed 100 bn USD. India’s major import categories from China are: electronics, machinery, solar, chemicals, finished steel, equipment, active pharmaceutical ingredients. India’s trade deficit with China is growing every year. The dependence on China’s export is also harming the growth of domestic manufacturing in certain sectors.

Strategic Recommendations for India

1. Invest in Infrastructure

India must prioritize infrastructure development, including roads, ports, airports, and power supply, to enhance its competitiveness. Public-private partnerships and increased budgetary allocations can accelerate progress in this area. India needs a strategic and sustained infrastructure investment plan to compete with China, which has built world-class infrastructure over the past few decades. Here’s what India should focus on: increase infrastructure spending through increasing 8-10% GDP over infrastructure. India need to develop a high-speed and efficient transport network like, railway, roads and highways, urban transport. India should also focus to strengthen logistics and supply chain through improve port efficiency to reduce turnaround time and make them globally competitive. It also needs to build world-class smart cities within the country, enhance energy and power infrastructure, modernize industrial infrastructure, strengthen digital infrastructure etc.

2. Strengthen Skill Development Programs

India needs a large-scale, structured skill development program to compete with China in manufacturing, technology, and services. Here’s how it can be done: Industry aligned skill training (manufacturing and industrial skills, technology and AI skilling), strengthening vocational education through integrating vocational training in schools, Public-Private Partnership (PPP) in skill training through industry training and foreign partnership, digital and soft skill development through expanding online platforms and enhancing soft skills. India should also focus on rural and women-centric skill programs through rural skill hubs and women in workforce, incentives and government support through tax benefits for skill development and start-up & MSME skill grants, monitoring and feedback mechanism through a centralized skill development authority etc. Expanding and modernizing skill development initiatives is essential to equip the workforce with the skills required for high-tech manufacturing and services. Collaboration between industries and educational institutions can bridge this gap effectively.

3. Promote Innovation, Research and Development (R&D)

India should increase investments in research and development, particularly in emerging sectors such as artificial intelligence, renewable energy, and biotechnology. Creating innovation hubs and incentivizing start-ups can foster a culture of entrepreneurship. For India to compete with global leaders like China in innovation and R&D, it must adopt a multi-pronged strategy focusing on funding, industry-academia collaboration, policy reforms, and technology-driven ecosystems. India should increase Research and Development (R&D) investment boost public & private spending, India spends around 0.7% of its GDP on R&D, whereas China spends over 2.4%. India should target 2% of GDP investment in the next decade. Tax incentives for R&D through Offering tax benefits and subsidies for companies investing in R&D can encourage private sector participation. Government grants & seed funding through expanding programs like DST, DRDO, CSIR, and ISRO’s research grants for start-ups and universities will accelerate innovation. India should strengthen industry-academia collaboration through University-Industry R&D Hubs. Creating dedicated research clusters where IITs, IISc, and private firms collaborate on technology innovation. Joint ventures with global tech leaders like partnering with Google, Tesla, Intel, and Siemens for knowledge-sharing and research labs in India. Encouraging corporate R&D Centers for providing incentives for multinational corporations (MNCs) to set up research hubs in India for AI, semiconductors, biotech, and space tech.

4. Enhance Trade and Investment Policies

Simplifying regulatory frameworks, ensuring policy stability, and negotiating favourable trade agreements are critical to attracting foreign investment. India’s active participation in global and regional trade organizations can strengthen its economic ties. India needs strategic reforms in trade and investment policies to boost exports, attract global investors, and establish itself as a competitive alternative to China. Here’s how India can achieve this: through strengthening trade agreement and export policies like, expanding FTAs (Free Trade Agreements). India should accelerate trade agreements with the EU, UK, GCC, and African nations to gain preferential access to global markets. Joining global supply chains through strengthening ties with ASEAN, QUAD (US, Japan, Australia), and BRICS to integrate into high-value supply chains. Diversifying export through reducing dependence on traditional sectors and promoting high-tech exports like semiconductors, EVs, pharmaceuticals, and AI-driven services. Reducing tariff barriers through lowering import duties on raw materials and components to encourage domestic manufacturing competitiveness. India should attract Foreign Direct Investment (FDI) through improving ease of doing business. Streamlining business regulations, reducing bureaucracy, and ensuring faster clearances for foreign companies. Sector-specific incentives through offering targeted incentives in semiconductors, defence, green energy, and AI to attract global players. Reforming land and labour laws through making land acquisition easier and simplifying labour laws to encourage large-scale industrial investments. Expanding Special Economic Zones (SEZs) through establishing high-tech SEZs with world-class infrastructure and tax benefits for foreign investors.

5. Reduce Dependency on China

India heavily relies on China for imports of electronics, pharmaceuticals, machinery, and raw materials. To become self-reliant and competitive, India must adopt a multi-pronged approach focusing on domestic manufacturing, trade diversification, and policy reforms. India needs to strengthen its domestic manufacturing through expanding the production-linked incentive (PLI) Scheme. Scaling up incentives for key sectors like semiconductors, electronics, batteries, and textiles to boost domestic production. Investing in critical industries through prioritizing investments in telecom, pharmaceuticals, rare earth processing, and defence manufacturing to reduce import reliance. Encouraging Micro Small Medium Enterprises (MSMEs) and local supply chains through providing financial support and technology upgrades to Small and Medium Enterprises (SMEs) to enhance their global competitiveness. India needs to reduce imports and build an alternative supply chain through developing domestic semiconductor industry. Establishing chip fabrication plants (fabs) with government support to end reliance on China for electronic components. Strengthening bulk drug & API production through reviving India’s Active Pharmaceutical Ingredient (API) sector to reduce dependency on Chinese pharma raw materials. Boosting textile and toy manufacturing through promoting India’s traditional strengths in garments, toys, and furniture, which are currently dominated by Chinese imports. Including this, India also need to focus on trade diversification and alternative partners, infrastructure and logistics development, policy reforms and strategic government interventions, promoting consumer awareness and “Make in India” movement etc. India must accelerate efforts to diversify its import base and promote self-reliance in key sectors. This includes expanding domestic manufacturing capacity and fostering international partnerships to secure critical raw materials and technologies.

6. Strengthen Regional and Global Partnership

To counter China’s growing influence, India must adopt a strategic foreign policy that strengthens regional and global partnerships. By leveraging trade, defence, diplomacy, and infrastructure collaborations, India can expand its global footprint and become a stronger economic and geopolitical power. India needs to strengthen regional partnerships in South Asia through leading in SAARC & BIMSTEC. India should take a leadership role in SAARC (South Asian Association for Regional Cooperation) and BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) to counter China’s Belt and Road Initiative (BRI). India can enhance economic ties with neighbours through expanding free trade agreements (FTAs) with Bangladesh, Nepal, Bhutan, and Sri Lanka to create a strong South Asian trade network. For Investing in infrastructure projects, India can develop roads, railways, and ports in neighbouring countries to reduce their reliance on Chinese investments. India should strengthen Indo-Pacific alliances through expanding the QUAD (India, US, Japan, Australia). Strengthening security and trade cooperation within QUAD to counter China’s dominance in the Indo-Pacific region. Collaborations with ASEAN nations through deepening economic and military ties with Vietnam, Indonesia, and the Philippines, which are also countering Chinese influence in the South China Sea. India can develop strategic naval presence through expanding its presence in the Indian Ocean Region (IOR) by building naval bases in Mauritius, Seychelles, and Andaman & Nicobar Islands. Along this India should also focus on strengthening ties with global powers like US, EU, Japan and South Korea and should strengthening multilateral engagement with these powers. India should leverage its strategic partnerships to bolster its economic and geopolitical influence. Active engagement with the Quad, G20, and other multilateral forums can enhance India’s standing and create new avenues for collaboration.

Conclusion

China’s demographic realities and economic slowdown mark a pivotal moment in the global economic landscape. For India, this presents a unique opportunity to enhance its economic stature and assume a more prominent role in global affairs. However, grabbing these opportunities requires addressing internal challenges, including infrastructure deficits, skill mismatches, and bureaucratic inefficiencies.

By implementing strategic reforms and fostering a business-friendly environment, India can attract global investments, strengthen its manufacturing base, and harness its demographic dividend. Concurrently, India must navigate the complexities of global economic shifts and regional competition to secure sustainable and inclusive growth. With the right policies and partnerships, India has the potential to emerge as a leading global economic powerhouse in the 21st century.

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