But India has a demographic problem of its own. If China's comparative advantage in attracting foreign investment lies in its enormous supply of unskilled labor, India has profited from its considerable pool of skilled workers, many of them English-speaking, who have filled the country's growing number of high-tech and service-sector jobs.
But that pool is in danger of reaching its natural limit, as well. According to a report released in December by McKinsey & Co. and the Indian IT trade association Nasscom, if the flow of service-sector jobs continues to grow at its current rate, and if India fails to enact substantial reform of its education system, the country will face a shortfall of 350,000 business-process staff and 150,000 IT engineers by the end of 2010. As the shortage of qualified workers grows, the expansion of India's service sector could shift into reverse, at an enormous cost to the country's still-fragile economic development.
India's world-class IT and engineering schools are not the problem. In fact, India already graduates five times as many engineers each year as the United States. The real problem lies in India's universities and in its woefully uneven level of primary education. The McKinsey-Nasscom report suggests that only 25 percent of India's university graduates have the basic skills—including the minimum level of spoken English—needed for work in the sectors that have fueled India's recent growth. The percentage of Indians who leave school by age 10 is 40 percent. Not coincidentally, 40 percent of Indian citizens are illiterate.
The most formidable obstacle to Indian efforts to reform its education system is that local governments control education policy. As a result, development of a coherent solution to the shortage of qualified faculty, inadequate educational infrastructure, and the current system's inability to produce the skilled workers its fast-changing economy demands will be both profoundly difficult and time-consuming.
There's very little chance that China and India can quickly solve these problems. It will be decades before China can redress its demographic deficit, particularly given the central government's deep reluctance to ease immigration restrictions. In the short term, India's education system can be improved at the margins, but the country's factionalized politics ensures that the level of policy coordination between the central and regional governments necessary for broader reforms is unlikely to develop anytime soon.
For the next several years, China and India will continue to profit from large inflows of foreign investment, but investors in these states will do well to remember that past performance is no guarantee of future results.