A tale of two emerging economies

What a difference a few decades make, especially when it comes to comparing China and India, the two largest emerging market economies in the world. In 1990, China's population was 30% larger than India's. Fast forward to 2026, this is when India is expected to overtake China as the world's most populous nation. China's past fears of overpopulation are starting to give way to fears of a shrinking population by 2031-and, more importantly, a shrinking workforce as the population ages-thanks in large part to the one-child policy the country introduced in 1979. In 2013, China's average household size is estimated at only 2.9 people, compared with India's 4.8.

India's and China's household size and urbanization rates, both critical to the development of a consumer-driven economy, began diverging in 1990, when China's industrialization started to accelerate. In 2013, China reached urbanization parity with the world average when 53% of its 1.4 billion people were classified as urban dwellers; that is 740 million people. IHS projections suggest that China will approach urbanization rates comparable to the West before the middle of this century.

So what happens as economic growth begins to slow in these economically diverging countries? India's real GDP growth rate is likely to be slightly more than 4.3% in 2013, down from 10.5% in 2010. China is expected to post a little less than 8% GDP growth in 2013, down from a peak of about 14% in 2007. Even though a growth rate of 4% generally would be considered respectable-if not robust-in the West, in India it feels more like a recession.

That is because India is experiencing what economists call the per capita problem. Its per capita GDP stands at just $1,500, in sharp contrast to the $6,000 in China and the $51,000 in the United States. Any significant slowdown in an emerging-market economy with low per capita GDP or income feels like the economy is contracting. Unless the country has a sufficiently high level of per capita income before growth rates begin to slow, declining growth will lower living standards and rattle even the most confident consumer.

China, on the other hand, with its combination of higher urban density, higher per capita GDP, smaller average household size, and larger middle class, will not feel as sharp a pinch from slowing growth. In fact, the combined factors help accelerate the growth of China's middle class, while India's middle class will expand only modestly during the next decade.

As China's urban middle class grows, so too will consumer spending. Indeed, consumer spending will be the main driver of China's economic engine for the foreseeable future. By 2015, China's GDP will surpass the EU4 (comprised of France, Germany, Italy, and the United Kingdom). And by 2021, China's GDP will pass the United States.

Chris G. Christopher Jr. Director, IHS Economics & Country Risk.