Amit Kumar
1. Introduction
China and India are the world’s two most populous countries. A large population means a burgeoning consumer base. And consumers are at the core of any economy for it is their will and ability to consume that creates demand and the need for supply, thereby keeping the economy alive, which in turn is a critical constituent of a state’s comprehensive national power.
By proportion, consumption (consumers) contributes the largest share to a country’s GDP ahead of the other three drivers, namely private expenditure, government expenditure, and net exports. To put things in perspective, in the OECD countries, the share of consumption as a percentage of their GDP roughly stands at over 60%, even reaching as high as 80% for some. For China, the corresponding share until 2021 stood at 55%.1 In India, consumption constitutes 60% of its national GDP.
Gross Fixed Capital Formation (GFCF), a marker for investment in an economy, generally tracks domestic consumption. Final consumption expenditure and investment are components of Aggregate Demand and are intertemporally linked with each other. First, firms make investment choices based on their expectations of future sales. If firms expect their sales to go up due to increased consumption demand, they are likely to increase their investment. The second interlinkage is the partial playing out of the classic Keynesian multiplier effect. Increased investment leads to employment generation, which leads to increased disposable income, which, in turn, creates demand for the goods produced. In effect, it creates a virtuous cycle of expanding consumption and investment in the economy. Also, innovation is directly linked to Total Factor Productivity (TFP) — efficiency and productivity in the economy.
Furthermore, consumers play a central role in driving innovation in the economy. Throughout human history, consumers have been at the centrestage of all the phases of industrial revolutions. It is so because unless consumers attribute relevance to a product, the underlying technology, however innovative and significant, is meaningless. Even technologies such as semiconductors and the internet that were first confined to military applications reached their zenith post-commercialisation. In that sense, consumers infused meaning into innovation that drove various phases of industrialisation in the past.
Consumption in a free market enables multiple suppliers, thus fostering competition which, in turn, is a prerequisite for innovation. Innovation also relies on research and development (R&D) investment. R&D investment would come from profit that would only be possible if there exists scope for scalability. And to achieve scale, a large and growing consumer class is quintessential. Therefore, for any research to translate into technology and then continue to innovate over time, end-product consumption is perhaps the most significant factor.
Finally, a large consumer base acts as a cushion in times of worsening geopolitical environment for it serves as a large market for exporting nations. For both India and China, their demography has been one of the principal sources of their geo-economic3 relevance to the world. This in turn has been key in determining how major powers have engaged with them. Geoeconomics has, in many instances, either cushioned or catalysed the impact of the geopolitical tide to their benefit. Be it the US opening up to China in the 1970s or its tilt toward India since the turn of the millennium, geoeconomics has complemented the geopolitical considerations of the time. Of late, as the geopolitical environment has soured for Beijing, its geoeconomic weight has tempered the anti-China tide.
Consequently, around 1990, when China and India’s per capita GDP was the same and the population was comparable at 1.1 billion and 830 million, respectively,4 there existed an opportunity for both countries to leverage their expanding consumer base and relatively cheap labour to integrate into the global supply chain. Eventually, China outcompeted India to become the global hub for foreign investment in consumer and labourintensive industries. In the period following 1990, China’s per-capita GDP massively accelerated as compared to India's. It embarked upon the path to become a global manufacturing hub along with an expanding consumer base with a rising spending power.
Three decades later, in 2023, India surpassed China to become the world’s most populous country.5 The development came against the backdrop of a declining birthrate in China which dropped to below 1% for the first time in its contemporary history. China also recorded a negative population growth rate for the first time in six decades. This means a rising dependency ratio in China, which is further projected to increase over time, putting stress on the younger population. In contrast, India’s population and birth rate (~2.1) are expected to remain significantly higher than that of China (1.2),6 with a relatively lower dependency ratio.
This development came amid slowing growth rates in China. Lately, the Chinese economy has been witnessing a slowdown, with the growth rate likely to stabilise around 4(±1) percent. The worsening of the external strategic environment for China has further exacerbated its economic woes. The deepening of the geopolitical contest between China and the US has initiated debates around de-risking and diversification away from China with several businesses pursuing a ‘China+1’ strategy. China’s domestic consumption (demand) has slowed down in the last two years and has failed to recover to pre-COVID levels. This is concerning for the Chinese leadership, which has been seeking to shift from an investment and export-driven growth model to one that is primarily driven by domestic demand. India on the other hand, has recorded a growth rate ranging between 6.5 to 7.5 per cent in the post-COVID period.8 India has also emerged as one of the options for Western businesses seeking to diversify and de-risk.
Reading the above developments together, there was a sense of euphoria among the strategic and business community in India with regard to the prospect of becoming the largest market and source of human capital, leaving China behind. A superficial but logical conclusion emerged from these developments that suggested that this relative demographic change combined with the favourable geopolitical currents would finally catalyse India’s rise as a real geoeconomic counterweight to China going ahead. In light of this shifting dynamic, a few questions arise — are the tides appearing to change course and undergoing a shift? Is this the beginning of the much-anticipated change or just another phase of euphoria that will gradually die down?
Assessing the damage that this competing narrative centred around India could have on China’s growth, the Chinese discourse attempted to counter the prevailing excitement around ‘India’s moment’ by drawing attention to the size and quality of its consumer market that will remain significantly higher for at least a decade despite India’s population eclipsing China’s.
While it is true that China’s per capita income is at least five times that of India and its consumer population about twice that of India, the story of the Indian consumer class is one of brisk growth. China is committed to boosting domestic consumption as a new driver of its economic growth in an attempt to rebalance its economy away from investments and exports but is handicapped by declining household consumption.
In this context, it becomes imperative to investigate the gap between the strengths and weaknesses of the two countries to arrive at a realistic assessment of the evolving situation. One of the key metrics to answer these questions is the comparative data on consumption in the two countries. So, what does the consumption story tell us about the deepening rivalry and competition between the two Asian giants?
This paper attempts to compare various aspects of the consumption data of China and India. The first section looks at the size of the consumer base and future projections from the two countries. The second section draws a comparison between the consumption expenditure and patterns of Indian and Chinese consumers. The third and final section offers policy recommendations for India to capitalise on its strengths in its competition with China.
2. Taking Stock of Consumer Classes in India and China
We have discussed the critical role of consumers in an economy; it would be worthwhile to define who a consumer is. A consumer is anyone who spends at least $12 a day at the 2017 Purchasing Power Parity (PPP) rate which is roughly equivalent to ₹247.20 or CN¥ 49 in 2023.9 It is equally important here to distinguish the consumer class from the middle class as often there is a risk of conflating the two. The World Data Lab defines the middle class as a constituent of the consumer class. Using spending as a metric, it defines the middle class as anyone who spends between $12- $110 a day. The World Bank, however, uses income as a parameter and defines the middle class as anyone who earns at least $10 and less than $50 in PPP (2011) a day.10 This paper prefers the former classification that uses spending to define the two classes for the simple reason that expenditure fully captures the consumption pattern of consumers as opposed to their income.
Consumer Base and Growth Projections
The strength of the world’s consumer class as of June 2023 stood at around 4 billion,11 approximately half the world’s population. China is home to the world’s largest consumer population, at over 900 million people.12 In comparison, India boasts a consumer base of over 500 million — the second largest in the world, but just a little over half the number in China.
Despite the stark difference in size, India closely matches China in terms of annual growth in absolute numbers to its consumer population. In 2023, China was poised to add another 36 million consumers to its numbers while India was to add another 31 million.14 In 2024, the ranks will likely reverse as India is projected to add 33 million consumers as against China’s 31 million.
Together, by 2030, India and China will add over half a billion new consumers, representing 55 per cent of the global total.16 While India’s consumer size is rising at a brisk pace of 6.5 percent, the rate at which China is likely to add consumers to its economy is declining. Yet, in absolute numbers, China will continue to boast the largest consumer base until at least the next decade, allowing it to become the first-ever country with a billion-plus consumer class by 2026-27.
The 2030 projections estimate that China’s consumer class will grow by 15% over its 2024 numbers to reach 1062 million. India’s consumer class in the same period is expected to grow by a staggering 46% to reach 773 million.
Demography: Age Distribution of Consumers in China and India
A Brookings Institution report provides useful data on the growing consumer class in different age categories in the two countries. The chart below provides a breakup by age of the consumers that the two countries will add between 2022 and 2030.19 It shows that while China will add more than 60% of its consumers in the age group of ‘45 and above’, the growth in India’s consumer base will be equally led by all age groups except for the ‘65 and above’ age category recording a meagre rise of 13 million as against China’s 76 million (the highest in any age category for China). This would make China a country with a relatively older consumer class with a median age of 39. Conversely, India would have a younger base with an average age of 30 years. Consequently, China and India will become the largest senior (one-fourth) and young (one-fifth) consumer markets, respectively, by 2030.20 India, by 2030, will have 357 million consumers under the age of 30.21 However, the rise in global consumer spending (including in young markets like India) will be led by the elderly (50 and above) and not the youngsters.
Thus, despite adding more numbers to its consumer strength, India will fall behind China in terms of adding annual global spending for two reasons. First, the existing spending power of Chinese consumers is greater than India.23 Second, the majority of the global annual spending will be contributed by the older consumer class where China will add maximum numbers.
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