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India’s consumption-led expansion and China’s investment-driven model reflect two divergent growth paths now facing tests of sustainability amid a changing global economic landscape.
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The World Economic Outlook of October 2025, published by the International Monetary Fund (IMF), has projected India’s economic growth to be the fastest in the world at 6.6 per cent in 2025–26, outpacing China’s 4.8 percent. The importance of India's growth numbers lies in the fact that it is slated to witness the highest growth among the Emerging Market and Developing Economies (EMDEs), which is the prime global growth driver.
Generally, the growth comparison between China and India is imprudent due to base effects, with China’s GDP projected at USD 19.23 trillion and India’s GDP projected at USD 4.19 trillion by 2025. Despite that, an interest in comparing the growth trajectories of the two Asian majors emerges due to their enhanced importance in the global economy, the rise of the Global South — where these two economies play a leadership role, and also to understand how two large, populous Asian economies with similar starting points diverged in policy choices, structural transformation, and development outcomes.
China’s ascent since the late 1970s has been powered by state-led industrialisation, export expansion, and massive fixed investment. India’s growth, particularly since the liberalisation of the 1990s and more distinctively in the last decade, has been driven primarily by domestic private consumption demand.
From a strategic comparative perspective, the structural compositions of the two economies have followed markedly divergent pathways. China’s ascent since the late 1970s has been powered by state-led industrialisation, export expansion, and massive fixed investment. India’s growth, particularly since the liberalisation of the 1990s and more distinctively in the last decade, has been driven primarily by domestic private consumption demand.
Generally, 70 percent of India’s GDP is contributed by consumption, with household consumption (measured as Private Final Consumption Expenditure, or PFCE) accounting for nearly 61 percent of India’s GDP, compared to China’s 40 percent in 2024 (Figure 1).
Source: Computed by author from World Bank data
The divergence in growth models can be best summarised in the form of a consumption-driven growth pathway followed by India, and an Investment and Export-driven growth pathway followed by China. A state-driven classical sequence is perceptible in China’s rapid industrialisation: high investment, export-oriented manufacturing, and large-scale urbanisation. Savings were channelled into physical capital formation through state-owned banks and local government to finance modern infrastructure and create extensive public goods, thereby reducing overall transaction costs. However, in the initial stages of implementation, especially until the 1990s, China experienced slower wage growth compared to productivity, resulting in high precautionary savings.
India’s growth story, in contrast, has been driven less by manufacturing and more by the expansion of services, trade, transport, digital platforms, and retail. Its consumption-led model draws energy from demographic dynamism and the spread of aspirational middle-class demand. Financial inclusion, digital payments, and e-commerce have democratised consumption by lowering entry barriers and transaction costs. The expansion of the digital economy through platforms like the Unified Payments Interface (UPI) and India Stack has formalised demand from millions of consumers who previously operated outside the organised market.
While China’s growth paradigm has been more diversified with its industrial policy creating global supply chains, India’s economic expansion is more inward-looking and underpinned by rising consumption.
At a fundamental level, India’s growth model has been anchored in the purchasing power of its people. The Indian economy’s PFCE increased from around USD 1.18 trillion in 2010 to USD 2.4 trillion in 2024, despite the pandemic-induced slowdown. China’s household consumption, far higher in absolute terms than that of India, increased from USD 4 trillion to nearly USD 7.5 trillion during the same period, but has remained a smaller component of its GDP. As can be seen in Figure 1, China’s share of consumption in GDP has hovered between 37 percent and 40 percent for over a decade, reflecting an economy that is structurally more diversified than India, with both investments and net exports being the other key drivers. During the same time, India’s share always remained above 58 percent. This structural distinction represents the philosophical divergence between the two development models. Thus, while China’s growth paradigm has been more diversified with its industrial policy creating global supply chains, India’s economic expansion is more inward-looking and underpinned by rising consumption.
Demographic structures have and will continue to play a critical role here. India’s median age, just under 29, gives it one of the youngest labour forces and consumer bases in the world. This demographic dividend is translating into growing disposable income, rising urbanisation, and deeper consumption penetration across both rural and urban markets. An expanding middle class is now transitioning from necessities to discretionary goods and digital services. Rural-urban consumption gap is narrowing, aided by rural electrification, connectivity, and targeted welfare transfers. This is barely the tip of the iceberg: with nearly two-thirds of its population still below the income threshold that globally defines the middle class, India’s latent consumption potential remains vast.
China, by contrast, is at the opposite end of the demographic curve. Decades of the one-child policy have resulted in a rapidly ageing population, with the median age now exceeding 40. The working-age cohort is shrinking, the dependency ratio is rising, and fiscal strains due to health and pension costs are mounting, thereby constraining the expansion of household consumption. This drag on consumption persists despite the Communist Party’s vision of achieving consumption-led growth to rebalance its economy away from exogenous global shocks emerging from international trade and supply chains. The phenomenal increase in nominal wages in China over the last 15 years has failed to spur the velocity of consumption. This is also because China’s consumers are at a mature stage of the demand cycle. A saturated housing market and a rising household debt (60 percent of GDP) have also limited the scope for new waves of demand.
India’s buoyant domestic consumption demand and negligible export dependency act as macroeconomic buffers, helping sustain the resilience of the economy’s growth pathways, even in situations of exogenous shocks like the 2008 financial crisis, the aftermath of the COVID-19 pandemic, or the recent Trumpian tariffs. China’s growth, by contrast, remains far more sensitive to global demand fluctuations.
India’s buoyant domestic consumption demand and negligible export dependency act as macroeconomic buffers, helping sustain the resilience of the economy’s growth pathways, even in situations of exogenous shocks like the 2008 financial crisis, the aftermath of the COVID-19 pandemic, or the recent Trumpian tariffs. China’s growth, by contrast, remains far more sensitive to global demand fluctuations. China’s export-heavy sectors are immediately impacted by global trade tensions or supply chain disruptions, as was evident during the US-China trade war and the post-pandemic slowdown. Figure 2 shows the persistent positive and negative trade balance (exports minus imports) of China and India, respectively, thereby reinforcing China’s export competitiveness and India’s high consumption demand.
Source: Computed by author from World Bank data
Despite its strengths, it is necessary to acknowledge the vulnerabilities inherent in consumption-led growth. While inequality in India has declined over the last decade, along with a substantial decline in absolute poverty, income dispersion remains. It will be important for India to pump more money into the hands of the middle and lower-middle classes, as they have a much higher marginal propensity to consume (increase in consumption spending with each unit rise in income) than the rich, thereby sustaining consumption velocity.
A second challenge lies in the lack of diversification in the growth driver portfolio. Any domestic demand slowdown can affect the economy. Further, if by 2055, India’s demographic dividend peters out, the economy will have to seek other sources of growth. A third source of potential vulnerability can arise if the lack of commensurate expansion in manufacturing, logistics, and infrastructure amid rising demand stokes inflation rather than growth. The fourth risk pertains to external balances, where higher consumption raises import dependence, particularly in energy and electronics, thereby widening the current account deficit and leading to macroeconomic problems.
China’s risks are of a different order. Its investment-led model has created over-capacity in real estate and infrastructure, local government indebtedness, and diminishing returns on capital. Pivoting toward consumption requires redistributing national income toward households — raising wages, expanding social welfare, and reducing inequality between corporate and household sectors. Yet, such redistribution confronts deep structural inertia within the Chinese political economy.
The post-pandemic world has witnessed global growth being increasingly underpinned by domestic consumption in Global South economies, as the Global North increasingly faces stagnation and an ageing demography. India’s expanding consumer base positions it as a potential global demand anchor, while China reorients its model to create a more diversified, robust economy. That said, India needs to be careful about the future. Multinational corporations are reconfiguring supply chains to serve India’s domestic market rather than solely using India as a production base, with manufacturing units still located in China, Vietnam, and South Korea, among other economies. While the rise of the Indian consumer has emerged as a strategic global story, India needs to diversify its growth drivers.
Multinational corporations are reconfiguring supply chains to serve India’s domestic market rather than solely using India as a production base, with manufacturing units still located in China, Vietnam, and South Korea, among other economies.
China, meanwhile, faces a dual challenge: managing its economic slowdown while sustaining geopolitical ambitions. Its domestic demand transition will determine the durability of its global influence in the coming decades. China’s policy challenge is to rebalance growth by stimulating consumption without triggering instability. This requires wage growth, urban hukou reforms to integrate migrant workers into the social security net, and the expansion of public services that reduce household savings compulsions. Only time will tell which model proves more resilient in an era of global volatility and shifting developmental paradigms.
Nilanjan Ghosh is Vice President - Development Studies at the Observer Research Foundation.
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Dr Nilanjan Ghosh heads Development Studies at the Observer Research Foundation (ORF) and is the operational head of ORF’s Kolkata Centre. His career spans over ...
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