Opinion: India vs China

China and India are in the vanguard of a wave of urban expansion that is driving the renaissance of Asia toward the global prominence the region had before the European and North American industrial revolution. By 2025, nearly 2.5bn Asians will live in cities, accounting for almost 54 per cent of the world’s urban population. India and China alone will account for more than 62 per cent of the Asian urban population growth and a 40 per cent of global urban population growth between 2005 and 2025.

In 1950, India was a more urban nation than China (17 per cent of the population lived in cities compared with China’s 13 per cent). But from 1950 to 2005, China urbanized far more rapidly than India to an urbanization rate of 41 per cent compared with 29 per cent in India. New research from the McKinsey Global Institute expects this pattern to continue with China forecast to add 400m to its urban population, which will account for 64 per cent of the total population by 2025, and India to add 215m to its cities whose populations will account for 38 per cent of the total in 2025.

Never before in history have two of the largest nations in terms of population urbanized at the same time—and at such pace. This process will drive fundamental shifts in both countries that will have significant consequences for the world economy and offer exciting new opportunities for investors.

In India, urban per capita GDP will grow at a rate of 6 per cent a year between 2005 and 2025, while China will see a growth of 7.3 per cent. The number of urban households with true discretionary spending power in India could increase seven fold to 89m households in 2025. In China, there are 55m middle-class households today. That number could more than quadruple to nearly 280m in 2025 to represent more than three-quarters of all China’s urban households. For businesses, the significant increase in per capita urban incomes and middle-income households offer the potential of vibrant new markets to serve.

So what markets are likely to benefit the most from these trends? In India, by 2025, the largest markets will be transportation and communication, food, and health care, followed by housing and utilities, recreation, and education. Even India’s slower growing spending categories will represent significant opportunities for businesses because these markets will still be growing rapidly in comparison with their counterparts in other parts of the world. In China’s cities today, the fastest-growing categories are likely to be transportation and communication, housing and utilities, personal products, health care, and recreation and education. In addition, in both China and India, urban infrastructure markets will be massive. For example, between 2005 and 2025, India will need to add between 700m and 900m square meters of floor space a year; in China, the required numbers could be between 1,600m and 1,900m square meters. During the same period, India will need to add at least 350 to 400 kilometres of metro rail and subways annually while the equivalent number in China will be closer to 1,000 kilometres.

There is little doubt about the scale of the new markets in India and China unleashed by the pace and scale of their urbanization. But businesses still need to be able to serve these markets in practical terms. The way cities are run—and the productivity that results—is a major factor for companies. Here, China is in much better shape than India. While India has barely paid attention to its urban transformation, China has developed a set of internally consistent practices across every element of the urbanization operating model: funding, governance, planning, sectorial policies, and shape. India has underinvested in its cities; China has invested ahead of demand and given its cities the freedom to raise substantial investment resources by monetizing land assets and retaining a 25 per cent share of value added taxes. While India spends $17 per capita in capital investments in urban infrastructure annually, China spends $116. Indian cities have devolved little real power and accountability to its cities; but China’s major cities enjoy the same status as provinces and have powerful and empowered political appointees as mayors. While India’s urban planning system has failed to address competing demands for space, China has a mature urban planning regime that emphasizes the systematic development of run-down areas consistent with long range plans for land use, housing, and transportation.

The starkest contrast between the two countries is that China has embraced and shaped urbanization while India is still waking up to its urban reality and the opportunities that its cities offer for economic and social transformation.

However, if India fixes its urban operating model, it has the potential to reap a demographic dividend from the increase in working age population of around 250m expected in the next decade. This demographic dividend is even larger than that in China, as China is aging rapidly. By 2025, nearly 28 per cent of China’s population will be aged 55 or older compared with only 16 per cent in India, whose population profile is much more youthful. If India optimizes the productivity of its cities and maximizes their generation of GDP, the economy could add over 170m urban workers to its labour force between 2005 and 2025 compared with 50m in China over the same period. The stakes are high.

Richard Dobbs is a Director of MGI and a Director of McKinsey, based in Seoul. Shirish Sankhe is a director of McKinsey based in Mumbai.