Mon Sep 1, 2008 12:52am EDT TOKYO (Reuters) - A sudden slowdown in car sales in China and India is threatening to shrink the global auto market this year, promising tougher times for an industry leaning on the two most populous countries to pick up the slack in the West. Early this year, industry executives had been optimistic that demand in the world's second- and 11th-largest car markets would charge ahead, despite fallout spreading from the U.S. credit crisis. But inflation, led by soaring fuel costs, and other economic problems have caught up with car consumption much faster than expected. In July, car sales in China rose 6.8 percent from the year before, the slowest pace in two years, while sales in India fell for the first time in about three years. And while booming fuel and commodities prices have powered a faster-than-expected sales surge in resources-rich Russia, Brazil and the Middle East, that hasn't been enough to make up for struggling demand almost everywhere else. "China is almost three times the size of the Russian car market so for every 1 percent reduction in Chinese sales you need a Russian rise of 3 percent to offset that," said Adam Jonas, auto analyst at Morgan Stanley. "For now, Brazil and Russia are helping to soften the blow but we have still revised down our global growth forecasts throughout the year." Morgan Stanley now expects global car sales to decline 0.3 percent this year to 58.1 million vehicles after forecasting an expansion of 3.5 percent at the beginning of the year. China will still account for much of the sales increase as its economy heads for a sixth straight year of double-digit growth, but with so much resting on that market, competition is set to intensify just as fast. In a sign of the times, Mazda Motor Corp (7261.T: Quote, Profile, Research, Stock Buzz) last week halved its sales forecast at a Chinese venture selling compact cars, admitting it had set its goal too high. Standard & Poor's says rising competition among carmakers in BRIC countries -- Brazil, Russia, India and China -- is already beginning to dampen profitability. Within a few short years, China has turned into one of the most competitive auto markets from one of the most lucrative, suggesting even Russia, where foreign car sales grew 40 percent in July, could soon go down a similar road.