Urbanisation, growing middle class and inclusion to lift Indian prosperity

21 February 2017 Consultancy.uk

India has enjoyed rapid economic growth in recent years, pulling hundreds of millions out of abject poverty. Growth in the near term remains robust at 7.7% per annum, according to a new report. Areas of concern remain however: big Indian cities – pulling in millions of people – lack the basic infrastructure for safe and productive living, and women, who continue to be severely underrepresented in the country’s economy, face considerable barriers to inclusion. 

The Indian economy has enjoyed strong growth over the past decades. Between 1994 and 2012 the country’s poverty ratio fell from 45% of the population to 22%, while its nominal GDP jumped from around $333 billion in 1994 to $2 trillion last year. In a new report, McKinsey Global Institute (MGI), the research arm of McKinsey & Company, analyses some of the vital economic pillars of the country, as well as considers five areas in which the country may be able to find additional prosperity.

Indian GDP growth

Growing prosperity

The current rate of growth for the Indian economy remains relatively robust, particularly when compared to other emerging economies. In 2015 the country managed growth of 7.3%, with only China, at 7.5%, out ahead. Brazil and Russia both saw contractions, at -1.6% and -2% respectively, while Mexico and Turkey were able to increase only 1.1% and 1.2% respectively. 

When it comes to near-term future growth, the country has by far the most rapidly growing economy between 2016 and 2020, projected at 7.7% per year. China comes in second at 6.4% per year, while Brazil and Russia manage to pull out of recession to an average annual growth rate of 2.2% and 2.3% respectively. 

The continued growth of the economy is set to create a relative boon for the country’s middle class (those with disposable incomes of more than $31,000 per year), whose number are said to triple to around 89 million households by 2025. 

Urban centre mammoths

Urban development

Urbanisation is projected to grow in India, up from 31% in 2011 to around 41% by 2030, while in some states, such as Gujarat, Kerala, Maharashtra, and Tamil Nadu, urbanisation will reach almost 60%. By 2030 the number of people living in cities will increase to almost 600 million, and the number of cities with more than a million is also expected to hit 69.

Cities are one of the major growth engines of the Indian economy. The McKinsey report suggests that up to 77% of new growth in the country between 2012 and 2025 will be from 49 clusters of districts with metropolitan cities at their centre. Some cities, such as Mumbai and Delhi will have such sizable local economies by 2030 that they compare to large countries’ 2014 economy (Malaysia and the Philippians respectively).

The rapid development of cities in India, as well as migration to the cities by formerly rural dwellers, comes with considerable challenges however. Infrastructure is one area of dire need if Indian cities are to become safe and economically productive. Currently, city dwellers make do with 105 liters of water per capita per day, around half of the international benchmark, with similar gaps in public transportation, sewage, and sanitation. Air pollution is also dangerously high in many of the largest cities, with ten of the world’s more air polluted cities in India. Migrants may also find themselves out of luck in the big city, with around 44% (171 million) of those living in cities in 2012 below the empowerment line – representing the minimum acceptable standard of living and about 50% above the poverty line. 

According to the consulting firm, national and local government are taking an active role in the development of urban areas – given the potential benefits to their people and economies. A large number of initiatives are in the pipeline, such as the Atal Mission for Rejuvenation and Urban Transformation to transform the infrastructure of 500 towns; Pradhan Mantri Awas Yojana, which aims to build 20 million affordable homes; as well as India’s Smart Cities Mission include a number of initiatives aimed at improving infrastructure; and efforts to reduce pollution.

Gender inequality in India

Gender parity

Another area in which the firm considers potential economic benefits for the Indian economy is improved gender parity. MGI estimates that around 17% of GDP is contributed by women in India, far behind Sub-Saharan Africa at 39% and China at 41%. Many women in India spend much of their time in unpaid care work, which is 10 times that of Indian men, compared to an average of three times globally. When it comes to MGI’s gender parity score, India performs particularly poorly compared to almost all regions globally at 0.48, with North America and Oceania out ahead on 0.74 each, while China comes in at 0.61.  

According to the firm’s analysis, India is the region that would most benefit from moving towards the same level of parity of the fastest-improving country in their region, and could see an additional $700 billion added to GDP by 2025 – representing a 1.4% GDP boost on its current already strong performance and adding 68 million more women to the workforce.

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