McKinsey & Co. sees bright future for Indian economy

01 December 2014 4 min. read

After India’s decade of average growth, marred by bureaucratic and global economic pressures, the recent government stability, a will to push through reforms and rapid urban development are all expected to fertilise strong year on year growth over the coming decade, forecasts McKinsey & Company. “India’s fortunes have changed. If you look at the trends that are going on in the world, India is right in the centre," says Dominic Barton, CEO of McKinsey.

In the recently released research paper ‘India’s economic geography in 2025: states, clusters and cities’, global strategy consultancy McKinsey & Company reviews India’s broad economic landscape. The firm looked at both the macro and granular level for key drivers for growth in the period 2012-2025. The report reveals that in recent years India’s economy has faced a dropping momentum, mainly led by deceleration in the industrial sector.

Real growth of value

On the back of a recovering economy and effective government reform, under the leadership of Narendra Modi, India’s fortunes for the coming years are brighter, according to McKinsey. The firm analysed the the effect of the reforms and wider economic challenges, and created three scenarios that measure the potential economic development of India between 2012 and 2025. In the worst case scenario, in which reforms are held back and political instability returns, the annualised growth rate is calculated to be 5.2%. The between position, with key reforms taking place, sees growth at 6.1%. While continued political stability and will, as well as the implementation of wider reforms, may allow for a strong growth rate of 7.2% annually.

McKinsey insights India estimates

According to Dominic Barton, CEO of McKinsey, the improving outlook will have a positive effect on the country’s attractiveness to foreign multinationals. "People had given up on India. They felt India is too complicated and it was difficult to get anything done. It had dropped in the last five years on people's priority list,” he said to the Economic Times of India. “I think India has gone right back up, people are interested, obviously people are going to want to see action but I think the feeling is they will because this government seems serious," the Canadian-origin CEO adds.

High growth clusters
The report’s more granular analysis reveals the key factors that stand at the heart of India’s revival, of which urbanisation and ‘high performing clusters’ are considered as those that stand out. Calculations form the researchers forecast that just 49 such clusters (183 districts) will drive about 77% of India’s incremental GDP from 2012 to 2025.

Cluster GDP

Of the 49 clusters, 21 are likely to be more affluent and grow faster than the India average:

Clusters matrix on GDP growth and richness

The faster growth and higher per capita output of these ‘high performing’ states can be attributed to several factors, foremost amongst them being the investment in human and physical capital, higher urbanisation, relatively superior land use, and the benefits accrued from inherent structural advantages e.g., coastlines. These states have also broadly adhered to fiscal boundaries. Consequently, they are typically home to high-skill industries such as automobiles and automotive components, petrochemicals, financial services, pharmaceuticals and IT amongst others. “These complementary factors have created a virtuous growth cycle in these states,” write the consultants.

High performing states are advantaged on key parameters

The second key component to India’s growth lies in the accelerated urbanisation of regions. In 2011, India was 31% urbanised, and McKinsey estimates it will be about 38% urbanised by 2025, with some 538 million people dwelling in cities by that time. This will benefit the country’s productivity – the consultancy states that an average urban job has approximately 1.7 to 1.9 times the productivity of an average rural job.

Urban population

With these fundaments in place, Barton believes that India could find itself in a sweet spot, not only boosting the outlook of its own nation, but also providing stimulus to the wobbly world economy. “If India unleashes, it is going to help not only India but the world," says Barton.