Geographies in Depth

How to find India’s growth hotspots

Anu Madgavkar
Partner, McKinsey & Company
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India’s economy could soon be on the move again. The new government is re-establishing fiscal discipline and energizing the bureaucracy, fueling optimism that rising business confidence will re-activate investment, particularly in infrastructure. But India’s overall growth prospects conceal a patchwork of economic opportunities that exist within states, districts, cities, and even towns – opportunities that companies can uncover only with careful research.

India’s economic data are promising. Annual average GDP growth is forecast to range from 6.4% to 7.7% until 2025. This compares favorably with last year’s 4.7% rate, and is close to the 7.7% average recorded in the decade up to 2012. Moreover, it contrasts sharply with the expectations of secular stagnation in the developed world. This acceleration would place India among the world’s fastest-growing large economies and increase the number of Indian consumers who can afford discretionary items from 27 million in 2012 to 89 million in 2025.

But the potential is far from uniform. According to a new report, more than half of India’s GDP growth between now and 2025 will come from just eight states (Gujarat, Haryana, Himachal Pradesh, Kerala, Maharashtra, Tamil Nadu, Andhra Pradesh, and Uttarakhand), home to just 31% of the country’s population. Along with four dynamic city-states (New Delhi, Goa, Chandigarh, and Pondicherry), these states will be home to 50 million consumers, or 57% of the country’s middle-class households.

Indeed, per capita GDP in India’s highest-performing regions could grow to twice the national level. This reflects several factors, including rapid urbanization, sustained investment in skills and infrastructure, and a shift from agriculture to industries such as automotive components, petrochemicals, pharmaceuticals, financial, and IT-enabled services.

By 2025, the economies of these regions will resemble those of middle-income countries. Maharashtra’s consumer market of 128 million will wield purchasing power similar to that now seen in Brazil. New Delhi’s 22 million people will boast living standards similar to today’s Russia.

Slightly less dramatically, though still significant, per capita GDP in Chhattisgarh, Odisha, West Bengal, Rajasthan, and Madhya Pradesh, based on current trends, is forecast to reach 0.7-1.2 times the national average by 2025, swelling the number of middle-class consumers four-fold, to 16 million. By contrast, the weakest-performing states, including Bihar, Uttar Pradesh, and Jharkhand, with per capita GDP of under 0.7 times India’s average, will struggle with low incomes and high population growth, unless they improve their governance and investment trajectory significantly.

But investors seeking the best growth opportunities will have to search beyond states’ headline figures and scrutinize India’s districts more closely, especially urban clusters and their hinterlands. We have identified 49 such high-growth clusters, located in 183 districts nationwide. In 2012, these areas accounted for half of India’s population, 70% of its GDP, and 71% of consumers. They are also home to 250 of India’s 450 cities with populations above 100,000.

Interestingly, one-third of these clusters can be found in states that have delivered low to medium economic performance, or are located close to smaller, lesser-known towns in better-performing states. The Nellore cluster in Andhra Pradesh, for example, has paddy, tobacco, groundnut, mango, and sugarcane farms. The Bikaner cluster in Rajasthan is rich in oilseed and the quarrying and production of Makarana marble and limestone. The more diversified Aurangabad cluster, in Maharashtra, is home to some of India’s largest seed companies, an active automotive, pharmaceutical, and sugar-manufacturing industry, and a tourism hub that includes the Ajanta and Ellora caves.

The location of these lesser-known clusters underscores the point that investors, seeking low-cost real estate and a skilled workforce, should look more carefully at India’s economic geography when deciding where to place their operations. These locations could eventually become knowledge-based industry or services hubs, similar to those of large Indian cities such as Bengaluru, Hyderabad, and Pune – only cheaper.

As they continue to develop, India’s dynamic economic clusters will themselves need to invest in modern sanitation and water systems, education and health, airports, railways, and road links. As such, they offer investors opportunities in many sectors, including consumer goods, financial services, housing, and infrastructure.

Given their structural advantages – including proximity to large urban centers for some – these clusters could generate some of the best returns on investment anywhere in India. Companies hoping to catch India’s next growth wave might want to consider areas that seldom feature on investment lists, but that might offer better value than marquee destinations.

Published in collaboration with Project Syndicate

Authors: Anu Madgavkar is a senior fellow at the McKinsey Global Institute. Rakesh Mohan, a former deputy governor of the Reserve Bank of India, is India’s Executive Director at the IMF, Vice Chairperson of the Indian Institute for Human Settlements, and former Professor in the Practice of International Economics of Finance at the Yale School of Management.

Image: Vehicles move along New Delhi’s Connaught Place during evening hours, October 28, 2014. REUTERS/Anindito Mukherjee.

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Related topics:
Geographies in DepthFinancial and Monetary SystemsEconomic Growth
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