A new McKinsey Institute report identifies growth hotspots (or investable pockets of growth) in India for the next decade. It takes into account two main factors: urbanization rate (shows how fast the economy is growing) and the shape of income pyramid (shows how fast consumer class households are added). India has 29 states and 7 union territories – all different in terms of economic drivers and income level.
Goa, Chandigarh, Delhi and Pondicherry are classified as very high performing states and union territories. The per capita GDP of these states was twice the national average in 2012.
Gujarat, Haryana, Himachal Pradesh, Kerala, Maharashtra, Punjab, Tamil Nadu and Uttarakhand have per captia GDP between 1.2 and 2 times the national average and are called high performing states. These represent large, prosperous, and fast growing states of India— in other words, India’s economic powerhouses. The main attributable factors for this are the investment in human and physical capital, higher urbanization, relatively superior land use, and structural advantages (for instance, coastlines). All have good fiscal position and host high-skill industries like automobiles, petrochemicals, financial services, etc. Gujarat’s growth is led mostly by manufacturing sector. Tamil Nadu’s growth is driven by services sector and knowledge-intensive industries.
Very high performing and high performing states accounted for:
- 45% of India’s GDP in 2012
- 58% of India’s consuming class households (4 million in very high performing states and 14 million in high performing states). Consuming class households are those with household disposable income (at 2012 prices) ranging from INR 0.485 million and INR 1.7 million or/and above INR 1.7 million.
- Except for Kerala and Punjab, these states benefited from higher productivity of non-agricultural workforce (and hence higher consuming class). Kerala benefited from larger share of remittance inflows, and Punjab benefitted from strong agricultural production (India’s wheat basket)
- Households demand more consumer durables and automobiles, and also spend significantly higher share of income on transportation and recreation.
Although Bihar and Madhya Pradesh are low performing states, they will make good progress with the ongoing investment climate reforms, including developing industries and better performing legislatures. However, Bihar, Uttar Pradesh and Jharkhand will likely remain low performing states in 2025 due to high population growth rate.
Over 2012-2025, the high performing states are likely to account for:
- 52% of India’s incremental GDP growth
- Tamil Nadu, Gujarat, Kerala and Maharashtra are likely to be more than 50% urbanized by 2025 (against 38% average for whole of India). The rapid urbanization and the associated income growth will likely increase these states’ income to that enjoyed by global middle income countries in 2012.
- 57% of India’s consuming class (or 51 million) will be concentrated in these states. Consumer expenditure on non-food items will increase faster than the national average (education, health care, automobiles, personal products and recreation)
Finally, below is the map of potential growth hotspot cities in India.