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Understanding India’s economic geography

The country’s economy once again holds promise. To make the most of it, companies must identify growth opportunities at a granular level.


India’s rapid growth in the decade to 2012 saw it emerge as one of Asia’s most promising markets. But the recent slowdown made growth and profitability increasingly elusive, forcing companies to think harder about the way they allocate resources. As growth picks up, and rapid shifts in India’s urban and rural economic landscapes occur, marketers will need to make strategic market choices to maximize returns. Understanding the growth drivers and identifying high-potential markets at a granular level are critical priorities for businesses looking to benefit significantly from this returning tide of growth.

Taking into account their existing footprints, product mixes and extensions, and long-term aspirations, companies could consider three approaches to dissect the Indian market and decipher its heterogeneity: states, clusters, and cities. The research underpinning McKinsey’s latest report—India’s economic geography in 2025: States, clusters, and cities—combines a robust understanding of macroeconomic issues at a national level with microlevel insights on the economic and income potential of states, districts, and cities.1 1. This analysis used Insights India, a tool kit that provides estimates based on the macroeconomic outlook for India and on more than 20 economic, demographic, and social variables at the state, district, and city levels. These variables include population, the sector composition of GDP, government finances, investment, urbanization, education, labor participation, plans for infrastructure development, and the availability of basic services. By building a granular view, based on several different economic scenarios, of where growth and market opportunities will emerge, the report shows that businesses can tailor investment decisions to capture a disproportionate share of the pie in India’s ever-changing economic geography.22. For the purposes of this work, we have used a base-case scenario of gradual recovery, which assumes an annualized GDP growth rate of 6.1 percent from 2012 to 2025.

Our research focuses on distinct geographic slivers of opportunity at each level of granularity.


India’s 29 states and seven union territories are at different stages of demographic and economic evolution. The per capita gross domestic product of states, a marker of their inhabitants’ affluence or deprivation, reasonably depicts the variation in living standards and market potential across India. We have classified states into four broad groups based on their relative 2012 per capita GDP: very high performing, high performing, performing, and low performing. This approach helps companies understand which states will probably contribute most to India’s growth and the potential size of households in different income segments in each state. That in turn makes it possible to estimate future market demand for specific categories of goods and services.33. We base the classification of states on their average GDP per capita in 2012, relative to India’s average. Very high-performing states are those with more than 2.0 times India’s average GDP per capita. High-performing states have an average GDP per capita 1.2 to 2.0 times India’s per capita GDP, performing states more than 0.7 to 1.2 times India’s per capita GDP, and low-performing states less than 0.7 of India’s per capita GDP.

We find that eight high-performing states will account for some 52 percent of India’s incremental GDP growth from 2012 to 2025. Along with four very high-performing city-states, these eight will have 57 percent of India’s consuming-class households in 2025.4 4. The consuming class comprises what we call “Globals” and “Consumers,” which (at 2012 prices) have disposable incomes of 1,700,000 rupees and of 485,000 to 1,700,000 rupees, respectively. Rapid urbanization and the associated income growth will propel the high-performing states to per capita income levels similar to those of today’s middle-income nations. In 2025, for instance, Maharashtra’s 128 million residents will have a purchasing-power parity similar to Brazil’s today. Goa’s and Chandigarh’s 2025 purchasing-power parity will mirror that of Spain today (Exhibit 1).

Exhibit 1

 By 2025, the standard of living in ‘very high’ and ‘high-performing’ states will mirror that of high- and middle-income nations today.

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