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    • India’s Coming Economic Surge


    India is now the fastest-growing large economy in the world. Its GDP grew by 7.5 percent in 2015 and, according to the International Monetary Fund, it is expected to increase by 7.4 percent this year.1, 2

    Among India’s advantages are:

    - Its population is the second-largest in the world, after China’s. According to the CIA’s World Factbook, India is home to 1.27 billion people, which is roughly four times greater than the population of the United States.3

    - India’s middle class will expand to 89 million households by 2025, more than three times its current size, according to the McKinsey Global Institute (MGI).4 As hundreds of millions of people move up the economic ladder over the next two decades, we expect that Indian consumer spending will soar.

    One factor in India’s future economic boom is migration. India’s population is increasingly moving to cities. Data from McKinsey reveals that when Indian states or districts become 35 percent urbanized, GDP per capita more than doubles. The benefits from higher productivity are unleashed as people receive more education, better healthcare, and more job opportunities. By 2030, the entire country will achieve 35 percent urbanization, and several states will achieve urbanization rates of 50?60 percent.

    Another factor is demographic. India’s population is younger and better educated than those of other developing nations. McKinsey predicts that India will have 90 million college-educated workers by 2030.

    India’s economy is also benefiting from a worldwide drop in energy prices. India imports as much as 80 percent of the oil it consumes, making it one of the biggest customers for oil producers. As the price of crude oil has plummeted, India’s companies have had more money to spend to hire more people and invest in more technology; the government has been able to cut back on fuel subsidies; and consumers have been able to spend more on goods and services.

    Still another factor is political. Prime Minister Narendra Modi met with leaders of 26 countries last year, urging them to invest in India. So far, it’s working. According to TradingEconomics.com, increases in Foreign Direct Investment in India averaged $1.177 billion per month from 1995 until 2016. In July 2016, FDI in India increased by $4.73 billion.5

    Yet another factor is that the regulatory climate in India is improving. As The Asia Foundation recently reported, Modi has launched several reforms to bureaucratic policies, such as offering the ability to apply for permits online or at a single window.6 Since last year, India has moved past four countries on the World Bank’s “Ease of Doing Business Index,” improving its ranking to 130 out of 189.7 It made even better progress on the World Economic Forum’s “Global Competitiveness Report,” jumping to 55 from 71 last year.8 Most importantly, India recently enacted a goods-and-services tax, or GST. According to the BBC, the GST will replace “India’s messy plethora of indirect taxes, duties, surcharges, and cesses into a single tax.9 It is expected to:

    - Ease a cumbersome tax system

    - Help goods move seamlessly across state borders

    - Curb tax evasion

    - Improve compliance

    - Raise revenues

    - Spur growth

    - Stimulate investment

    - Make investing and doing business in India easier

    But even with all this momentum on its side, India is poised for even greater growth. MGI recently identified five key opportunities that could propel India into prominence on the global stage.10

    The first opportunity is to elevate the living standards of India’s entire population. The country’s poverty ratio dropped from 45 percent to 22 percent between 1994 and 2012. However, that still leaves 270 million people below the poverty line.

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    Beyond improving the economic outlook of the poorest Indians, the next step is to meet the population’s most basic needs and actually improve its quality of life. MGI calls the minimum acceptable standard of living?based on meeting the needs for food, housing, drinking water, heath care, education, and so on?the Empowerment Line. By this standard, more than half of the country’s population, or 680 million people, are living under the line.

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    To elevate hundreds of millions of people above the line over the next five years, the government and private companies need to create 115 million non-farming jobs. Most of these new jobs will come in the construction industry as India makes urgently needed improvements in its infrastructure. Meanwhile, farms must raise their productivity growth rate from today’s 2 percent to 5.5 percent, which similar countries have achieved. One way to do this is through investments in better irrigation systems.

    The second opportunity is to develop India’s major cities into what MGI calls “engines of growth.” Within ten years, sixty-nine of India’s cities will each have more than one million inhabitants. These cities will generate more than three-quarters of the country’s economic growth from now to 2025 through investment and job creation. In 2030, Mumbai will generate $245 billion of consumption, while Delhi, Ahmedabad, Hyderabad, and Bengaluru will each account for between $80 billion and $175 billion of annual consumption. They will provide both Indian and foreign companies with lucrative markets due to their needs for infrastructure, consumer products, and services.

    The third opportunity is to manufacture in India to target the domestic market. Unlike foreign companies that have used Chinese factories as a cheaper way to produce goods for consumers in the U.S. and the EU, companies that invest in manufacturing in India will focus on appealing to India’s growing consumer market. India’s government wants to increase manufacturing’s share of the country’s GDP from 17 percent in 2015 to 25 percent by 2022, while creating one hundred million new jobs by 2030.

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    Currently, most of India’s factories are both small and unproductive: 84 percent of India’s manufacturers have less than 50 workers and, depending on the sector, those small factories are only 25?65 percent as productive as small manufacturers in other countries. India’s government is working to reduce red tape through the reforms mentioned earlier, and programs such as Skill India are designed to train more than 400 million workers by 2022. Corporations are adopting initiatives such as the Quality Council of India’s “Zero Defect Zero Effect” program to increase quality and productivity.

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    The fourth opportunity is to embrace digital technologies. The technologies that will make the biggest impact on India’s economy include the mobile Internet, cloud technology, the automation of knowledge work, digital payments, the Internet of Things, and intelligent transportation systems. MGI estimates that by increasing workers’ productivity, making industries more efficient, improving education, and expanding access to healthcare, digital technologies will provide economic value of between $550 billion and $1 trillion each year by 2025.

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    This will enable millions of Indians to be hired in jobs with good salaries. India’s government has announced plans to link every Indian household to the Internet through broadband connections, and in the meantime it has opened 100,000 Common Services Centers to give people in rural areas access to computers and the Internet.

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    The fifth opportunity is to welcome more women into the workplace. MGI’s research shows that Indian women account for only 17 percent of the country’s GDP, compared to 41 percent in China and 33 percent in Latin America. They also account for less than 25 percent of India’s workforce, which is far less than the worldwide average of 40 percent. India will need to change societal attitudes toward the role of women in order to increase their participation in the workforce.

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    Currently, women in India perform ten times the amount of unpaid care work than men perform; the worldwide average is three times. Procter & Gamble has produced ads for the Indian market called “Share the Load,” which attempt to change the expectation that doing the laundry is women’s work. The government will need to get involved in order to change these stereotypes and to equip female workers with the skills they’ll need in the workforce. For instance, the government’s Skill India program could offer training courses specifically for women.

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    If India can make even modest progress toward gender equality, MGI estimates that it will be able to increase its GDP by $700 billion by 2025.

    Looking ahead, we offer the following forecasts:

    First, to succeed in marketing to India, multinationals will need to stop trying to target the country as a single consumer market.

    India is a country with a vast population and profound regional differences that account for variations in consumer spending. It’s true that Indian consumers in general may use products differently than people in other countries. For example, they may need to fit six or seven family members in a car, rather than three or four. But the country’s population is so large that many regional differences exist. According to McKinsey senior partner Alok Kshirsagar, “When you go down south, the demographics are more like southern Europe. You need to know that the consumer growth there is in the relatively older population. It’s the 50- to 70-year-olds that have the purchasing power because of various reforms and government payments. Whereas if you go to the northeast of the country, it’s all in the young?it’s all in the 18- to 30-year-olds.” Furthermore, by 2025, India will have sixty-nine “megacities,” each with more than one million residents. By studying each of these megacities and tailoring specific products, services, and marketing campaigns to them, companies will achieve better results than they would with a “one size fits all” approach to the entire country.

    Second, India’s need to make massive improvements in its infrastructure will provide big opportunities for American companies.

    India needs to build roads and to improve its citizens’ access to water, sanitation, and energy. According to CNN, 300 million people in India lack access to electricity.11 That’s almost the size of the entire U.S. population, which is 324 million, according to the Census Bureau. The demand for smart technologies, such as smart meters, will be vast.

    Third, India is uniquely positioned among the emerging economies to thrive in the Digital Era.

    Because much of its economy is still agricultural, India hasn’t made the massive investments in manufacturing that China has made over the past three decades. So, while China has tried to catch up to the United States by moving from an agricultural economy to the Mass Production Era, India could theoretically move directly into the Digital Revolution that the U.S. is transitioning into today. India already has 462 million Internet users. In India between 2015 and 2025, MGI estimates that the number of smartphone users will increase from 200 million to as many as 900 million; the number of cloud computing users will leap from 2 million to 20 million; the number of digital transactions will grow from 1 billion to 12 billion; and the number of devices linked to the Internet of Things will swell from less than 1 million to as many as 10 billion.

    Fourth, because of India’s strengths in information technology and in entrepreneurship, it will become the birthplace of many innovative companies over the next two decades.

    Consider that India is already home to eighty-four of the billionaires on the Forbes list, with a combined net worth of $274 billion; it ranks fourth worldwide. Indian startups won’t make just their founders rich; they’ll create jobs and spread prosperity to employees, and they’ll increase living standards for consumers throughout the country

    References
    1. World Economic Outlook, July 2016, “Uncertainty in the Aftermath of the U.K. Referendum.” ⓒ 2016 International Monetary Fund. All rights reserved. https://www.imf.org/external/pubs/ft/weo/2016/update/02/2. Forbes, November 30, 2015, “India Now Fastest Growing Large Economy at 7.4% Third Quarter GDP Growth,” by Tim Worstall. ⓒ 2015 Forbes Media LLC. All rights reserved. http://www.forbes.com/sites/timworstall/2015/11/30/india-now-fastest-growing-large-economy-at-7-4-third-quarter-gdp-growth/-4af15ea21acb3. For access to The World Factbook, visit the CIA website at: https://www.imf.org/external/pubs/ft/weo/2016/update/02/4. McKinsey Global Institute, September 2016, “India’s Economy: Why the Time for Growth Is Now,” by Noshir Kaka, Alok Kshirsagar, Anu Madgavkar, and Cecilia Ma Zecha. ⓒ 2016 McKinsey & Company. All rights reserved. http://www.mckinsey.com/global-themes/india/indias-economy-why-the-time-for-growth-is-now5. To access information regarding Foreign Direct Investment in India,” visit the Trading Economics website at: http://www.tradingeconomics.com/india/foreign-direct-investment6. In Asia, June 15, 2016, “India’s Economy Booming, but Critics Warn of ‘Excessive Enthusiasm,’” by Mandakini Devasher Surie. ⓒ 2016 The Asia Foundation. All rights reserved. http://asiafoundation.org/2016/06/15/indias-economy-booming-critics-warn-excessive-enthusiasm/7. To access the “Doing Business” report, visit The World Bank website at: http://www.doingbusiness.org/rankings8. To access “The Global Competitiveness Report,” visit the World Economic Forum website at: https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1/9. BBC News, August 4, 2016, “Why India’s GST Is One of the World’s Most Complex Tax Forms,” by Soutik Biswas. ⓒ 2016 BBC. All rights reserved. http://www.bbc.com/news/world-asia-india-3695020510. McKinsey Global Institute, August 2016, “India’s Ascent: Five Opportunities for Growth and Transformation,” by Noshir Kaka and Anu Madgavkar. ⓒ 2016 McKinsey & Company. All rights reserved. http://www.mckinsey.com/global-themes/employment-and-growth/indias-ascent-five-opportunities-for-growth-and-transformation11. CNN, April 11, 2016, “India’s Economy Is Booming?but Does It Have the Infrastructure to Match?” by Michelle Cohan. ⓒ 2016 Cable News Network. All rights reserved. http://www.cnn.com/2016/04/10/travel/india-economy-boom/