When viewed through the lens of economic performance and evolution—the grouping of India’s states and the composition of the four Indias is very different from the conventional grouping of geography—North, South, East and West alone.
To understand Indian states from an economic geography perspective requires companies and policy-makers alike to answer a few questions: How do you group states based on their economic performance? What differentiates one group from the other? How are these groups likely to perform in the future? And can states turn around their economic trajectories?
At the top of the ladder are the four ‘very high performing’ city states of Chandigarh, Delhi, Goa and Puducherry, with average per capita GDP of R2,22,000 in 2012, which is more than twice of all-India average. The GDP per capita of the next richest state is at least 20% less than the least rich city state and hence provides a natural threshold to define the eight ‘high performing’ states of Gujarat, Maharashtra, Tamil Nadu, Haryana, Punjab, Himachal Pradesh, Uttarakhand and Kerala. ‘High performing’ states are India’s economic powerhouses—large, prosperous and fast growing, with a per capita GDP between 1.2x to 2x of India’s. Amongst themselves, they contribute almost 45% of India’s GDP and more than 50% of its consuming class*. Next in the rung are the ‘performing’ states of Chhattisgarh, Karnataka, Andhra Pradesh and Telangana (considered together for this work), Odisha, Rajasthan, Jammu & Kashmir, and West Bengal, which have a per capita GDP between 0.7x to 1.2x that of India’s. In other words, the performance of these states is similar to that of India’s. Those in the last rung, ‘low performing’ states, have a GDP per capita less than 0.7x of India’s, and include Madhya Pradesh, Jharkhand, Bihar, Uttar Pradesh and the North Eastern states.
What makes Gujarat perform better than Bihar when the economic policies of India are equally applicable to all states and labour and capital are mobile? Assessing states from three distinct but interrelated dimensions: (1) structural advantages and quality of governance, (2) social development and (3) economic development helps understand these performance differences. For the sake of comparative analysis we fold the four categories of states into two buckets with India as the defining threshold. Consequently, the 12 ‘very high performing’ and ‘high performing’ states that outperform India on eight key development metrics constitute one group, and the remaining states with performance similar to India’s and under-performers comprise the second group. Of these, four metrics—investment rate, urbanisation, percent of cultivable land and share of coastline—are noteworthy (see table). A similar grouping of states is also implicitly reflected in the recently published Economic Census 2012-13. It shows that the non-agricultural share of GDP relative to non-agricultural share of employment is higher in these states, explaining their relatively higher labour force productivity. Consequently, a majority of consuming class households are concentrated in these states.
In 2012, 58% of India’s 27 million consuming class households were situated in these states. Consumption patterns of households in these states were starkly different from those in the ‘performing’ and ‘low performing’ states reflective of their stage of development. For example, households in the 12 ‘very high performing’ and ‘high performing’ states have the highest penetration of cars (7% of total households) and even spend more on transportation and recreation. On the other hand, 68% of the households in ‘low performing’ states own bicycles and spend roughly 50% of share of wallet on food.
Looking ahead, ‘very high performing’ and ‘high performing’ states will continue to contribute disproportionately to India’s growth as they account for 58% of incremental GDP through 2025 and eight of these 12 will be more than 55% urbanised. The ability of most of these states to transition from low-skill sectors to high-skill sectors and attract investments due to their various competitive advantages has set them on a virtuous development cycle. Those unable to do so are likely to slide leading to some changes to this group of states.
Punjab is likely to slide and join the ranks of ‘performing’ states by 2025. The state’s ability to diversify from agriculture and low-skill-based industries such as hosiery and bicycle manufacturing would be a key factor in determining whether it can improve its investment attractiveness and growth momentum.
Andhra Pradesh and Telangana will rise to become ‘high performing’ due to Hyderabad’s long-standing economic momentum, the focus on infrastructure development, and the emphasis on core sectors such as mining and minerals. Companies looking to tap consuming class households while adopting a state-based approach to markets would benefit by focusing on the this group of 12 for two reasons—first, 57% of India’s 89 million consuming class households will dwell in these states, and second, the standard of living in these states will mirror those of high and middle income nations of today (Goa and Chandigarh with a PPP-adjusted per capita of $32,000 will be similar to Spain today, while Maharashtra and Haryana will resemble Brazil at $14,000.)
Organisations looking to target the neo-middle classes would benefit by focusing on ‘performing’ states in the coming decade**. This group of states is expected to see two entrants in 2025—Madhya Pradesh and Punjab. Madhya Pradesh’s rise from a ‘low performing’ state to a ‘performing’ state can be explained by strong push on economic development, led by the agricultural sector. Land under irrigation increased from 7 lakh hectares in 2005 to 21 lakh hectares by 2012. The power sector was reformed—separate feeder lines for farmers and domestic users in rural areas were established, and distribution companies were restructured. And a big push on infrastructure development and tourism was made. This thrust on development created a virtual spiral, leading to rapid growth of demand-led sectors such as communication and financial services. The five largest ‘performing’ states—Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan and West Bengal—will be home to 18 million of the 20 million first-time aspirer households. All ‘performing’ states together will be home to a total of 66 million or 37% of India’s aspirer households. This cohort of ‘performing’ states is likely to witness substantial improvements in living standards by 2025. For example, West Bengal’s per capita GDP is estimated to reach that of Maharashtra’s today at R1,20,000.
In summary, the development journey of states such as Madhya Pradesh posits that they can turnaround within a decade with a continued push on economic policy and relentless focus on execution. Going by current trends, the per capita GDP of Madhya Pradesh will be similar to India’s by 2020. On the other hand, high population growth rate will weigh on the performance of ‘low performing’ states such as Uttar Pradesh, Bihar and Jharkhand. They will need to grow 1.5 times faster from current levels to match India’s per capita GDP in 2012. Socio-economic choices made by state governments today will determine the economic trajectories of tomorrow.
Mithun Sundar is associate partner with McKinsey. Sunali Rohra is co-leading McKinsey’s work on urbanisation in India. Shishir Gupta is a knowledge expert with MGI Economic Research. They are co-authors of the report India’s Economic Geography in 2025: States, Clusters and Cities
* Households based on their annual disposable income at 2012 prices: globals (> R17,00,000; $110,000), consumers (R4,85,000-17,00,000; $31,000-110,000), globals and consumers households together constitute the consuming class.
** Neo-middle class is defined as aspirer households which are defined as those having household disposable income at 2012 prices of R1,80,000-4,85,000; $11,000-31000). Dollar prices are reflective of PPP conversion factor of $1 = R16 at 2012 prices
By Mithun Sundar, Sunali Rohra and Shishir Gupta