India’s 29 states and seven union territories are at different stages of demographic and economic evolution. Richer and more urbanised states like Gujarat and Tamil Nadu differ in potential compared to rapidly emerging ones such as Andhra Pradesh, or states breaking out of low growth equilibrium such as Madhya Pradesh and Bihar.

Our approach helps companies understand which states are likely to contribute to India’s growth, and identifies the potential size of households in different income segments within each state, allowing them to estimate future market demand for specific categories of goods and services.

For instance, by our estimates, eight ‘High performing’ states (with an average GDP per capita of 1.2 to 2 times that of India, and the ‘Very high performing’ states are those with greater than 2 times India’s average GDP per capita) will account for some 52 per cent of India’s incremental GDP growth from 2012 to 2025. Along with four ‘Very high performing’ city-states, these will be home to 57 per cent of India’s consuming class households in 2025.

Other states will see rapid growth in the household segments just below the consuming class. Companies can use these insights to make decisions on their footprint. For example, would doubling the sales force in Punjab be more effective than doing so in Rajasthan? Should a new product entry be focused on a clutch of Western states, or Southern ones?

Identifying attractive cities and their hinterlands: Within the urban areas of states, we focus on the top one hundred cities distributed across states, distinguishing between metropolitan cities (cities with a population of more than one million) and others in this group. For example, in 2012, India had 54 metropolitan cities which together with their hinterlands (65 districts) accounted for 40 per cent of GDP, and 45 per cent of consuming class households.

Hinterlands, in this instance, refer to districts in which metropolitan cities are situated and stretch across.

We estimate India will have 69 metropolitan cities in 2025, and together with their hinterlands they will account for 54 per cent of India’s incremental GDP from 2012 to 2025 and 50 per cent of India’s total income in the terminal year.

In short, the incremental growth offered by these cities is similar to that provided by India’s eight ‘High performing’ states mentioned above.

Depending on the cost to serve, level of competition, type of consumer and existing footprint, companies could focus on the eight states or just on the 69 cities and the cities housing them, to target roughly equivalent market potential.

Tapping into metropolitan clusters: For companies looking at a granular pan-India play, another approach would be to target metropolitan clusters.

Our work suggests just 49 such clusters (183 districts) will drive about 77 per cent of India’s incremental GDP from 2012 to 2025. (We define ‘high potential’ districts as those that accounted for the highest share of GDP in 2012 and will account for the highest share of incremental GDP through 2025. 49 clusters include 5 standalone districts — Amritsar, Bhopal, Gwalior, Kota and Patna.) Top-ranked metropolitan districts constitute the nucleus of these clusters with the surrounding ‘high potential’ districts making the cluster a serviceable market.

A company that operates in the 10 largest cities of India and targets consuming class households may simply choose to expand either in the hinterlands of these cities or the collective group of 21 ‘high growth, high affluence’ clusters, rather than building a broad-based national footprint.

To benefit most from the granular approach, companies need to tailor their strategies to effectively cater to growth markets. An integrated approach would comprise three key steps:

Developing alternate granular heatmaps of investible pockets : A growth matrix of investible pockets needs to be created and mapped to priority geographic segments and product categories and extensions.

For example, several automotive companies have prioritised rural expansion as a growth driver supplemented by product extensions (lower cost platforms), and have prioritised high potential rural markets for the next wave of growth. At the same time, several companies are challenging the fundamental product and geography heatmap and exploring different methods to identify new pockets of opportunity.

As an example, a leading food retailer recently identified a new business line for direct-to-home beverage sales for the top 20 cities based on redefining the growth matrix to a product category and shopping occasion heatmap.

Reallocating resources significantly : Once the potential for growth across the product-geography matrix has been ascertained, companies need to determine the appropriate level of resource allocation.

This requires understanding the scale of resources needed to ensure the strategy is dynamic, for example for capital expenditure, sales force, promotion and advertisement spend, as well as understanding the triggers required for review and reallocation. Dynamic companies reallocate up to 5 to 10 percent of their resources and achieve over twice the growth of companies who allocate just 3 to 5 per cent of their resources.

Developing a tangible implementation roadmap : Companies need to define critical capability gaps and develop detailed implementation plans across the full business system (marketing, sales and operations) to build new competencies relevant to their growth strategy.

In our experience, more than two-thirds of growth strategies fail because of a lack of attention to detail and the inability of management to break-down the strategy to tangible actions that the front-line needs to initiate to accelerate growth. As India prepares for its next phase of high-growth, companies looking to succeed in the changing economic and business environment should consider identifying granular growth opportunities. Subsequently fine-tuning strategies to specifically target various consumer groups across markets will help them emerge as winners in the near-to-long term.

Transformation of two laggards

Bihar: Efforts to improve the enforcement of law and order, and a modest increase in physical infrastructure, especially road connectivity, have made Bihar one of the fastest growing states.

From 2005 to 2014 its GDP grew at 9.5 per cent annually, compared to 7.5 per cent for India as a whole.

Additionally, Bihar grew its highway network by some 25 per cent between 2007 and 2010. These infrastructure initiatives enabled the construction sector to grow by more than 20 per cent per year.

Other core sectors, such as manufacturing and communication, have also grown at 15 to 20 per cent annually. The state managed to turn its economy around while maintaining fiscal prudence — its 2013 estimated budget deficit is at 2.9 per cent.

Madhya Pradesh: The turnaround in MP’s economic performance is more broad-based, with agricultural GDP growing by 10 per cent each year between 2005 and 2014, much higher than its historical annualised growth rate of 2.3 per cent from 1995 to 2004. The state invested in bringing more land under irrigation, which rose from 7 lakh hectares in 2004-05 to 21 lakh hectares in 2011-12.

The power sector was reformed. As a result, the power sector in MP grew at the rate of approximately 14 per cent per year between 2008 and 2013, compared to about 5 per cent for India as a whole.

Extracted and edited with permission from the report ‘India’s economic geography in 2025: states, clusters and cities — Identifying the high potential markets of tomorrow’ prepared by McKinsey Insights India October 2014

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