McKinsey & Company sees bright future for Indian economy

01 December 2014 Consultancy.in

After India’s decade of average growth marred by bureaucratic and global economic pressures, the recent government stability, a will to push through reforms, and rapid urban development are all expected to fertilise strong year on year growth over the coming decade, as forecasted by McKinsey & Company. “India’s fortunes have changed. If you look at the trends that are going on in the world, India is right in the centre," says Dominic Barton, CEO of McKinsey.

In the recently released research paper ‘India’s economic geography in 2025: states, clusters and cities’, global strategy consultancy McKinsey & Company reviews India’s broad economic landscape. The firm looked at both the macro and granular level for key drivers of growth in the period from 2012-2025. The report reveals that, in recent years, India’s economy has faced dropping momentum, mainly led by deceleration in the industrial sector.

Real growth of value

On the back of a recovering economy and effective government reform, under the leadership of Narendra Modi, India’s fortunes for the coming years appear brighter according to McKinsey. The firm analysed the effect of the reforms as well as some wider economic challenges, and created three scenarios that measure the potential economic development of India between 2012 and 2025. In the worst case scenario, in which reforms are held back and political instability returns, the annualised growth rate is calculated to be 5.2%. The in-between position, where only key reforms take place, sees growth at 6.1%. Continued political stability, as well as the implementation of wider reforms may allow for a strong growth rate of 7.2% annually.

McKinsey insights India estimates

According to Dominic Barton, CEO of McKinsey, the improving outlook will have a positive effect on the country’s attractiveness to foreign multinationals. "People had given up on India. They felt India is too complicated and it was difficult to get anything done. It had dropped in the last five years on people's priority list,” he said to the Economic Times of India. “I think India has gone right back up, people are interested, obviously people are going to want to see action but I think the feeling is they will because this government seems serious," the Canadian-origin CEO adds.

High growth clusters

The report’s more granular analysis reveals the key factors that stand at the heart of India’s revival, of which urbanisation and ‘high performing clusters’ are considered to stand out. Calculations conducted by the researchers forecast that just 49 such clusters (183 districts) will drive about 77% of India’s incremental GDP from 2012 to 2025.

Cluster GDP

Of the 49 clusters, 21 are likely to be more affluent and grow faster than the India average.

Clusters matrix on GDP growth and richness

The faster growth and higher per capita output of these ‘high performing’ states can be attributed to several factors, the foremost of which are the investment in human and physical capital, higher urbanisation, relatively superior land use, and the benefits accrued from inherent structural advantages e.g., coastlines. These states have also broadly adhered to fiscal boundaries. Consequently, they are typically home to high-skill industries such as automobiles and automotive components, petrochemicals, financial services, pharmaceuticals and IT amongst others. “These complementary factors have created a virtuous growth cycle in these states,” write the consultants.

High performing states are advantaged on key parameters

Urbanisation

The second key component to India’s growth lies in the accelerated urbanisation of regions. In 2011, India was 31% urbanised, and McKinsey estimates it will be about 38% urbanised by 2025, with around 538 million people dwelling in cities by that time. This will benefit the country’s productivity:the consultancy states that an average urban job has approximately 1.7 to 1.9 times the productivity of an average rural job.

Urban population

With these fundaments in place, Barton believes that India could find itself in a sweet spot, not only boosting the outlook of its own nation but also providing stimulus to the wobbly world economy. “If India unleashes, it is going to help not only India but the world," says Barton. 

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The travel and tourism sector's contribution to India's GDP is expanding

22 April 2019 Consultancy.in

Both domestic and international travel are increasing in frequency across India, with the total number of trips being taken in 2018 adding up to 2 billion, according to a new report from global management consultancy Bain & Company. Travel and tourism are becoming primary contributors to the GDP.  

The findings come in the context of a rapidly expanding economy, rushing towards the position of the second largest economy worldwide by 2050. Economic growth has been contributing to an overall increase in prosperity, and the extra disposable income appears to be trickling into the travel sector.

Indians took 2 billion trips last year, and the overall spending on transportation amounted to nearly $94 billion. As a result, the size of the travel and tourism industry has been rapidly expanding over the last half a decade, making it the seventh biggest contributor to the Indian GDP currently.

Domestic and International trips by Indian travellers

In 2013, the sector contributed just under 7% of the GDP, a figure that has now grown to nearly 9.5% for last year. According to Bain & Company, the contribution is starting to resemble that in developed economies, given that the travel & tourism sector contributes 10.5% to the UK economy.

The upward trajectory is only likely to continue. Leading up to 2021, the travel & tourism sector in India is expected to grow at a compound annual growth rate of 13.5%, reaching a staggering value of $136 billion. Bain anticipates changes in the nature of travel expenditure as well.

India is currently home to 850 million online users, which is making online marketing and consumption alike of travel services a growing market. Mobile data usage is at an all time high, which is leading to “high platform penetration” and “new business models,” according to Bain.

Indian tourist spending

“New business models like the sharing economy, and standardisation and aggregation of capacity, mean that the relevance of online channels is expected to gain share. To reap the benefits of increasing online spending, companies need to facilitate new user adoption and increase penetration in the existing base across the purchase journey,” says the report.

As per the firm, the online domain is not only affecting volumes in the market, but is also having an influence on the decision-making patterns of consumers across the country. In order to understand this influence, the report breaks internet usage down into three phases, namely interest, research and experience.

Nearly 90% of consumers were influenced by online factors at any one of these three phases. Examples of such online actors include price comparison websites and travel search engines in the early phases, and booking websites and feedback portals in the latter phases of travel.

Travel and tourism as a percentage of the GDP

According to the firm, nearly 60% of Indian consumers complete bookings for their travel online while more than 50% share feedback via online portals. For businesses, the spike in online activity allows for data analytics-driven targeted marketing strategies using individual customer behaviour.

This targeted marketing is disseminated through five categories of Indian travellers, namely frequent flyers, budget business travellers, experience-oriented travellers, budget-group travellers and occasional travellers. Using this division, businesses can prioritise which phase of online activity they wish to invest in.