Thursday, March 31, 2011

Rising Northern India

The Times of India: Once a Leader, South Now Lags in GDP Growth
Hindustan Times: Growth Rate Declining in Southern States: Report
The Times of India: Gujarat leads in growth, South India Needs to Catch Up: Report

McKinsey & Co., a global consulting firm, recently released a report at the conference “The Next Wave of Growth – South India,” which the Confederation of Indian Industry (“CII”) organized, saying that the traditionally strong Indian nouth’s economic growth was now lagging behind the poorer south’s economic growth. The report examined the last five years of Indian economic growth, and all four of the major southern states saw real GDP growth rates below the national average of 8.7%. Andhra Pradesh and Tamil Nadu both grew at 7.4%, Karnataka grew at 8.5% and Kerala grew at 8.1%. The data belie a recent Wikileaks quote from the Indian Home Minister to the U.S. Ambassador that “India’s growth would have progressed better if it comprised its southern and western parts only.”

Although southern Indian growth is slowing, its GDP base is much larger than the GDP base in the north. So while the news is not good for the south, for India as a whole it means there is greater regional equality. While greater regional equality is good for India, McKinsey revealed many real problems in the south that explain the recent five years of slow growth, citing, rising land prices, significant shortages of labor, infrastructural inadequacies and growing congestion, especially in Bangalore, Chennai, and Hyderabad.

In contrast, the northern region of Gujarat has taken steps to market itself as an attractive destination for investment by holding “Vibrant Gujarat” summits every year for the past eight years. Additionally, the north has grown across sectors because of investments in infrastructure and incentives for specific industries. For example, Gujarat is now a leader in the chemicals industry with a 35% share of all Indian investments in the chemical industry over the past five years.

The north, however, still faces challenges to its continued economic growth. Government policies on land acquisition are still burdensome and overly bureaucratic, and employees generally have a lower skill level than in the south. Because the labor supply for professional workers is so constrained, wages are rising which increases costs for businesses.
Both regions are also transitioning from the low end of the value chain, like off-shore IT work, to higher value research and production like building advanced medical equipment. The CII has issued a six-step agenda to implement the transition to higher value production, and various state secretaries and industry leaders will establish a steering committee that will monitor the transition’s progress.

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