India at a Crossroads

In many ways, Asia can be considered the epicenter of the global economy. Over the past 30 years, the region has risen in prominence and now plays a significant role across five key economic domains that underpin McKinsey Global Institute research: world order, technology platforms, demographic forces, resource and energy systems, and capitalization.^[1]

Today, however, Asia is on the cusp of a new era, with notable opportunities that uniquely position it to revolutionize how we live, do business, and function as a global society. That said, Asia also faces significant challenges across each of the five domains—such as growing political tensions, rapidly aging populations, and concerns around both energy security and clean energy.

A key driver in the region is India. India is highly distinctive due to a combination of factors such as its information technology prowess and relatively young population. As such, the country has the potential to achieve high growth in the near term while securing a bright future for its people in the long term. Nevertheless, to benefit from the wave of change flowing across Asia will require India to rethink long-term strategies in the face of new realities. With this in mind, how well-positioned is India?

What Has Progress Looked Like So Far?

India is the world’s fifth-largest economy^[2] and its largest democracy, accounting for 18% of the global population. It is a huge economy—so much so that it could be considered a region in its own right. We project that, by 2040, India’s economy could become as big as the Middle East and Africa’s combined. This projection lies in India’s strong historical patterns of growth, with the economy really taking off following liberalization in 1991. Foreign direct investment tripled between the 1990s and the early 2000s. India was responsible for 4% of global growth^[3] from 1991 to 2021, and accounts for 3% of global GDP today. As part of the process, India has been able to lift hundreds of millions out of poverty. Despite these wins, India still has some way to go.

The Trade and Technology Challenge

India’s fast-growing economy has established major trade partnerships around the world: for example, with the US in electronics and textiles. Yet, compared to China, India still lags in its control of overall trade value and growth. Similarly, while India has become a world leader in producing technology talent and solutions, it remains heavily dependent on imported knowledge: for example, India imports nine times the intellectual property (IP) value of what it exports. The country could tackle this by building on its traditional strength in IT-enabled services to reflect digital and emerging technologies like artificial intelligence (AI) and machine learning-based analytics. The country also has an opportunity to develop high-value agricultural ecosystems, healthcare services, and high-value tourism.

The Sustainability Challenge

Beyond these issues of trade and technology, a key challenge for India is sustainability. Asia in general is not energy self-sufficient, and India is no different. As the second-largest energy importer in the region, around 28% of India’s consumption comes from overseas sources. Moreover, as Indian consumers become more affluent and the country continues to industrialize and urbanize, it is only going to become hungrier for energy. Meeting this energy demand in a sustainable and inclusive way will be a key challenge, given that India still uses coal to meet most of its energy needs. By introducing climate change mitigation and adaptation strategies, such as building more energy-efficient factories, India has the potential to more than triple its renewable energy capacity, and increase the share of wind and solar energy in power generation from about 7% to best-in-class 30%.

The Human Capital Promise

Encouragingly, these areas of weakness are balanced by key areas of strength. India is rapidly urbanizing, and this could be its golden ticket. The country’s urban population grew 2.3 times from 1990 to 2022. Moreover, in parallel to its urban growth, India’s productivity also grew four-fold over the same period. This was because many of India’s workers moved from less productive agricultural endeavors into other industries. Though large sections of India’s population still work on farms—with around 45% in the agricultural sector today—the number of agricultural workers is expected to fall sharply to around 30% by 2050. This shift is especially significant for women, who make up 60% of those working in subsistence agriculture. India will need to unlock its significant human capital potential to propel its continued growth—including creating at least 90 million nonfarm jobs by 2030.

Like its regional peers, India is ripe with opportunity. However, capturing this immense potential will require India to tackle existing weaknesses. For example, McKinsey Global Institute has identified three growth boosters, spanning 43 high-productivity business opportunities, that can contribute $2.5 trillion to India's economy by 2030. As business leaders, we need to start rethinking our long-term strategies and how best to position our businesses for this economic future. India needs to rise to the challenge and move forward with confidence into a new era.

Gautam Kumra is the Asia Chairman of McKinsey & Company.

[1] World order includes GDP growth, value of world trade involving Asia, and manufacturing sector value added; technology platforms includes R&D spend, patents granted, top tech company revenue growth; demographic forces include urban population, population over 65, middleclass households (purchasing power parity; resource and energy systems include primary energy consumption, new investments in clean energy, renewable energy capacity; and capitalization includes gross domestic savings, foreign direct investment inflows, fixed investment.

[2] India is the fifth-largest economy in nominal terms but ranks third on the basis of purchasing power parity.

[3] In terms of GDP.