India’s economy: Why the time for growth is nowMcKinsey Global Institute September 2016
Indian consumption is going to be powered by a rising middle class that’s expected to more than triple to 89 million households by 2025.
The best companies in India grow at 25 to 30 percent a year. Some of the best banks in India have grown north of 20 percent a year for 20 years in a row.
When urbanization rates in districts or in states cross the threshold of about 35 percent, we start seeing productivity benefits kick in. You see higher GDP per capita because the dense cities and urban centers will have better connections with the rest of the world and with markets. Citizens have better access to education, health, and so on and this will also help in improving productivity.
As you get to that 35 percent, the actual per capita GDP in that particular district more than doubles.
69 megacities each with a million-plus population are emerging.
There’s a huge opportunity for both domestic and global companies in the provision of infrastructure—often, leapfrogging generations of what’s happened elsewhere through the use of smart meters, smart technologies, and networked cities.
How international companies should do business in India?
The opportunity is visible. What does it take to win? What does it take to execute?
There are four or five things that might be useful.
First important issue is commitment through the cycle. There will be cycles, have to factor them in your plan and stick with your business doing downturns. You should not close your business at the first downturn.
The second issue is building an India-centric business model, and that means identifying the three or four segments within the country for doing business.
The third big point is around empowering your talent. Both senior level personnel and middle level persons.
The last point is having the right alignment with the government.The truth is the best companies do so with absolute commitment to ethics and values. What that means in practice is to be in business and business models, where the government is already focused. Those who are focused on Smart Cities, those who are focused on Skill India etc. will be much more successful. You are in the flow of the country and will be able to take advantage of that and demonstrate that you’re doing good for the country in terms of jobs and employment.
McKinsey Global Institute (MGI)
INDIA’S ASCENT: FIVE OPPORTUNITIES FOR GROWTH AND TRANSFORMATIONAUGUST 2016
McKinsey published several reports: From poverty to empowerment: India’s imperative for jobs, growth, and effective basic services (February 2014), which laid out a path for inclusive growth; The power of parity: Advancing women’s equality in India (November 2015) took a deep look at gender equality in India; India’s economic geography in 2025: States, clusters, and cities (October 2014), identified the high-potential markets of the future; and India’s technology opportunity: Transforming work, empowering people (December 2014), explored the impact of disruptive technologies on India over the next ten years.
Important Points of the Report
The International Monetary Fund has projected India’s GDP growth at a robust 7.4 percent
for 2016–17. India has attractive long-term growth potential, powered largely by a consuming class that is expected to triple to 89 million households, by 2025.
MGI suggests five important measures to support India's Development
PROVIDE ACCEPTABLE LIVING STANDARDS FOR ALL INDIANS
SUSTAINABLE URBANISATION: BUILDING INDIA’S GROWTH ENGINES
MANUFACTURING FOR INDIA, IN INDIA
RIDING THE DIGITAL WAVE: HARNESSING TECHNOLOGY FOR
UNLOCKING THE POTENTIAL OF WOMEN
PROVIDE ACCEPTABLE LIVING STANDARDS FOR ALL INDIANS
The McKinsey Global Institute (MGI) has created an analytical framework to define a minimum acceptable standard of living. The result is the Empowerment Line. The concept of the Empowerment Line is based on the level of spending required for an individual to meet the necessities of human development? It is based on the estimate of the cost of fulfilling eight basic household needs (food, energy, housing, drinking water, sanitation, health care, education, and social security) at a level sufficient to achieve a decent, if modest, standard of living rather than just
bare subsistence. The people under Empowerment Gap are estimated to be 680 million people.
The spending required to bring these persons to the level of the Empowerment Line, equates to 4 percent of annual GDP (I think India can afford to spend this 4 per cent of annual GDP and improve the living standard of people).
PLANNED AND SMART URBANISATION: BUILDING INDIA’S GROWTH ENGINES
In 2011, India was 31 percent urbanised, and MGI estimates that figure will be about 41 percent by 2030. The country will have some 598 million urban residents in 2030. Four large states—Gujarat, Kerala, Maharashtra, and Tamil Nadu—will be more than 60 percent urbanised by then. India’s future economic growth has to be based on rising urbanisation, leading to growth in non-farm jobs and industrial- and service-sector output. (As agricultural employment decreases, rural areas will have less population and urban population will increase. Also, many farmers will live in urban areas and go to fields by motorised transport every day).
About 77 percent of India’s economic growth from 2012 to 2025 will come from 49 clusters of districts with metropolitan cities at their nucleus.
Mumbai’s economy in 2030 will reach $245 billion of consumption. The next four cities by market size (Delhi, Ahmedabad, Hyderabad, and Bengaluru) will each have annual consumption of $80 billion to $175 billion by 2030.
MANUFACTURING FOR INDIA, IN INDIAThe government’s stated ambition is to raise manufacturing’s contribution to 25 percent of GDP by 2022 and to create 100 million jobs in the coming decade.
India’s manufacturing sector has produced world-class companies in diverse sectors such as auto and auto components, two-wheelers, and pharmaceuticals. But most manufacturing enterprises are sub optimal scale and have low productivity. According to a study by the Asian Development Bank, 84 percent of India’s manufacturers employed fewer than 50 workers in 2009, compared with 70 percent in the Philippines, 65 percent in Indonesia, and 25 percent in China. Across all sectors, India’s largest companies (those with more than 200 employees) have about the same level of labour productivity as large enterprises elsewhere in Asia, But the country’s smallest enterprises are only 25 to 65 percent as
productive as their small-scale peers elsewhere.
The Skill India mission aims to train more than 400 million people in different skills by 2022. There is plan to start 5,000 more Industrial Training Institutes to increase their capacity from 1.85 million to 2.5 million students. There is also plan to set up 50 overseas employment skill training centres in regions from which workers have traditionally migrated in search of employment. A new skills certification body, along the lines of the Central Board of Secondary Education, is in the works, an attempt to encourage skills training beginning at the secondary school level.
In the corporate sphere, the Zero Defect Zero Effect (ZED) initiative of the Quality Council of
India is introducing integrated certification systems to raise quality, productivity, and energy
efficiency, and to mitigate pollution in manufacturing.
RIDING THE DIGITAL WAVE: HARNESSING TECHNOLOGY FOR INDIA’S GROWTH
The sector accounted for 26 percent of India’s total merchandise exports in 2014–15 and has catalysed entrepreneurship in the country.
The annual economic impact of new digital applications could be $550 billion to $1 trillion a year in
2025. That represents 20 to 30 percent of India’s incremental economic growth from 2012 to 2025 and up to six times the current revenue of the IT services sector. (If we think India's GDP will expand by 5 trillion dollars by 2025, $1 trillion will be 20% of it).
The government has launched Digital India, an initiative to build a digital backbone of infrastructure and services. Bharat Net seeks to connect all of India’s households through broadband using public-private partnerships. Common Services Centers are being rolled out to provide computer access and e-government services in rural areas, and according to government data, about 100,000 are perational
today, including some run by women’s cooperatives. The modernisation of India Post is bringing digital payment services to some 155,000 post offices throughout India. Business process outsourcing facilities, such as call centers, are to be launched in smaller, rural towns.
UNLOCKING THE POTENTIAL OF WOMEN
Women are underrepresented in India’s economy. MGI estimates that, at 17 percent, India’s women have the lowest share of contribution to GDP in the world, lower than women in China (41 percent), Sub-Saharan Africa (39 percent), and Latin America (33 percent). Women in India make up just 24 percent of the workforce, compared with 40 percent globally.
India could raise its GDP by $700 billion in 2025 by bringing 68 million more women into
the economy over this period. But India needs to provide physical security to women. (Both social change and change in security infrastructure and legal system are needed. India may also experiment with shorter working hours for women to take care of domestic responsibilities).
Government Capabilities Have to Change to Accelerate Development
Improve and integrate specific capabilities
To become more efficient, the government needs to build a range of new functional capabilities.
These include procurement and supply-chain expertise; deep technical skills for planning portfolios of infrastructure investments, and strong project management capabilities to ensure that large capital projects are completed on time and on budget; and training staff members to use digital technologies to automate and re-engineer processes, manage big data and advanced analytics, and improve citizen interactions through digitisation of touchpoints, online access platforms, portals, and messaging and payment platforms. The government could acquire these capabilities through training programmes and secondments from the private sector, where private sector has developed the capabilities ahead of government. Management institutes and technical institutes can provide help to the government in this regard by providing the necessary continuing education to government officers.