India’s ascent: Five opportunities for growth and transformation (updated Aug. 17, 2016 with Seminar)
Noshir Kaka is a senior partner in McKinsey’s Mumbai office, where Anu Madgavkar is a partner of the MGI, the McKinsey Global Institute, firstly, there is their executive summary of the study “India 2016: A nation on the Move”(August 2016). Secondly, we let TextileFuture Readers also have the entire study with many interesting aspects on India, in order give you the full picture on India and its prospects.
TextileFuture wishes to add that in the week of August 8, 2016, Prime Minister Narenda Modi landed a veritable coup by pushing through a major reform for India. For the first time ever, and for the first major reform after 25 years, Modi introduced a uniform GST Goods and Service Tax, replacing 20 different state added value tax schemes. The states will be compensated by the Federal Government for their losses. Experts are expecting that this will mean a growth for the Federal Budget, but they all praise the reform as a guarantee for further growth. It is further expected, that Modi will be now in a position to push through other reforms that country needs desperately.
The executive summary of the study
The country could create sustainable economic conditions in five ways, such as promoting acceptable living standards, improving the urban infrastructure, and unlocking the potential of women
Twenty-five years ago, India embarked on a journey of economic liberalisation, opening its doors to globalization and market forces. We, and the rest of the world, have watched as the investment and trade regime introduced in 1991 raised economic growth, increased consumer choice, and reduced poverty significantly.
Now, as uncertainties cloud the global economic picture, the International Monetary Fund has projected that India’s GDP will grow by 7.4 % for 2016–17, making it the world’s fastest-growing large economy. India also compares favourably with other emerging markets in growth potential. (Exhibit 1). The country offers an attractive long-term future powered largely by a consuming class that’s expected to more than triple, to 89 million households, by 2025.
Liberalisation has created new opportunities. The challenge for policy makers is to manage growth so that it creates the basis for sustainable economic performance. Although much work has been done, India’s transformation into a global economic force has yet to fully benefit all its citizens. There’s a massive unmet need for basic services, such as water and sanitation, energy, and health care, for example, while red tape makes it hard to do business. The government has begun to address many of these challenges, and the pace of change could accelerate in coming years as some initiatives gain scale.
From the authors vantage point, India has an exciting future. In the new McKinsey Global Institute report India’s ascent: Five opportunities for growth and transformation, we look at game-changing opportunities for the country’s economy and the implications for domestic businesses, multinational companies, and the government. The five areas we focus on by no means provide a comprehensive assessment of India’s prospects, but we believe they are among the most significant trends. Foreign and Indian businesses would do well to recognize these opportunities and reflect on how to exploit them.
1. From poverty to empowerment: Acceptable living standards for all
The trickle-down effect of economic liberalisation has lifted millions of Indians from indigence in the past two decades. The official poverty rate declined from 45 % of the population in 1994 to 22 percent in 2012, but this statistic defines only the most dismal situations. By our broader measure of minimum acceptable living standards—spanning nutrition, water, sanitation, energy, housing, education, and healthcare—we find that 56 % of Indians lacked the basics in 2012.
The country will need to address these gaps to achieve its potential. The task is certainly within India’s capacity, but policy makers will have to promote an agenda emphasizing job creation, growth-oriented investment, farm-sector productivity, and innovative social programs that help the people who actually need them. The private sector has a substantial role to play both in creating and providing effective basic services.
2. Sustainable urbanization: Building India’s growth engines
By 2025, MGI estimates, India will have 69 cities with a population of more than one million each. Economic growth will centre on them, and the biggest infrastructure building will take place there. The output of Indian cities will come to resemble that of cities in middle-income nations (Exhibit 2). In 2030, for example, Mumbai’s economy, a mammoth market of USD 245 billion in consumption, will be bigger than Malaysia’s today. The next four cities by market size will each have annual consumption of USD 80 billion to USD 175 billion by 2030.
To achieve sustainable growth, these cities will have to become more liveable places, offering clean air and water, reliable utilities, and extensive green spaces. India’s urban transformation represents a huge opportunity for domestic and international businesses that can provide capital, technology, and planning know-how, as well as the goods and services urban consumers demand.
3. Manufacturing for India, in India
Although India’s manufacturing sector has lagged behind China’s, there will be substantial opportunities to invest in value-creating businesses and to create jobs. India’s appeal to potential investors will be more than just its low-cost labour: manufacturers there are building competitive businesses to tap into the large and growing local market. Further reforms and public infrastructure investments could make it easier for all types of manufacturing businesses—foreign and Indian alike—to achieve scale and efficiency.
4. Riding the digital wave: Harnessing technology for India’s growth
Twelve powerful technologies will benefit India, helping to raise productivity, improving efficiency across major sectors of the economy, and radically altering the provision of services such as education and healthcare. These technologies could add USD 550 billion to USD 1 trillion a year of economic value in 2025, according to our analysis, potentially creating millions of well-paying, productive jobs (including positions for people with moderate levels of formal education) and helping millions of Indians to enjoy a decent standard of living.
5. Unlocking the potential of Indian women: If not now, when?
Our research suggests that women now contribute only 17 % of India’s GDP and make up just 24 percent of the workforce, compared with 40 % globally. In the coming decade, they will represent one of the largest potential economic forces in the country. If it matched the progress toward gender parity of the region’s fastest-improving country, we estimate that it could add USD 700 billion to its GDP in 2025. Movement toward closing the gender gap in education and in financial and digital inclusion has begun, but there is scope for further progress.
Public-sector efforts to address the five areas are under way. The government is attempting to improve the investment climate and accelerate job creation—India’s ranking on the World Economic Forum’s Global Competitiveness Report climbed to 55 in 2015–16, from 71 a year earlier. Officials are moving to make the government more efficient, using technology that can leapfrog traditional bottlenecks of a weak infrastructure. One billion Indian citizens, for example, are now registered under Aadhaar, the world’s largest digital-identity program and a potent platform for delivering benefits directly to the poor.
India’s path from poverty to empowerment
Realising India’s promise will require national, state, and local leaders to adopt new approaches to governance and the provision of services. To meet the people’s aspirations, these officials will also need new capabilities. The requirements include private sector–style 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 finish on time and on budget. Training will be needed to help staff members use digital technologies to automate and reengineer processes, manage big data and advanced analytics, and improve interactions among citizens through digitized touchpoints, online-access platforms, portals, and messaging and payment platforms. The government could acquire these capabilities by adopting quality-oriented procurement policies and taking advantage of secondments from the private sector. For businesses, India represents a sizable market but will require a granular strategy and a locally focused operating model.
TextileFuture has purposely eliminated the additional explications contained in the original study.
No single report can capture all the changes taking place in the country, but we have tried here to identify the most significant trends. Foreign and Indian businesses should consider how their strategies will be influenced by them. Policy makers should focus on helping all stakeholders to capitalize on them. By any measure, the challenge is daunting, but success could give a historic boost to India’s economy.
Preface of the study
Twenty-five years ago, McKinsey & Company founded the McKinsey Global Institute (MGI) as its business and economics research arm. MGI has gained a reputation globally for distinctive knowledge and insights. That same year, McKinsey expanded into India, where we have built a deep advisory practice with more than 3,500 employees. In addition to serving leading organisations and contributing knowledge to inform national priorities, MGI has invested in wide-ranging research efforts focusing on India. We feel privileged to have been partners in India’s economic growth and evolution for the past quarter century.
From our vantage point, India has an exciting future. In this briefing note, we look ahead to five game-changing opportunities for India and their implication for Indian businesses, multinational companies, and the government. We have built on the foundation of our recent India research, drawing on 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), which took a deep look at gender equality in India; India’s economic geography in 2025: States, clusters, and cities (October 2014), in which we identified the high-potential markets of the future; and India’s technology opportunity: Transforming work, empowering people (December 2014), which explored the impact of disruptive technologies on India over the next ten years.
Our hope is that this executive briefing helps business leaders and policy makers capture opportunities that will promote equitable growth and broad-based prosperity in India.
Over the years, we have received valuable input from advisers with deep expertise in India’s economic and policy evolution, and we are indebted to them: R. Chandrashekhar, President of the National Association of Software and Services Companies (NASSCOM) and former secretary in the India Department of Telecommunications and Department of Information Technology; Subir Gokarn, Executive Director of the IMF; Rajesh Shukla, Managing Director and CEO, People Research on India’s Consumer Economy; Rakesh Mohan, management professor in the practice of international economics and finance, Yale School of Management, and senior fellow, Jackson Institute for Global Affairs at Yale; Subramaniam Ramadorai, chairman of the National Skill Development Corporation and National Skill Development Agency; and Usha Thorat, former deputy governor of the Reserve Bank of India, and chair of the Reserve Bank of India’s External Advisory Committee for Small Finance Banks.
This effort was led by Noshir Kaka, managing director of McKinsey in India; Anu Madgavkar, an MGI partner in Mumbai; Rajat Gupta and Shirish Sankhe, McKinsey senior partners
in Mumbai and members of the MGI Council; Jonathan Woetzel, an MGI director and McKinsey senior partner in Shanghai; and Jacques Bughin, an MGI director in Brussels; Ashwin Hasyagar, an MGI fellow in Bengaluru and Shishir Gupta, an urbanisation expert in Gurgaon, have led several MGI research projects in India on which this paper is based. In addition, we have benefited from the guidance of McKinsey senior partners and directors. We are also grateful to Adil Zainulbhai, former chairman of McKinsey in India and chairman of the Quality Council of India, for his valuable counsel. We thank MGI partners Michael Chui, Susan Lund, and Jaana Remes and MGI senior fellows Tera Allas, Jan Mischke, Sree Ramaswamy, and Jeongmin Seong, whose research was a great benefit. Special thanks go to Mekala Krishnan for contributing to MGI’s research on gender equality in India, and to Rishi Arora and Vritika Jain for providing extensive research support. For providing crucial support for this paper, we would like to thank Cuckoo Paul, senior editor, and Allan Gold, executive editor; Fatema Nulwala and Natasha Wig from the external relations team; Matt Cooke and Rebeca Robboy for external communication and media support at MGI; Therese Khoury of New Media; and Vineet Thakur for design support.
This report contributes to MGI’s mission to help business and policy leaders understand the forces transforming the global economy, identify strategic locations, and prepare for the next wave of growth. As with all MGI research, this work is independent and has not been commissioned or sponsored in any way by any business, government, or other institution. While we are grateful for all the input we have received, the report is ours, including any errors.
India has long been a study in contrasts, but probably never as much as in recent years. The International Monetary Fund has projected India’s GDP growth at a robust 7.4 percent for 2016–17, even as uncertainties cloud the outlook for global growth (Exhibit 1). Twenty five years after India embarked on its liberalisation programme, it offers attractive long- term potential, powered largely by a consuming class that we expect will more than triple, to 89 million households, by 2025. This rapid growth is contributing to a major shift in the world’s economic balance of power. Looking back, it took a thousand years for the world’s economic centre of gravity to shift from Asia to Europe, but MGI studies show that this trend is reversing at a stunning speed. The shift back—from the United States and Europe toward Asia—is expected to continue over the next decade, with India contributing significantly.
The challenge for Indian policy makers is to manage growth in such a way that it creates the basis for sustainable economic performance. India’s transformation into a global economic force has yet to fully benefit all Indians. There is massive unmet need for basic services, such as water and sanitation, energy, and health care. Despite a strong entrepreneurial class, businesses in India have long been shackled by red tape. The government has begun to address many of these challenges. Efforts are under way to improve the investment climate—in 2015–16, India’s ranking on the World Economic Forum’s Global Competitiveness Report climbed to 55, from 71 a year earlier. Officials are moving to improve government efficiency, using technology that can leapfrog traditional bottlenecks of a weak infrastructure. For instance, one billion Indian citizens are now registered under Aadhaar, the largest digital identity programme in the world and a potent platform to deliver direct benefits to the poor with minimum leakage.
In this briefing note, the authors focus on five areas with the potential for deep and widespread economic impact. By no means is this a comprehensive assessment of India’s prospects, but we believe these are among the most significant opportunities and are emblematic of broader change. Foreign and Indian businesses would do well to recognise these trends and understand their implications.
From poverty to empowerment: Acceptable Living Standards for all Indians
India has been able to lift millions out of poverty in the past two decades. The trickle-down effect of economic liberalisation has improved the condition of many more. The official poverty ratio declined from 45 percent of the population in 1994 to 22 percent in 2012, but this statistic defines only the most dismal situations. To achieve its full potential, the country will need to address deprivation using a new set of parameters that address quality of life and access to basic services. This is certainly within India’s capacity, but it will require policy makers to promote an agenda that emphasises job creation, growth-oriented investment, farm-sector productivity, and innovative social programmes so that the benefits actually reach the people who need them. The private sector can have a substantial role in both job creation and providing effective basic services.
Sustainable Urbanisation: Building India’s growth engines By 2025, MGI estimates that India will have 69 cities with a population of more than one million each. Economic growth will be concentrated around these cities, and the biggest infrastructure building will take place there. To achieve sustainable growth, these cities will have to be more liveable places, offering clean air and water, reliable utilities, and green spaces. India’s urban transformation represents a huge opportunity for domestic and international businesses that can provide capital, technology, and planning know-how as well as the goods and services the urban consumer demands.
Manufacturing for India, in India
Although India’s manufacturing sector has lagged behind China’s, substantial opportunities to invest in value-creating businesses and create jobs will be available. India’s appeal to potential investors will be more than just its low-cost labour. Manufacturers in India are innovating to build competitive businesses and tap the large and growing local market.
Reforms and public investment in infrastructure could make it easier for all types of manufacturing businesses—foreign and Indian—to achieve scale and efficiency.
Riding the Digital Wave: Harnessing technology for India’s growth
Twelve powerful technologies can empower India, helping raise productivity, improving efficiency across major sectors of the economy, and radically altering the provision of services such as education and health care. These technologies could add economic value of USD 550 billion to USD 1 trillion a year in 2025, according to MGI, creating millions of well-paying, productive jobs (including positions for people with moderate levels of formal education) and helping bring a decent standard of living to millions of Indians.
Unlocking the potential of women: If not now, when?
Our research suggests that women contribute only 17 % of India’s GDP today and make up just 24 percent of the workforce, compared with 40 percent globally. Women represent one of the largest potential economic forces in India in the coming decade. If the country were to match the progress toward gender parity of the fastest-improving country in the region, we estimate that India could add USD 700 billion to its GDP in 2025. Movement toward closing the gender gap in education and in financial and digital inclusion is a signal of broader change, though there is scope for further progress.
Realising India’s promise in these five areas, and more, will require national, state, and local leaders to adopt new approaches to governance and provision of services. These officials will also need new capabilities to meet citizens’ aspirations. For businesses, India represents a sizeable market, but one that will require a granular strategy and a locally focused operating model. The rest of this briefing note explores the opportunities and implications in greater detail.
From Poverty to Empowerment: Acceptable living standards for all Indians
Long considered an immutable fact of life in India, extreme poverty is in retreat. India’s official poverty ratio declined from 45 percent of the population in 1994 to 22 percent, with some 270 million people below the poverty line, in 2012. This is an achievement to be celebrated—and yet the government’s definition of poverty counts only those living in the most abject conditions. If India is to achieve its full potential, it must address not just acute poverty but also deprivation in terms of quality of life and access to basic services.
The McKinsey Global Institute (MGI) has created an analytical framework to define a minimum acceptable standard of living. The result is the Empowerment Line, a measure of income-based deprivation. The concept of the Empowerment Line poses an important question: what is the level of spending required for an individual to meet the necessities of human development? We estimate 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.
In applying this metric for 2011–12, we found that 56 percent of India’s population lacked the means to meet essential needs. By this measure, some 680 million Indians are deprived—more than 2.5 times the population of 270 million below the official poverty line. Hundreds of millions of Indians have exited extreme poverty, but their lives are still marked by a continuous struggle to achieve a modicum of dignity, comfort, and security. The Empowerment Gap, or the additional spending required to bring these 680 million people to the level of the Empowerment Line, equates to 4 percent of annual GDP.
Merely increasing government subsidies can achieve only a fraction of this goal. Government spending is critical to ensure access to basic services, but simply channelling more money into the same programmes without addressing their operations and outcomes will result in very little. With the right set of measures to unlock investment for job growth, productivity, and efficiency across sectors of the economy, more than half a billion people could cross the threshold of consumption required for an economically empowered life by 2022. Achieving this level of poverty reduction requires action in four areas (Exhibit 2):
▪ About half the impact could come from creating 115 million non-agricultural jobs over the next decade to absorb the growing pool of workers and accelerate the shift toward more modern industries. This contrasts with about 75 million jobs likely to be created in a business-as-usual scenario.
▪ About 20 % of the impact could come from raising agricultural productivity from its historical growth of 2 % a year to 5.5 % a year, a level seen in comparable countries.
▪ About 20 % of the impact could come from improving the outcomes — in the form of financial benefits or better nutrition, health and education—of public spending on basic services. The value of basic services that actually reached the poor was estimated at just 50 percent in 2011–12; that figure could climb to 75 % in 2022, assuming all states achieve the effectiveness of the best-performing states.
▪ Less than 10 percent of the impact could come from raising spending. India should consider raising public spending on social services but could do so at a pace in line with GDP growth over ten years. Much of the increase would go to improve health care, sanitation, and drinking water, services that represent the largest gaps for people below the Empowerment Line.
Achieving these goals is within India’s grasp. But it will require policy makers at all levels of government to emphasise job creation, growth-oriented investment, farm-sector productivity, and innovative provision of social programmes so that the benefits reach the people who need them. While the policy direction and funding would fall to the central government, many of the specific initiatives can be implemented at the state level. The requirements are political will and a relentless focus on results.
The government has repurposed existing programmes and introduced many new ones that have the potential to spur job creation and improve basic services provision where it is needed most (Exhibit 3).
One shift that will enable faster job creation is higher public spending on infrastructure and transportation, particularly rail, roads, and ports. This could not only lead to improved competitiveness of private enterprises, but also create jobs directly. MGI’s analysis suggests that some three-quarters of the incremental non-farm jobs that India requires must come from the industrial sector, with the construction sector alone offering the potential to create 50 million jobs in the coming decade.
In farm productivity, the national initiative Pradhan Mantri Krishi Sinchai Yojana aims to spend INR 50000 crore (USD 7 billion) over five years to improve irrigation. Its projects will soon be monitored by government satellites and through apps on the geoportal website Bhuvan.
The Mahatma Gandhi National Rural Employment Guarantee Act programme, started by an earlier government, has been retained and amended to better align with irrigation, animal husbandry, and road programmes aimed at raising rural farm incomes through greater productivity.
To improve access to basic services and stem leakage in public spending, one major initiative is the Direct Benefit Transfer programme, leveraging a national drive to extend unique identities and bank accounts to all Indians. The goal is to transfer financial benefits under social schemes programmes directly to beneficiaries’ bank accounts rather than through intermediaries. The government’s Swachh Bharat (Clean India) mission aims to improve sanitation and waste management through something akin to a social movement.
Empowerment and efficiency, not welfare payments and entitlement, have been the philosophy underlying many of these initiatives, but lasting results will require a relentless focus on execution and monitoring outcomes. India’s population is demanding a better quality of life. By any measure, the challenge is huge and the numbers are daunting. But if aspirations for a minimum acceptable standard of living are met, the result could be a profound and historic step forward in India’s economic and human development.
Sustainable Urbanisation: Building India’s Growth Engines
Mahatma Gandhi said India lives in its villages, but modern India is quickly urbanising. The pace is slower than in China but still dramatic: every year India adds urban population equivalent to three times the population of Los Angeles. In 2011, India was 31 % urbanised, and MGI estimates that figure will be about 41 % by 2030, when the country will have some 598 million urban residents. Four large states—Gujarat, Kerala, Maharashtra, and Tamil Nadu—will be more than 60 % urbanised by then. Much of India’s future economic growth is predicated on rising urbanisation, leading to growth in non-farm jobs and industrial- and service-sector output.
Metropolitan cities with million-plus populations are India’s engines of growth. With better infrastructure and services, such as public health care and quality education, these cities will be magnets for investment and job creation. About 77 % of India’s economic growth from 2012 to 2025 will come from 49 clusters of districts with metropolitan cities at their nucleus (Exhibit 4). And as India’s cities grow, so do their hinterlands—clusters of semi-urban and rural districts whose economies are linked to the expanding city nearby.
In the coming decades, Indian cities will resemble middle-income nations in terms of output (Exhibit 5). Mumbai’s economy, for example, will be bigger in 2030 than that of Malaysia today, representing a mammoth market of USD 245 billion of consumption. The next four cities by market size (Delhi, Ahmedabad, Hyderabad, and Bengaluru) will each have annual consumption of USD 80 billion to USD 175 billion by 2030.8 The 49 clusters around India’s metropolitan cities will be thriving markets for discretionary, consumption-driven goods and services, such as motorcycles and televisions.
India’s urban population is concentrated in its largest cities and in cities with fewer than half a million residents. Only 27 % of the urban population lives in middle-tier cities (those with populations between 500000 and four million). By contrast, nearly 50 % of urban residents in China live in middle-tier cities. A large share of India’s 115 million new non-farm jobs will be created in urban areas, but accommodating these new urban workers in India’s existing megacities will prove exceptionally challenging and expensive, pointing to the need for a broader approach to urbanisation over the coming decades.