The McKinsey recipe for India to boost growth

India needs to create a large number of non-farm jobs and at the same time make its manufacturing more competitive and productive if it is to fully realise its potential, according to Kevin Sneader, Chairman, Asia, McKinsey & Co.

For India to lift the huge portion of the population from below the poverty line, it needs to create large-scale employment.

That employment, according to Sneader, has to be more than farming. “If you have to create non-farm jobs, then a number of things have to be in place,” he added. A stable taxation regime, increased productivity, including in agriculture, are prerequisites.

Smaller cities

Creating more non-farm jobs means increased urbanisation. It is not just the large cities such as Delhi and Mumbai that have to provide job opportunities to the millions who move out of agriculture.

The mid-tier ones — with population ranging from 500,000 to 4 million — need to get their act together, provide basic infrastructure and become productive engines of growth.

Almost 27 per cent of India’s population, compared to China’s 50 per cent, lives in mid-tier cities.

For these cities to work and to make manufacturing more competitive, India needs to increase its infrastructure spending. It now spends 2.5 per cent of its GDP on infrastructure, while China spends 8 per cent and “that 8 per cent is of a larger number.”

Growth engine

In a recent interaction in Chennai, Sneader said Asia is still the engine of growth for the world. With China expected to grow slower than previously forecast, it is up to India to make good that opportunity, create conditions favourable for increased domestic consumption and take the lead in the region.

India is expected to grow at 7.4-7.6 per cent, which is higher than most other countries.

“The implication for India is that it has plenty of things it can do domestically to create the conditions for non-farming jobs, empower people out of poverty, get its manufacturing competitive and generate those opportunities,” he said. India, as also China, will add a huge number of people to the consumer class in the next 10-15 years.

On the manufacturing side, Sneader said there is a lot of talk and some action around Make in India.

But clearly, he said, the nature of manufacturing is changing.

One of the challenges for India is to make its manufacturing productive. India, he pointed out, is made up of a large number of small and medium enterprises (SMEs). Nearly 75 per cent of all jobs in India are in companies that employ less than 200 persons; in comparison it is 25 per cent in China.

The challenge is to get these companies to scale up quickly, become competitive and productive.

“Creating a set of tax and regulatory codes that will reward companies for getting to scale, and on the back of the scale, being competitive and productive, is vital to the manufacturing sector. There are a number of things that need to happen to accelerate that progress and make sure companies can scale and be competitive,” he said.

Family businesses

He did not agree with the perception that being family owned — as a majority of the SMEs in India are — is an obstacle to growth.

Germany, with its mittelstand firms — was founded on its family owned businesses. Even in China, a majority of them are private family entrepreneurs.

On the contrary, the family ownership structure can be a great advantage in terms of continuity, stability and long-term view.

“But,” he said, “the aspiration needs to be there.” Across Asia, he pointed out, family owned businesses are very much at the heart of economies. “I don’t think India is unique in that aspect.”

Sneader, a first class honours graduate in Scots Law from the University of Glasgow and an MBA from the Harvard Business School, said digital is another great opportunity for India.

However, for the country to take that big leap in digital, the infrastructure had to be vastly improved.

He also felt that if India were to create another wave of economic growth, the role of women, who account for nearly half the population, is going to be vital to that.

Half the population contributes just 17 per cent to the GDP; in China it is around 40 per cent.

He said it will be difficult for any country to win just on the basis of labour cost. Instead, India should get competitive and productive.

That is why investing in digital, technology and capability matters. Ultimately, the combination of labour cost and productivity will determine who will be able to compete.

China, where wages are rising 15 per cent every year, has managed to remain competitive by boosting productivity, he said.

To a question, Sneader said Indian manufacturers should not be too fixated on China, as they will then miss the point.

First of all, Indian companies should fulfil the domestic market. China faces the twin challenges of a declining labour force and rising wages, posing tremendous pressure on the cost side. That is a great opportunity for India.

Robust export market

Indian manufacturers should look at whether they are automating enough, employing people in the right way, if their export markets are robust and how the domestic market spans out.

There is plenty for Indian companies to do without getting too fixated on China.

He said there is renewed optimism about India and “there is no question that the election of Prime Minister Modi changed the way, and his charismatic journey around the world has absolutely increased interest in India.” The reality of India’s growth rate, which is higher than China’s and the rest of the world’s, generated a lot of interest.

The passing of the GST Bill recently has also provoked a lot of interest in the country. Along with the rise in interest, so too has there been an increase in expectation, he pointed out.

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