A clarion call for India: Time for a step change in reforms

A clarion call is sounding for India. The country needs to create at least 90 million jobs by 2030 as a new generation reaches working age, millions of others move from farm work to better paid jobs in other sectors, and more women participate in the labor force. Creating that many jobs will in turn require a strong boost to GDP growth, which will need to average between 8 and 8.5 percent every year from 2023 to 2030, according to our estimates. This is double the growth rate we have seen in the year leading up to the COVID-19 pandemic. Manufacturing and construction sectors will need to accelerate the most, from their tepid past performance, while the services sectors, the mainstay of India’s economy, will have to maintain their growth momentum. 

Given the severe blows that the virus is dealing to both lives and livelihoods in India, getting GDP growth back on the fast track may seem like a tall order. It means sharply reversing the trend of stalling growth, which was down to 4.2 percent, before the pandemic, as well as navigating the tremendous economic uncertainty posed by the crisis itself. Yet India in the past has been able to rise to such challenges, to introduce strong and sustained reforms spurred by a crisis. The country can do so again, providing that it rallies around a sharply-defined reform agenda based on forward-looking opportunities. The alternative is potentially a decade of stagnation, with low income growth and rising unemployment. India thus finds itself at a turning point.

The opportunities it can seize arise from global trends. At a time of rapid progress in automation and digitization, shifts in global value chains, and a growing awareness of the need for health, safety and resilience, India is well positioned to play a more forthright role in the global economy. We have identified 43 frontier business opportunities that could contribute $2.5 trillion of economic value and support 30 percent of the nonfarm jobs India needs in 2030. Each of these frontier businesses would operate at a high level of productivity compared to traditional businesses and promise pathways to higher wage jobs for millions of India’s aspiring workers across skill levels. 

India’s growth-booster opportunities follow three themes. First, India could do much more to become a global hub serving the world in areas like manufacturing, agriculture, and digital services. Second, there are new business models that could create new efficiencies in areas that underpin a competitive economy, such as power, logistics, financial services, automation, and government services. And third, India can cater to new ways of living and working, including better housing, more modern retail, and a sharing economy for jobs and skills.

Companies have a big role to play in building frontier businesses for India. Large, competitive firms are powerful drivers of growth amongst high-growth Asian economies, and, by comparison to its peers, India has fewer large companies with more than $500 million in revenue. We see room for the number of these firms to triple from the current 600, as more than 1,000 small and mid-size firms scale up and create a new competitive dynamism. 

All this requires reforms, and we have described a comprehensive reform agenda in a new McKinsey Global Institute report published this month. These span longstanding areas that have hindered India’s productivity for decades: unlocking land supply for affordable home ownership and industrial use, making labor markets more flexible, and power distribution more efficient; privatizing state-owned firms; and making doing business in India both easier and less costly. System-wide financial reform is also critical to reduce cost of capital and enable investment of $2.4 trillion in 2030, by firms of all sizes. They include measures to channel more household savings to capital markets, to reduce the cost of credit intermediation, and to streamline government finance.

As always, implementation will be key. Central government obviously has a central role, and its conviction and speed of action will be important. About half of the reforms we identified can be enacted through a policy or law and focused expert committees could be set up to propose such reforms in high priority areas within the next six to 12 months. An institutional body could steward the process, under the jurisdiction of the Prime Minister’s office, in order that the reform agenda endures across multiple years. 

The role of states will also be critical – even more so now, than in India’s first phase of reforms in 1991. Indeed, we estimate that India’s states will drive about 60 percent of the reforms. Dynamic state government leaders could pick the frontier businesses they wish to enable, and figure out how to get them to work at scale within a two-year time frame. One promising idea is for each state to create “demonstration clusters” (for instance, special manufacturing zones) under a CEO-led entity. Successful pilots of this type would create powerful precedents.

Granted, these are ambitious goals, especially at a time when the country is struggling with a pandemic. We are encouraged to see that some recent announcements of the government seem to head in the direction of structural reforms, for example allowing farmers to sell produce more freely and starting the process of privatizing power distribution companies in states and union territories. But much more will need to be done, and urgently. India has transformed its economy before. It needs to do so again now.

An excerpt of the new Future of Asia podcast episode on India’s turning point. To listen to the entire episode, click here. 

Oliver Tonby is the Chairman of McKinsey’s offices in Asia, while Anu Madgavkar is a Partner with the McKinsey Global Institute.