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MGI: From poverty to empowerment: India’s imperative for jobs, growth, and effective basic services

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Some 680 million people, or 56% of India, live below MGI’s Empowerment Line and lack acceptable minimum standards of living; the Empowerment Gap is 4% of GDP in value terms (about 7 times the official poverty gap)

From 2005 to 2012, 75% of the improvement in living standards was due to rising incomes, the rest due to government spending; to reduce the gap faster, India needs more productive jobs and higher effectiveness of government spending (e.g., 85 million people below the official poverty line could have been lifted to minimum living standards just by improving delivery of public services)

Almost 40% of the Empowerment Gap comes from health care, drinking water and sanitation; in addition, hunger is a major issue for the poorest segments, and housing for the urban vulnerable

Apart from lacking the means, Indians also lack access to 46% of the basic services they need, with significant variations in the pattern of access deprivation across districts

A path of Stalled Reforms would leave 36% of India below the Empowerment Line and 12% below the Poverty Line in 2022, but the path of Inclusive Reforms can bring these down to 7% and 1% respectively – while achieving fiscal consolidation and reducing access deficit in basic services to 17%, from 46% currently. Raising government spending on subsidies alone delivers just 8% of the total impact. 4 themes are critical

Non-farm jobs deliver >50% of impact; 115 million jobs are needed (38 million more than Stalled Reforms) through 6 broad-ranging reforms and investments in 70-100 job creation engines

Agricultural yield growth delivers ~20% of impact, needing 9 farm sector initiatives and investment rebalancing towards rural infrastructure, research and extension
Public spending on basic services should grow at 7% p.a. in real terms and share of health, water and sanitation to rise from 20% to nearly 50%

Government spending effectiveness must improve from 50% to 75%, by working with private and social sector, community involvement and tight monitoring using technology

Six themes are essential to improve governance across the board (raise institutional capacity and strengthen external accountability)

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MGI: From poverty to empowerment: India’s imperative for jobs, growth, and effective basic services

  1. 1. From poverty to empowerment MGI INDIA | February, 2014 India’s imperative for jobs, growth and effective basic services The full report can be found at http://bit.ly/McKIN-MGI-Pov2Emp
  2. 2. 1 The McKinsey Global Institute (MGI) – an overview ▪ Help leaders in the private, public, and social sectors develop a deeper understanding of the evolution of the global economy ▪ Provide a fact-base and ideas that contributes to decision-making on critical management and policy issues ▪ Focus on long-term fundamental research and maintain very high standards of peer review and intellectual rigor in its work ▪ Build deep knowledge in core areas: productivity, competitiveness and growth and key markets – technology, labour, natural resources, finance MGI Mission & Aspirations OVERVIEW ▪ Founded in 1990 as McKinsey’s business and economics research arm ▪ Distinctive “micro to macro” approach combines real business experience with the rigor of world-class economic analyses ▪ Project teams are led by MGI senior fellows and draw from top-performing consultants around the world ▪ Leading global economists, including Nobel laureates, act as advisers ▪ Research is funded by the partners of McKinsey independent from any business, government, or other institution
  3. 3. 2 2014 MGI has invested in significant India research over the years 2001 2007 2010 2
  4. 4. 3 Leadership team for MGI’s India ‘poverty to empowerment’ report Rajat Gupta Shirish Sankhe Director, Mumbai office Director, Mumbai office Richard Dobbs Jonathan Woetzel Director, London office Director, Shanghai office Anu Madgavkar Ashwin Hasyagar Senior Fellow, McKinsey Global Institute Fellow, McKinsey Global Institute
  5. 5. 4 Some 680 million people, or 56% of India, live below MGI’s Empowerment Line and lack acceptable minimum standards of living; the Empowerment Gap is 4% of GDP in value terms (about 7 times the official poverty gap) From 2005 to 2012, 75% of the improvement in living standards was due to rising incomes, the rest due to government spending; to reduce the gap faster, India needs more productive jobs and higher effectiveness of government spending (e.g., 85 million people below the official poverty line could have been lifted to minimum living standards just by improving delivery of public services) Almost 40% of the Empowerment Gap comes from health care, drinking water and sanitation; in addition, hunger is a major issue for the poorest segments, and housing for the urban vulnerable Apart from lacking the means, Indians also lack access to 46% of the basic services they need, with significant variations in the pattern of access deprivation across districts A path of Stalled Reforms would leave 36% of India below the Empowerment Line and 12% below the Poverty Line in 2022, but the path of Inclusive Reforms can bring these down to 7% and 1% respectively – while achieving fiscal consolidation and reducing access deficit in basic services to 17%, from 46% currently. Raising government spending on subsidies alone delivers just 8% of the total impact. 4 themes are critical ▪ Non-farm jobs deliver >50% of impact; 115 million jobs are needed (38 million more than Stalled Reforms) through 6 broad-ranging reforms and investments in 70-100 job creation engines ▪ Agricultural yield growth delivers ~20% of impact, needing 9 farm sector initiatives and investment rebalancing towards rural infrastructure, research and extension ▪ Public spending on basic services should grow at 7% p.a. in real terms and share of health, water and sanitation to rise from 20% to nearly 50% ▪ Government spending effectiveness must improve from 50% to 75%, by working with private and social sector, community involvement and tight monitoring using technology Six themes are essential to improve governance across the board (raise institutional capacity and strengthen external accountability) 1 2 3 4 6 5 KEYMESSAGES
  6. 6. 5 Contents ▪ The path from poverty to empowerment ▪ What keeps India poor? ▪ Access to basic services ▪ Understanding the empowerment gap ▪ The empowerment line
  7. 7. 6SOURCE: Planning Commission of India; McKinsey Global Institute analysis India performance on reducing extreme poverty has been encouraging 45 2004-05 22 2009-10 30 1993-94 37 2011-12 Headcount ratio of population below India’s official poverty line Percent Headcount below official poverty line Million India’s total population Million 404 407 354 270 890 1,090 1,190 1,230
  8. 8. 7 We ask what it would take to economically empower every Indian – at the very least, through the fulfillment of eight basic needs SOURCE: McKinsey Global Institute analysis 2,100-2,400 calories, including 60 grams protein and 40 grams fat1, per capita per day for rural-urban 215-275 square feet of acceptable housing in rural- urban areas Access to clean cooking fuel and electricity for lighting needs, based on minimum energy consumption levels ENERGY FOOD HOUSING 70-135 litres per capita per day of piped water supply in rural-urban areas DRINKING WATER Sanitary latrine in rural households, and underground sewerage with wastewater treatment in urban SANITATION Access to primary education, and secondary education (substitutable with vocational training), for all children based on accepted norms EDUCATION Access to an essential basket of health-care services across primary, secondary, and tertiary health care HEALTHCARE Insurance to cover income loss based on 2% premium-to-coverage ratio SOCIAL SECURITY 1 Protein and fat norms for adults Basic services
  9. 9. 8 MGI’s ‘Empowerment Line’ is the cost of eight basic services, less goods and services paid for by the government that actually reach the people SOURCE: McKinsey Global Institute analysis Normative consumption requirement and Empowerment Line INR per capita per month, 2011–12; 2011–12 prices 1 Includes clothing, footwear, travel, entertainment, communication, domestic appliances, etc. 2 Includes primary, and secondary education (substitutable with vocational training), costs 3 Includes health care, drinking water and sanitation 154 128 221 221 25 14 Food Health4 Education3 Housing2 Social security Others1 Empowerment line 1,336 580 Energy 203 106 82 16 Effective public spend on basic services 208 37 29 89 14 Normative consumption required 1,544 617 232 195 96 30 This means INR 6,700 Per family of five INR 1,692 Urban Empowerment Line INR 1,228 Rural Empowerment Line
  10. 10. 9SOURCE: Report of the Expert Group to Review the Methodology for Estimation of Poverty – Planning Commission (2009), McKinsey Global Institute analysis 1 Includes clothing, footwear, travel, entertainment, communication, domestic appliances, etc.; corresponding category in official poverty line does not include travel 2 Corresponding category in official poverty line includes travel costs 3 Includes primary and secondary education costs; corresponding category in official poverty line includes all education costs 4 Includes healthcare, drinking water, and sanitation; corresponding category in official poverty line includes healthcare only 5 Subcomponents calculated based on of Tendulkar poverty estimation methodology used in 2004-05 Official poverty line and Empowerment Line INR per capita per month, 2011–12; 2011–12 prices The Empowerment Line has relatively higher requirements for heath, drinking water and sanitation, and education 128 185 221 107 0 874 Food Health4 Fuel Education3 Housing2 Social security1.5x Others1 Empowerment Line (EL), 2012 1,336 580 203 106 82 16 Official Poverty Line5 (2011-12) 472 37 28 46 1.2x 1.8x 3.8x 1.2x 5.5x 1.2x 36 36 78 22 166 108 Difference between EL & PL INR Ratio of EL to PL
  11. 11. 10 1 The Empowerment Gap and the Poverty Gap are defined as the aggregate differential between actual private consumption expenditure and the consumption requirements of the Empowerment Line and the poverty line, respectively 2 Using average exchange rate of $1 = INR 48.0769 for April 2011–March 2012 Average monthly consumption expenditure INR per capita per month, 2011-12, in 2011-12 prices SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis 680 million Indians are below the Empowerment Line, against 270 million who are below the official poverty line Empowerment line Official poverty line 0 500 1,000 1,500 2,000 2,500 3,000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Percentile of population (percent) INR 874 INR 1,336 Empowerment Gap1 INR 332,000 crore ($69 billion)2 4% of GDP Poverty Gap1 INR 50,000 crore ($10 billion)2 0.6% of GDP
  12. 12. 11 171 million Urban Indians and 509 million Rural Indians are below the Empowerment Line SOURCE: McKinsey Global Institute analysis 1 BEL – Below Empowerment Line 2011-12 BEL1 population Million BEL1 Headcount ratio Percent Empowerment line (average) INR per capita per month All India 680 Rural 509 Urban 171 61 56 44 1,692 1,228 1,336
  13. 13. 12 Urban and Rural India are equally disadvantaged, on a relative basis SOURCE: McKinsey Global Institute analysis 1 MPCE – Monthly Per Capita Expenditure, average; BEL = Below Empowerment Line 2 Empowerment gap defined as a the monetary value of the difference between actual private consumption expenditure and the consumption required under Empowerment line Empowerment line and per capita empowerment gap, 2012 INR per month RuralUrban Per capita empowerment gap 521 (31%) MPCE of BEL population1 1,171 Empowerment line 1,692 Per capita empowerment gap 370 (30%) MPCE of BEL population1 859 Empowerment line 1,228 BEL population % Million 44 171 61 509
  14. 14. 13 Contents ▪ The empowerment line ▪ What keeps India poor? ▪ Understanding the empowerment gap ▪ Access to basic services ▪ The path from poverty to empowerment
  15. 15. 14 74% of the past reduction in Empowerment Gap was attributable to higher incomes, the rest to more government spending SOURCE: National Sample Survey Office survey, household consumption survey, 61st (2005) and 68th (2012) rounds; McKinsey Global Institute analysis Empowerment gap, 2011–12 332 Additional public spend reaching the people1 111 Private consumption growth due to higher incomes 321 Gap (2011–12) holding per capita consumption constant 764 Impact of increase in population 168 Empowerment gap, 2004–05 597 1 Public spending reaching the people is ~20% of monthly per capita expenditure (MPCE) for below Empowerment Line (BEL) population in 2012. Empowerment Gap, 2005–12 %; INR thousand crore 1 Share of past poverty reduction % For Below Empowerment Line For Below Poverty Line 74% 66% 26% 34% 56%78% xx% BEL population
  16. 16. 15 Two reasons why India’s poor have not been able to meet their basic consumption needs, despite fast GDP growth Inadequate and inefficient provision of basic servicesB Low productivity improvement and a poor job creation engineA Agriculture is plagued by low productivity, high underemployment (20%) and slow productivity growth (2.3% p.a. between 2000-10) and houses 60% of India’s “working poor” Non-farm job creation has been inadequate: India created just 65 million new non-farm jobs in the last decade, not enough to move workers out of agriculture Low productivity of jobs: 65-75% of non-farm jobs are in the unorganised sector, 84% of manufacturing employment in tiny enterprises of less than 50 workers Low workforce skills: almost 70% of the workforce is not educated beyond primary school Effectiveness of government spending is low, with 50% of what is spent not translating into real benefits for people Despite rapid overall growth, public spending is insufficient in critical areas such as healthcare, water and sanitation There is wide variation in public spending, and hence outcomes, across states and sectors (urban vs. rural)
  17. 17. 16 Over half the workforce (and 60% of the working poor) are in agriculture where productivity is one-third to one-half that of the next two sectors 955550 800 1001050 45403530252015 Productivity per worker INR ‘000 per worker 1,000 200 400 600 Share of employment Percentage 0 Banking & insurance Real estate & business services Transport, storage & communications Public administration & defense Trade, hotels & restaurants Unregistered manufacturing Construction Agriculture SOURCE: NSSO 66th Round; MOSPI website; McKinsey Global Institute analysis Registered manufacturing Productivity and employment by sector 2010 ServicesIndustryAgriculture 50 million more non-farm jobs by 2012 could have lifted 100 million more people above the Empowerment Line Other services
  18. 18. 17 Even in the non-farm sector, India’s glut of low-productivity small enterprises kept average worker incomes low SOURCE: Asian Development Bank; “Enterprises in Asia: Fostering Dynamism in SMEs,”Key Indicators for Asia and the Pacific (2009), McKinsey Global Institute analysis 70 46 25 65 841-49 employees 50-199 employees 200+ employees China 23 52 Thailand 13 42 Indonesia 6 29 Philippines 8 23 India 6 11 1.5 15.15.72.33.2 13.1 31.113.112.414.0 1 Both manufacturing & non-manufacturing businesses 2 Productivity data is only for small enterprises (i.e., 5-49 employees) and does not include micro enterprises (i.e., 1-4 employees) Share of manufacturing employment by business size Percent Value add per worker for 200+ employee businesses1 2005, USD ‘000 per year Value add per worker for 5-492 employee businesses1 2005, USD ‘000 per year
  19. 19. 18 0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 2,250,000 2,500,000 Interest Payments Administrative expenses Expenditure for growth Other social expenses Basic services2 2011-1232007-082003-042000-01 SOURCE: Indian Public Finance Statistics; Budget documents of Government of India and State governments; IMF Note: • Data for 01-02 and 02-03 was not available, so their values have been calculated by interpolating along the graph • Data for 11-12 is as per revised estimates • Values differ slightly from calculations for 2009-10 shown previously, as this only takes into account fiscal expenditures; also tertiary education is included in basic services head for this graph Government social spending for basic services has risen faster than GDP over the past decade to INR 570,000 crore ($118 billion) Government (Centre and state) fiscal expenditure INR crore 9% 15% 17% CAGRxx 9% 17% 7% 13% 16% 16% 16% 9% 20% 20% 19% 14% Nominal GDP CAGR
  20. 20. 19 Half of government social spending (or INR 285,000 crore) does not benefit the people SOURCE: NSSO, government fiscal statistics, MGI analysis 1 Estimated by comparing actual government spend to benefits reported as received in NSSO’s consumption surveys 2 Estimated by comparing best performing states on health and education outcomes per rupee of spend to average performing states across India 2011-12 government spending INR ’000 crore Estimated efficiency/effectiveness of government spending % of spending that typically reaches the people Health, drinking water and sanitation 36 Fuel1 47 Education2 51 NREGA1 52 Food1 64 If subsidies were 75% efficient in reaching intended beneficiaries, 85 million more people would be above the official poverty line today Spend reaching people Inefficiencies and leakages 50 50 INR 285,000 crore not reaching the intended beneficiaries
  21. 21. 20 Contents ▪ The empowerment line ▪ What keeps India poor? ▪ Understanding the empowerment gap ▪ Access to basic services ▪ The path from poverty to empowerment
  22. 22. 21 Health and food are 60% of the Empowerment Gap; housing is a large unmet need for the urban poor SOURCE: NSSO 68th round, McKinsey Global Institute 9 25 20 10 332 ($69) -1 39 19 17 7 Rural 226 ($47) -1 40 18 9 Urban 107 ($22) Health2 Others Education Food Housing Fuel Total 21 37 -1 32 1 Empowerment Gap by service and sector, 2011–12 %; INR thousand crore ($ billion1) 1 Using average exchange rate of US $1 = INR 48.0769 for 1 April 2011 to 31 March 2012. 2 Includes health care, drinking water, and sanitation.
  23. 23. 22 There are three distinct segments below the Empowerment Line SOURCE: National Sample Survey Office survey, 68th round; Oanda; McKinsey Global Institute analysis India’s population and Empowerment Gap1 by segment, 2011–121 Percent 1 The Empowerment Gap is defined as the aggregate differential between actual private consumption expenditure and the Empowerment Line 2 Using average exchange rate of US$ 1 = INR 48.0769 for April 2011-March 2012 3 Monthly per capita expenditure 1.9x 1.4x 2.6x Ratio of Empowerment Line to average MPCE3 44 100% = Excluded Impoverished Vulnerable Empowered Empowerment gap1 INR 332,000 cr ($69 billion2) 17 46 38 0 Population below the Empowerment Line 1.2 billion 8 17 34
  24. 24. 23 Needs are very different for each segment – absolute gap SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis Consumption gap by segment and service, 2011–12 INR per capita per month 1 Includes healthcare, drinking water and sanitation. 292 161 285 163 25 63 Health1 Food Education Housing Energy Vulnerable 278 138 24 60 32 Impoverished 477 160 72 36 46 Excluded 638 173 79 38 Vulnerable 415 184 -20 100 158 -7 Impoverished 724 216 136 187 23 Excluded 910 227 149 196 46 Consumption gap % of Empowerment Line 66 53 30 63 47 27 Urban Population by segment Million 12 42 118 45 169 295 Rural
  25. 25. 24 Contents ▪ The empowerment line ▪ What keeps India poor? ▪ Understanding the empowerment gap ▪ Access to basic services ▪ The path from poverty to empowerment
  26. 26. 25 In addition to purchasing power, people needs access to basic services – we constructed Access Deprivation Score (ADS) to assess access SOURCE: McKinsey Global Institute analysis 1 Oral Rehydration Solution; 2 High Level Expert Group; 3 Liquefied Petroleum Gas (used as cooking fuel). Electricity usage LPG3 usage Drinking water and sanitation access Good or liveable housing Education infra with regard to norms Net enrolment ratio ORS1 usage during diarrhoea Extent of full immu- nisation Health infra with regard to HLEG2 norms Energy deprivation score Water and sanitation deprivation score Housing deprivation score Education deprivation score Healthcare deprivation score Household services deprivation score Community services deprivation score Access Deprivation Score Overall basic services Two types of basic services Six basic services Nine dimensions
  27. 27. 26 An average Indian lacks access to 46% of services SOURCE: McKinsey Global Institute analysis 1 Healthcare metrics include ORS, immunisation and infrastructure; education metrics include net enrolment and classroom and teacher availability; energy includes electricity and LPG usage 2 LPG penetration is taken as a proxy 3 ADS is a population-weighted average of district-level access deprivation score Average deprivation scores by basic service (percent) Based on 9 parameters across these 6 basic services, we find that the Access Deprivation Score (ADS)3 for India is 46% i.e., on average, Indians do not have access to 46% of basic services Two types of basic services Six basic services Community level services Healthcare1 Education1 Household level services Energy 59 Drinking Water 18 Sanitation 57 Housing 523 53 46 Overall ADS3
  28. 28. 27 0 10 20 30 40 50 60 70 80 0 1,000 2,000 3,000 4,000 5,000 Household services Deprivation Score1 Percent Monthly per capita expenditure (average for district) INR 0 10 20 30 40 50 60 70 80 0 1,000 2,000 3,000 4,000 5,000 Community services Deprivation Score2 Percent Monthly per capita expenditure (average for district) INR Access to health and education are relatively less responsive to income, while access to energy, water and sanitation seem correlated to income SOURCE: National Sample Survey Office survey, 2011-12; McKinsey Global Institute analysis R2 = 0.05R2 = 0.66 District data, 2011 1 Household services Deprivation Score = distance of each district from the point of no deprivation in household services. 2 Community services Deprivation Score = distance of each district from the point of no deprivation in common services.
  29. 29. 28 Access deprivation has substantial district-level variations (1/2) SOURCE: Census 2011, District-Level Health Survey 2007-08, DISE 2009-10, MGI analysis MOST DEPRIVED (Extremely deprived on all services) HOUSEHOLD SERVICES DEPRIVED (Extremely deprived on all except health & education) MODERATELY DEPRIVED (Moderately deprived on all services) COMMUNITY SERVICES DEPRIVED (Deprived on health and education; less so on others) 1 Monthly Per Capita Expenditure 126 DISTRICTS 27% POPULATION SHARE 59% ADS 1,083 MPCE1 (INR) 177 DISTRICTS 18% POPULATION SHARE 49% ADS 1,177 MPCE1 (INR) 127 DISTRICTS 26% POPULATION SHARE 41% ADS 1,653 MPCE1 (INR) 59 DISTRICTS 27% POPULATION SHARE 37% ADS 2,761 MPCE1 (INR) LEAST DEPRIVED (Least deprived on health & education; moderately on others) 126 DISTRICTS 27% POPULATION SHARE 34% ADS 1,855 MPCE1 (INR)
  30. 30. 29 Access deprivation has substantial district-level variations (2/2) SOURCE: Census 2011; District-Level Health Survey, 2007–08; DISE, 2009–10; National Sample Survey Office survey, 2011–12; Forest Survey of India 2011; McKinsey Global Institute analysis 1 Household services deprivation score = distance of each district from the point of no deprivation in household services. 2 Community services deprivation score = distance of each district from the point of no deprivation in community services. 3 Monthly Per Capita Expenditure Averages Categories HDS1 Percent CDS2 Percent ADS Percent MPCE3 INR Most Deprived 62 56 59 1,083 Household Services Deprived 57 39 49 1,177 Moderately Deprived 41 41 41 1,653 Community Services Deprived 20 46 37 2,761 Least Deprived 38 31 34 1,855 All-India average 46 44 46 1,627 10 20 30 40 50 60 70 10 20 30 40 50 60 70 HDS Percent CDS Percent Districts Category
  31. 31. 30 Contents ▪ The empowerment line ▪ What keeps India poor? ▪ Understanding the empowerment gap ▪ Access to basic services ▪ The path from poverty to empowerment
  32. 32. 31 We have developed two scenarios to see how rapidly India can move people from poverty to empowerment SOURCE: McKinsey Global Institute Stalled reforms ▪ Low job creation and productivity growth in both farm and non-farm sectors would persist ▪ Low tax revenue base would constrain the government’s ability to spend on social services ▪ Inefficiency in service delivery would remain unaddressed Inclusive reforms ▪ Stimulate job creation and productivity growth across the economy (with particular emphasis on the most labour- intensive sectors) ▪ Rising incomes would support higher tax revenues that enable increased public spending on basic services ▪ A concerted push for more efficient delivery by the government machinery would make public spending yield greater results
  33. 33. 32 3.9 2.8 2.3 352 312 237 1,088 771 570 2022 – inclusive reforms 2022 – stalled reforms 2012 75 5050 2022 – inclusive reforms 2022 – stalled reforms 2012 Inclusive reforms in four key areas Inclusive reforms are needed in four key areas SOURCE: McKinsey Global Institute analysis Create new non-farm jobs Increase farm productivity Million Yield (tonnes per hectare) Increase public spending on basic services Improve effectiveness of public spending INR ’000s crore, 2012 Percent 2.0% p.a. 5.5% p.a.+115 +75 6.7% p.a. 3.1% p.a. 25 p.p.
  34. 34. 33 10 9 8 7 6 5 0 Inclusive reforms Stalled reforms 202220172013 … which will result in faster poverty reduction and GDP growth SOURCE: McKinsey Global Institute analysis 1 Below Empowerment line 2 Below official poverty line 7 36 1 12 22 2022 – inclusive reforms 2022 – stalled reforms 2012 56 BPL2 BEL1 Head-count ratio % of population GDP growth rate Percent Compound Annual Growth Rate 7.8% 5.5%
  35. 35. 34 Non-farm job creation and farm productivity will drive almost 75% of poverty reduction SOURCE: McKinsey Global Institute analysis Contribution to poverty reduction 74% 26% Population share 2022 7 Improve effectiveness of public spending 9 Increase public spending on basic services 4 Increase farm productivity 10 Create new non-farm jobs 25 Population share 2012 56 Reduction in BEL population – Inclusive reforms
  36. 36. 35 84% 16% Contribution to poverty reduction Percentage of population Even for the extremely poor, non-farm job creation and farm productivity will contribute to about 60% of poverty reduction SOURCE: McKinsey Global Institute analysis 4 Increase farm productivity 1 Create new non-farm jobs 6 Population share 2012 6 Population share 2022 18 Improve effectiveness of public spending 34 Increase public spending on basic services Impoverished and Excluded Below the official poverty line Vulnerable Above the official poverty line but below the Empowerment line 1 5 3 4 822 59% 41% Contribution to poverty reduction
  37. 37. 36 India can create 115 million additional non-farm jobs by 2022, but the stalled reforms scenario will fall 40 million short SOURCE: National Sample Survey Office survey, 68th round; United Nations Population Division; McKinsey Global Institute analysis 35220 26 69 237 2012 – non-farm jobs Change in working-age population1 2022 – non-farm jobs Farm to non-farm shift3 Change in labour force participation rate2 Non-farm job potential, Inclusive reforms Million 1 Working-age population, defined as 15 years and above, assumed to grow at 1.4% per annum based on demographic profile 2 Labour force participation rate assumed to rise by 2.6 percentage points 3 Share of farm sector in total employment assumed to fall from 49% to 37% +115 40 115 75 Non-farm jobs 2012–22 Stalled reforms Non-farm job creation gap 1
  38. 38. 37 India’s industrial sector will need to lead the way on job creation, especially in construction and manufacturing Incremental job creation in Inclusive Reforms scenario, 2012–22 Headcount, million Compound annual growth rate SOURCE: McKinsey Global Institute analysis 3.8% 3.9% 7.4%Construction1 Manufacturing1 Others1,2 80 50 27 3 95Total Agriculture 20 Services 35-40 Industry 75-80 5.6%1 2.4%1 -0.9% 1.9% NOTE: Numbers may not sum due to rounding 1 Calculated assuming 80 million new industry and 35 million new services jobs 2 Includes mining and quarrying, electricity, gas and water supply 1
  39. 39. 38 Reforms that remove barriers to competitiveness and attract investment are key to generating jobs SOURCE: McKinsey Global Institute analysis 1 Build multiple self-sustaining job creation engines Non-farm job creation reforms B Reduce administrative and compliance burden, especially for MSMEs, in all government and judicial interface Reform land markets and land acquisition process to reduce time and improve predictability D C Implementation of GST and removal of specific product-market barriers (policy, taxation) A Improve process for timely approval and execution of infrastructure investments E Make the labor market more flexible, along with boosting income security for workers F Build skills for poor workers to enable them to move into more productive work ▪ Make focused public investment in centres for job creation – build trunk infrastructure, skills and market linkages in greenfield and brownfield locations focused on labour-intensive sectors e.g., industrial clusters, tourism, food processing ▪ Plough back the resources generated from such government investments into development
  40. 40. 39 Potential shape of a National Infrastructure Delivery Unit SOURCE: McKinsey Global Institute analysis 1 ▪ Permanent institutionalised support to the CCI ▪ Reporting to the prime minister ▪ Specifically accountable for infrastructure outcomes ▪ Empowered to resolve bottlenecks. ▪ Governed by an outcomes-based MoU ▪ Led by an empowered and accountable ‘chief executive’ Key functions 1 Actively coordinate various arms of government and entities involved in project implementation 2 Plan for critical linkages across ministries and functions, set and monitor schedules, and facilitate implementation 3 For projects above a certain size, evaluate feasibility and contain costs 4 Actively shape portfolio of large and critical infrastructure projects to ensure optimisation and balance Potential structure
  41. 41. 40 Step-wise change in administrative reforms SOURCE: Expert interviews; McKinsey Global Institute analysis 1 LONG-TERM (>5 yrs.) MEDIUM-TERM (2-4 yrs.) NEAR-TERM (<2 yrs.) Create transparency ▪ Launch single website that con- solidates all rules and regulations businesses face, organized by type of enterprise and state ▪ Clarify which inspectorates are responsible for which regulations, penalties per rule, and rights of business during inspections ▪ Make case judgments (i.e., precedent) in contractual disputes publicly available Reduce direct cost to do business ▪ Allow new businesses to be registered with no paid-in minimum capital ▪ Streamline the tax system to simplify number of different taxes and reduce overall tax take Reinforce property rights ▪ Make cadastral information (i.e., land ownership) available online through a central website ▪ Reinstate property rights as a fundamental right in the constitution Optimize interactions with government ▪ Allow self-assessment for corporate taxes ▪ Create a framework for self- & third-party certification for inspections deemed less critical to the public good ▪ Institute risk-based inspections for import & export cargoes … ▪ Establish specialized commercial court for contractual disputes ▪ Create single government window for starting a business and getting a construction permit ▪ Launch electronic platform for sub-mitting & processing trade docs … ▪ Reform inspections regime – e.g., focus inspections on highest-risk businesses, institute expedited redressal mechanisms, reinforce punishments for bribe-taking, etc. ILLUSTRATIVE
  42. 42. 41 Step-wise flexibility in labour laws SOURCE: Expert interviews; McKinsey Global Institute analysis 1 Catalyze enterprise growth Make life simpler for MSMEs Create transparency ▪ Launch a single user- friendly website that consolidates all labor regulations, organized by type of enterprise ▪ Clarify which inspectorates are responsible for which regulations, penalties per rule, and rights of business during inspections ▪ Remove restrictions on female work at night, daily work hours, and weekly work hours ▪ Remove requirement of government approval and union consultation for changes in terms of work (i.e., standing orders) ▪ Streamline excessive regulations related to working environment (e.g., wall painting, lighting, spittoons, creches, etc.) ▪ Remove requirement of government approval for retrenchment in the case of industrial enterprises with 100+ employees ▪ Reduce time for filing of unfair dismissal claim from 3 years to 3 months ▪ Pair with direct unemployment assistance requiring registration with a job placement agency and actively seeking work ▪ Strengthen employ- ment exchanges ILLUSTRATIVE
  43. 43. 42 Job creation engines can generate 11 million jobs, almost one-third of the incremental jobs required over the Stalled Reforms case SOURCE: Expert interviews; McKinsey Global Institute analysis 1 Industrial clusters/ towns ▪ High value-add manufacturing with good growth potential and significant impact on productivity ▪ INR 15,000 per year (INR ~484,000 cr. investment over 25 years) with IRR of 25% ▪ 4.2 million jobs through 35 industrial towns in steady state; 2.0 million jobs by 2022 ▪ Average salary of INR 450,000 p.a. Tourism ▪ Pro-poor growth- enabling sector and potential to include informal participation ▪ INR 2,000 cr. over 5 years with IRR of 28% ▪ 7.7 million jobs through 5 mega tourism circuits ▪ Average salary of INR 80,000 p.a. Food processing ▪ Labour-intensive sector in rural areas and impact farmers through improved productivity ▪ INR 3,400 cr. over 5 years with IRR of 37% ▪ 1 million jobs through 30 food parks ▪ Average salary of INR 300,000 p.a. ▪ 1.5 million farming households with income increase of 20-80% Case study Rationale Outlay Impact
  44. 44. 43 Building industrial clusters is self-sustaining and can yield government IRRs in excess of 20% per year SOURCE: McKinsey Global Institute analysis Setting the aspiration Economic profile ▪ ~4.2 mn jobs created in steady state, supporting a population of ~15.8mn ▪ Cumulative Gov’t capex of INR 484,000 cr. over 25 years (INR 286,000 cr. by 2022) ▪ Cashflow positive in year 9 ▪ Nominal payback in year 13 ▪ Ramp-up of township launches – 1 launched in 2014 – 2 in 2015 – 3 in 2016 – 4 in 2017 – 5 in 2018 – 5 per year thereafter ▪ ~50% brownfield and ~50% greenfield ▪ 35 new job creation engines launched until 2022 Cashflows ‘000 INR crore 54 40 60 120 -20 20 0 100 80 -40 -60 -7 -17 Net cashflow Revenue Opex Capex 3.0 2.5 2.0 1.5 1.0 0.5 0 2.8 2.4 2022 0.1 2013 0 2.0 0.7 0.7 0.5 1.7 2020 1.3 0.9 0.7 0.5 0.3 2015 0.2 Construction Indirect Direct 24%IRR 1
  45. 45. 44 To improve yields, there is a need to focus on all aspects of the agriculture value chain SOURCE: McKinsey Global Institute analysis 2 Technical levers Enablers Input Farm Market Price support Precision farming Post-harvest management Soil fertility Irrigation and water management Market access Credit Research and extension Land tenure and governance Seed quality
  46. 46. 45 By 2022, India can increase farm yields to 4 tonnes per hectare, comparable to current yields in other emerging economies SOURCE: UN Food and Agriculture Organization; McKinsey Global Institute analysis 1 Includes post-harvest infrastructure and rural roads. 4.00.3 0.4 0.20.3 0.5 2.3 +72% 2022 yield target Market access1 Precision farming Seed quality IrrigationSoil fertility2012 yield 2 Yield (tonnes per hectare) India Other countries, 2011–12 7.4 5.5 5.0 4.2 3.7 3.1 ChinaVietnamMalaysiaIndonesiaMexicoThailand
  47. 47. 46 The technical levers need to be supported by nine ‘enabler’ ideas SOURCE: McKinsey Global Institute analysis 2 Enable private trade by reforming APMC Acts1 Re-balance price support3 Reform the crop insurance program4 Research and Extension Overhaul the Research & Extension network6 Credit Improve farmers’ access to credit7 Land tenure Reform land markets to promote leasing8 Price support Incentivize new technology adoption5 Governance Integrate governance at grass roots9 Market access Leverage technology for better price discovery2
  48. 48. 47SOURCE: Planning Commission (2012); McKinsey Global Institute analysis 13% Support to agriculture has emphasised input subsidies over investment in productive assets 1 Does not include electricity subsidy accruing to agriculture and subsidy to indigenous urea production 2 A part of the food subsidy is actually a consumer subsidy rather than a producer subsidy, but a break-up is unavailable Expenditure on subsidies and investments in agriculture INR thousand crore 21% 17% 2 Compound annual growth rate Percent 0 30,000 60,000 90,000 120,000 Output support (food subsidy2) Input subsidy1  Fertilizer  Irrigation Gross capital formation  Research and extension  Post-harvest infrastructure  Irrigation infrastructure 2010-112008-092006-072004-052002-03
  49. 49. 48 Basic services spending should double in real terms over 10 years, shifting towards healthcare, drinking water and sanitation SOURCE: IPFS; McKinsey Global Institute analysis 1 Not accounting for inefficiencies and leakages. NOTE: Numbers may not sum due to rounding. 3 571 +517 (+91%) 2022 1,08840% 9% 23% 11% 9% 4% 3% 2012 15% 6% 42% 13% 14% 7% 4% HousingFuel Social Security Food Education DW+S Healthcare Public spend on basic services Percent; INR ’000 crore, 2011-12 Per capita1 INR per month, 2011-12 390 662
  50. 50. 49 Effective public spending can significantly improve access to basic services across all areas 4 SOURCE: McKinsey Global Institute analysis 1 LPG penetration is taken as a proxy. 2 ADS is a population-weighted average of district-level access deprivation score. Sub- centres Primary health centres Community health centres District hospitals Students per classroom Pupils per teacher Enrolment Electrification Modern Fuel2 Toilet penetration Piped water in the community Healthcare Per capita Education Ratio Energy Percent Water and sanitation Percent 0.0 0.2 0.4 0.6 0.8 1.0 Access to basic services Current levels Potential levels in 2021-22 (inclusive reforms) Access Deprivation Score2 -63% 0.26 0.46 0.17 2022 Stalled reforms 2022 Inclusive reforms 2012
  51. 51. 50 Several modes of benefit delivery are available for basic services4 SOURCE: Government of India programs; McKinsey Global Institute analysis through producers … Fortified food production to consumers … Subsidised low-cost private/ PPP schools in urban/rural areas In-kind transfer ▪ Midday meals in schools ▪ Public Distribution System (PDS) ▪ Government-run healthcare institutions Cash transfer ▪ Conditional scholarships for girls and women ▪ Community grants through Nirmal Gram Puraskar Voucher ▪ Food vouchers ▪ Skills vouchers system with accredited providers Insurance ▪ Micro-insurance for hospitalisation, e.g., Rashtriya Swasthya Bima Yojana (RSBY) BENEFITS
  52. 52. 51 Government programmes should be made more effective by using 3 themes: external agents, community involvement and tight performance monitoring SOURCE: McKinsey Global Institute analysis 4 Education Health Food Leverage external service providers (for profit and NGOs) ▪ Cash transfers – service providers will be private ▪ NGOs, for-profits to run FPS ▪ Health vouchers funded by the Govt. ▪ Contracting out (to for-profits, NGOs) ▪ PPP and tech- enabled PHCs ▪ School vouchers funded by the Govt. ▪ Low – cost private schools ▪ PPP schools (e.g., charter schools) ▪ Gram panchayat to identify beneficiaries and monitor FPS performance ▪ Women SHGs to run FPS ▪ Community health workers ▪ Village health committees ▪ Dispensaries in micro-entrepreneurs’ homes ▪ School management committees ▪ Low-cost, semi- skilled teachers trained intensively ▪ Nationwide assessment system ▪ Alternate teacher certification methods ▪ Digital attendance recording ▪ Digital tracking of supply chain ▪ Surprise audits ▪ Web-based portal for grievance redressal ▪ Online medicine availability database ▪ SMS-based tracking of patients based on biometric identification Involve the community, especially women Create performance monitoring mechanisms
  53. 53. 52 Innovations along 3 dimensions, along with the 3 themes, are essential to drive more effective social services SOURCE: Literature review; web and press search; McKinsey Global Institute analysis Khan Academy (Global) Chunampet Diabetes Program (India) SughaVazhvu (India) MediCall (Mexico) HMRI (India) Bridge Academy (Africa) opAsha (India) Charter Schools (USA) Ignition Process (Bangladesh) Pratham (India) Living Goods (Uganda) YMCA Diabetes Prevention Program (USA) Arogya Ghar (India) Health Services Point (India) BRAC schools (Bangladesh) Satya Bharti schools (India) Escuela Nueva Project (Vietnam) Minas Geiras Assessment System (Brazil) Swastha Slate (India) Jordan Educational Initiative (Jordan) Eklavya Foundation (India) Presbyterian healthcare services (USA) Smile on wheels (India) Home-based care for HIV/AIDS and TB (Zambia) Greenstar (Pakistan) Rapid SMS (Malawi)CARE Rural Health Mission (India) Kriti Clinics (India)Healthkeepers (Ghana) Government Private ▪ New ways to reach consumers ▪ Better supplier capability ▪ New products to enhance effectiveness and efficiency ▪ Leveraging existing skills in the community ▪ Creating low-cost skills in community ▪ New ways of reaching consumers and providing services ▪ New ways of managing resources 4 Technology Human Resources Operating model innovations
  54. 54. 53 To strengthen governance, each government role needs both more capacity building and a stronger sense of accountability SOURCE: McKinsey Global Institute analysis Accountabilities Government roles Policy making PeopleRegulatory oversight Service delivery Dispensation of justice Transactional Reputational Reputational Reputational Political Legal Political Political Regulatory Legal Legal Legal Democratic
  55. 55. 54 Top 6 themes for governance Transparency in public information and service effectiveness, backed by rights-based entitlements to business and citizen services Decentralisation of funds, functions and functionaries Talent and performance management in the bureaucracy Robust anti-corruption framework Simpler laws and greater judicial capacity to enforce the rights of households and enterprises Empowered agencies for high-priority initiatives, given operational flexibility but held strictly accountable for outcomes 1 2 34 5 6

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