mgi: from poverty to empowerment: india’s imperative for jobs, growth, and effective basic...

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

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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

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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

2014

MGI has invested in significant India research over the years

2001

2007

2010

3

4

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

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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3

4

6

5

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SA

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Contents

▪ The path from poverty to empowerment

▪ What keeps India poor?

▪ Access to basic services

▪ Understanding the empowerment gap

▪ The empowerment line

7SOURCE: 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 linePercent

Headcount below official poverty lineMillion

India’s totalpopulation Million

404 407 354 270

890 1,090 1,190 1,230

8

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 WATERSanitary 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

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


Normative consumption requirement and Empowerment LineINR 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), costs3 Includes health care, drinking water and sanitation

154128

221

221

25

14

Food

Health4

Education3

Housing2

Social security

Others1

Empowermentline

1,336

580

Energy

203

10682

16

Effective public spend on basic

services

208

37 2989

14

Normative consumption

required

1,544

617

232

195

9630

This means

INR 6,700

Per family of five

INR 1,692

Urban Empowerment Line

INR 1,228

Rural Empowerment Line

10SOURCE: 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 travel2 Corresponding category in official poverty line includes travel costs3 Includes primary and secondary education costs; corresponding category in official poverty line includes all education costs4 Includes healthcare, drinking water, and sanitation; corresponding category in official poverty line includes healthcare only5 Subcomponents calculated based on of Tendulkar poverty estimation methodology used in 2004-05

Official poverty line and Empowerment LineINR per capita per month, 2011–12; 2011–12 prices

The Empowerment Line has relatively higher requirements for heath, drinking water and sanitation, and education

128185

221

107

0

874

Food

Health4

Fuel

Education3

Housing2

Social security1.5x

Others1

Empowerment Line (EL), 2012

1,336

580

203

10682

16

Official Poverty Line5 (2011-12)

47237

2846

1.2x

1.8x

3.8x

1.2x

5.5x

1.2x

36

36

78

22

166

108

Difference between EL & PLINR

Ratio of EL to PL

11

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 expenditureINR 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

171 million Urban Indians and 509 million Rural Indians are below the Empowerment Line


1 BEL – Below Empowerment Line

2011-12

BEL1 populationMillion

BEL1 Headcount ratioPercent

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

Urban and Rural India are equally disadvantaged, on a relative basis


1 MPCE – Monthly Per Capita Expenditure, average; BEL = Below Empowerment Line2 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, 2012INR per month

RuralUrban

Per capita empowerment gap

521(31%)

MPCE ofBEL population1

1,171

Empowermentline

1,692

Per capita empowerment gap

370(30%)

MPCE ofBEL population1

859

Empowermentline

1,228

BEL population

%

Million

44

171

61

509

14

Contents






15

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

Privateconsumptiongrowth 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

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 servicesBLow 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

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 workerINR ‘000 per worker

1,000

200

400

600

Share of employmentPercentage

0

Banking & insuranceBanking & insurance

Real estate & business servicesReal estate & business services

Transport, storage & communicationsTransport, storage & communications

Public administration & defensePublic administration & defense

Trade, hotels & restaurantsTrade, hotels & restaurants

Unregistered manufacturingUnregistered manufacturing

ConstructionConstruction

AgricultureAgriculture

SOURCE: NSSO 66th Round; MOSPI website; McKinsey Global Institute analysis

Registered manufacturingRegistered manufacturing

Productivity and employment by sector2010 ServicesIndustryAgriculture

50 million more non-farm jobs by 2012 could have lifted 100 million more people above the Empowerment Line

Other servicesOther services

18

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

7046

25

65841-49 employees

50-199 employees

200+ employees

China

23

52

Thailand

13

42

Indonesia

6

29

Philippines

8

23

India

611

1.5 15.15.72.33.2

13.1 31.113.112.414.0

1 Both manufacturing & non-manufacturing businesses2 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 sizePercent

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

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

InterestPayments

Administrativeexpenses

Expenditurefor growth

Other socialexpenses

Basicservices2

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 expenditureINR crore

9% 15% 17%

CAGRxx

9%

17%

7%

13%

16%

16%

16%

9%

20%

20%

19%

14%

Nominal GDP CAGR

20

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 surveys2 Estimated by comparing best performing states on health and education outcomes per rupee of spend to average performing states across India

2011-12 government spendingINR ’000 crore

Estimated efficiency/effectiveness of government spending% of spending that typically reaches the people

Health,drinking waterand 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

Spendreaching people

Inefficiencies and leakages

50

50

INR 285,000 crore not reaching the intended beneficiaries

21

Contents






22

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

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, 2011–121Percent

1 The Empowerment Gap is defined as the aggregate differential between actual private consumption expenditure and the Empowerment Line2 Using average exchange rate of US$ 1 = INR 48.0769 for April 2011-March 20123 Monthly per capita expenditure

1.9x

1.4x

2.6x

Ratio of Empowerment Line to average MPCE3

44

100% =

Excluded

Impoverished

Vulnerable

Empowered

Empowermentgap1

INR 332,000 cr($69 billion2)

17

46

38

0

Population below the Empowerment

Line

1.2 billion

8

17

34

24

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, 2011–12INR per capita per month

1 Includes healthcare, drinking water and sanitation.

292161 285

163 25

63

Health1

Food

Education

Housing

Energy

Vulnerable

278

13824

6032

Impoverished

477

160

7236

46

Excluded

638

173

7938

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 segmentMillion

12 42 118 45 169 295

Rural

25

Contents






26

In addition to purchasing power, people needs access to basic services – we constructed Access Deprivation Score (ADS) to assess access


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

Educationdeprivation score

Healthcaredeprivation 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

An average Indian lacks access to 46% of services


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 proxy3 ADS is a population-weighted average of district-level access deprivation score

Average deprivation scores by basic service (percent)

Based on 9 parameters across these6 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

Householdlevel services

Energy

59

Drinking Water

18Sanitation

57

Housing

523

53

46Overall ADS3

28

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

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

126DISTRICTS

27%POPULATION

SHARE

59%ADS

1,083MPCE1 (INR)

177DISTRICTS

18%POPULATION

SHARE

49%ADS

1,177MPCE1 (INR)

127DISTRICTS

26%POPULATION

SHARE

41%ADS

1,653MPCE1 (INR)

59DISTRICTS

27%POPULATION

SHARE

37%ADS

2,761MPCE1 (INR)

LEAST DEPRIVED(Least deprived on health & education; moderately on others)

126DISTRICTS

27%POPULATION

SHARE

34%ADS

1,855MPCE1 (INR)

30

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

CategoriesHDS1

PercentCDS2

PercentADSPercent

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

HDSPercent

CDSPercent

DistrictsCategory

31

Contents






32

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

3.9

2.82.3

352312

237

1,088

771570

2022 – inclusive reforms

2022 – stalled reforms

2012

75

5050



2012

Inclusive reforms in four key areas

Inclusive reforms are needed in four key areas


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.

25p.p.

34

10

9

8

7

6

5

0

Inclusivereforms

Stalled reforms

202220172013

… which will result in faster poverty reduction and GDP growth


1 Below Empowerment line2 Below official poverty line

7

36

1

12

22



2012

56BPL2

BEL1Head-count ratio% of population

GDP growth ratePercent

Compound Annual Growth Rate

7.8%

5.5%

35

Non-farm job creation and farm productivity will drive almost 75% of poverty reduction


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


56

Reduction in BEL population – Inclusive reforms

36

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


4

Increase farm productivity

1

Create new non-farm jobs

6


6


18

Improve effectiveness of public spending

34

Increase public spending on basic services

Impoverished and ExcludedBelow the official poverty line

VulnerableAbove the official poverty line but below the Empowerment line

15

34

822

59% 41% Contribution to poverty reduction

37

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

3522026

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 reformsMillion

1 Working-age population, defined as 15 years and above, assumed to grow at 1.4% per annum based on demographic profile2 Labour force participation rate assumed to rise by 2.6 percentage points3 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

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


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 rounding1 Calculated assuming 80 million new industry and 35 million new services jobs2 Includes mining and quarrying, electricity, gas and water supply

1

39

Reforms that remove barriers to competitiveness and attract investment are key to generating jobs


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

Potential shape of a National Infrastructure Delivery Unit


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

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

Step-wise flexibility in labour laws


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

Job creation engines can generate 11 million jobs, almost one-third of the incremental jobs required over the Stalled Reforms case


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


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


▪ 1.5 million farming households with income increase of 20-80%

Case study Rationale Outlay Impact

44

Building industrial clusters is self-sustaining and can yield government IRRs in excess of 20% per year


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

5440

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

0.51.7

2020

1.30.9

0.70.5

0.3

2015

0.2

Construction

Indirect

Direct

24%

IRR

1

45

To improve yields, there is a need to focus on all aspects of the agriculture value chain


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

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.

4.00.30.40.20.3

0.52.3 +72%

2022 yield target

Market access1

Precision farming

Seedquality

IrrigationSoil fertility2012 yield

2

Yield (tonnes per hectare)

India

Other countries, 2011–12

7.4

5.55.0

4.23.7

3.1

China Vietnam Malaysia Indonesia Mexico Thailand

47

The technical levers need to be supported by nine ‘enabler’ ideas


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 accessLeverage technology for better price discovery2

48SOURCE: 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 production2 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 agricultureINR thousand crore

21%

17%

2

Compound annual growth ratePercent

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

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 servicesPercent; INR ’000 crore, 2011-12

Per capita1

INR per month, 2011-12

390

662

50

Effective public spending can significantly improve access to basic services across all areas

4


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

ModernFuel2

Toilet penetration

Pipedwater in the community

HealthcarePer capita

EducationRatio

EnergyPercent

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

2022Stalledreforms

2022Inclusive reforms

2012

51

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)

BE

NE

FIT

S

52

Government programmes should be made more effective by using 3 themes: external agents, community involvement and tight performance monitoring


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

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

TechnologyHuman Resources

Operating model innovations

54

To strengthen governance, each government role needs both more capacity building and a stronger sense of accountability


Accountabilities

Government roles

Policymaking

PeopleRegulatory oversight

Servicedelivery

Dispensationof justice

Transactional

Reputational

Reputational

Reputational

Political

Legal

Political Political

Regulatory

LegalLegal

Legal

Democratic

55

Top 6 themes for governance

Transparencyin public information and service effectiveness, backed by rights-based entitlements to business and citizen services

Decentralisationof 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 agenciesfor high-priority initiatives, given operational flexibility but held strictly accountable for outcomes

1

2

34

5

6

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