From Poverty to Empowerment: India's Imperative for jobs, growth, and effective basic services

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

1

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McKinsey independent from any

business, government, or other

institution

2

2014

MGI has invested in significant India research over the years

2001

2007

2010

2

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

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

KE

Y M

ES

SA

GE

S

5

Contents

▪ The path from poverty to empowerment

▪ What keeps India poor?

▪ Access to basic services

▪ Understanding the empowerment gap

▪ The empowerment line

6 SOURCE: 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

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

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


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

154128

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

9 SOURCE: 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

128185

221

107

0

874

Food

Health4

Fuel

Education3

Housing2

Social security 1.5x

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

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

11

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

Empowerment Line


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

12

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


1 MPCE – Monthly Per Capita Expenditure, average; BEL = Below Empow erment Line

2 Empow erment gap defined as a the monetary value of the difference betw een actual private consumption expenditure and the consumption required under Empow erment line

Empowerment line and per capita empowerment gap, 2012

INR per month

Rural Urban

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

13

Contents






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

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 services B Low productivity improvement and a

poor job creation engine A

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)

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

95 55 50

800

100 10 5 0 45 40 35 30 25 20 15

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 Services Industry Agriculture

50 million more non-farm jobs by 2012 could

have lifted 100 million more people above the Empowerment Line

Other services

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

7046

25

65841-49 employees

50-199 employees

200+ employees

China

23

52

Thailand

13

42

Indonesia

6

29

Philippines

8

23

India

6 11

1.5 15.1 5.7 2.3 3.2

13.1 31.1 13.1 12.4 14.0

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

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

2011-123 2007-08 2003-04 2000-01

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%

CAGR xx

9%

17%

7%

13%

16%

16%

16%

9%

20%

20%

19%

14%

Nominal GDP CAGR

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

20

Contents






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

2520

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.

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

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.

292161 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

24

Contents






25

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

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

26

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 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

5 23

53

46 Overall

ADS3

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 = 0.05 R2 = 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.

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)

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

30

Contents






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

32

3.9

2.82.3

352312

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


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.

33

10

9

8

7

6

5

0

Inclusive

reforms

Stalled

reforms

2022 2017 2013

… which will result in faster poverty reduction and GDP growth


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%

34

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

Population

share 2012

56

Reduction in BEL population – Inclusive reforms

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


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

8 22

59% 41% Contribution

to poverty

reduction

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

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 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

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


3.8%

3.9%

7.4% Construction1

Manufacturing1

Others1,2

80

50

27

3

95 Total

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

38

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

39

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

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

41

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

42

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


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


300,000 p.a.

▪ 1.5 million farming

households with income

increase of 20-80%

Case study Rationale Outlay Impact

43

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

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

44

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

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.

4.00.30.4

0.20.30.5

2.3+72%

2022 yield

target

Market

access1

Precision

farming

Seed

quality

Irrigation Soil fertility 2012 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

46

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


2

Enable private trade by reforming APMC Acts 1

Re-balance price support 3

Reform the crop insurance program 4

Research and

Extension Overhaul the Research & Extension network 6

Credit Improve farmers’ access to credit 7

Land tenure Reform land markets to promote leasing 8

Price support

Incentivize new technology adoption 5

Governance Integrate governance at grass roots 9

Market access Leverage technology for better price discovery 2

47 SOURCE: 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

2010-11 2008-09 2006-07 2004-05 2002-03

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 1,088 40% 9% 23% 11%

9%

4%

3%

2012

15%

6%

42%

13%

14%

7%

4%

Housing Fuel

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

49

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

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

50

Several modes of benefit delivery are available for basic services 4

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

51

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

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)

Sw astha Slate

(India)

Jordan Educational

Initiative (Jordan)

Eklavya Foundation

(India)

Presbyterian healthcare

services (USA)

Smile on w heels

(India)

Home-based care for

HIV/AIDS and TB

(Zambia)

Greenstar

(Pakistan) Rapid SMS

(Malaw i) 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

53

To strengthen governance, each government role needs both more

capacity building and a stronger sense of accountability


Accountabilities

Government roles

Policy

making

People Regulatory

oversight

Service

delivery

Dispensation

of justice

Transactional

Reputational

Reputational

Reputational

Political

Legal

Political Political

Regulatory

Legal Legal

Legal

Democratic

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

3 4

5

6

From Poverty to Empowerment: India's Imperative for jobs, growth, and effective basic services

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