India's Turning Point - Challenges & Opportunities

I am happy to share the outcome of the year-long research done by McKinsey Global Institute. The findings are important in the context of Covid-19's effect on health and economy. Though people have not returned to work at the levels that existed before Covid, it has been steadily recovering.

Covid and lockdowns have taken a big toll on our economy. Though we are bouncing back, we have structural challenges which cannot be ignored. Exports are slowly recovering but it has yet to show the buoyancy that it needs. Capex announcements are one fifth of the normal level, indicating weakness in the Capex recovery. Job creation is a challenge. The pace of growth of bank credits is a cause for concern. The report looks at not just the pandemic year but the next decade. The call to action is quite urgent.

Action Plan for the Next Decade

By 2030, India must create 90 Million jobs, which is three times the non­farm jobs created in FY13­19. For this to happen, GDP growth should be twice that of pre­Covid rate of 4.2%. Our research focused on four areas:

• Building frontier businesses that generate higher wages for workers; there are 43 of them.

• Climbing the ladder of scale. We need 1000 more mid­size companies to become large companies; 10,000 small companies must become medium size companies. The larger the companies grow, the more productive they will be.

• We need to raise $2.4 Trillion capital, which is three times the pre­pandemic level, at 3.5% lower cost. The cost of capital for investors must come down.

• Broad based reforms need to be implemented at a certain speed and urgency over the next 12 to 18 months.

Frontier Businesses

• We must create global hubs serving India and the world

• We must unlock efficiency engines for India's competitiveness

• We must find new ways of working and serving.

India's long-­term savings must flow into long­-term capital market products like insurance and pension funds. Liberalisation of insurance announced in the budget is one of the reforms that could enable this. The cost of capital also must come down. An average commercial borrower in India buys credit at 5% points more than the average commercial borrower in other Asian countries. The cost of bad loans is passed on to the borrower. The privatisation of banking can bring in more efficiency and, in turn, benefit the borrower.

On the reforms front, some progress has been made in intent and bold announcements. The Production Linked Incentive (PLI) for manufacturing is a good example. In agriculture too, we are seeing reforms. We need a whole range of reforms in land and labour market and power distribution to reduce tariff cost. Moreover, ease of doing business needs improvement. Reforms are needed in the financial sector too.

How Can We Make This Happen?

• We need two engines of reforms: 60% State­led and 40% Centre­led.

• 50% reforms need a policy or law that can be speedily implemented.

• There has to be an effective implementation architecture with a consultative process involving all stakeholders, rigorous PRAGATI style reviews for the next two years, and CM­led war rooms. �

Naveen: Can you share your thoughts on ourturning point in the year gone by, from your andyour organisation's perspective?

Preetha: I am sad at the number of people we have lost andthe battles we have fought. It was a tough year. There are somany lessons we've learnt. I am excited about the prospectsof the future.

We are in a position to give vaccines to the world. We have used it for our countrymen and we have already given millions of doses to other countries. Vaccination at a global scale has not happened like the way it has happened in India. We had the courage to announce a lockdown of this size. It was a question of lives versus livelihood. Suddenly we were thrown into a digital ecosystem. We have come through the challenge with resilience. India is a country that uses crisis as a springboard.

We had the courage to announce a lockdown of this size. It was a question of lives versus livelihood. Suddenly we were thrown into a digital ecosystem. ~ Dr. Preetha Reddy

We have the largest English­speaking workforce in theworld, which is a big advantage. We have 65% of ourpopulation as youth, and it's a powerful driver to take usforward. Using healthcare opportunities, we can keep ourageing population comfortable at their homes. Keeping peopleout of hospitals is a big opportunity for the healthcare sector.

Josh: The courage we have seen from the government, the frontline workers and factory workers has been incredible. India has already taken off from the springboard. Indian manufacturing will not be the same again for three reasons:

• Because of travel restrictions, we had to lean more on local expertise.

• Industry 4.0 and digitisation were on the back burner, but these will be in the forefront this year.

• Social distancing has led to new ways of conducting business. These will power India into a global manufacturing powerhouse and become a part of global supply chains.

Rakesh: I was in the US until October and was locked up in my place. In the US, Covid infections—after coming down in September—continued to rise; while in India, it is steadily coming down and I hope this trend will continue. We need to understand how the pandemic has unfolded in different places around the world. There is no explanation as to why the pandemic has been voracious in Europe, the US and North America, while it has been less virulent in South Asia and Africa and much less in East Asia. There is no way to figure it out if health systems are responsible for this difference.

For each one of us who have been privileged to take care of us staying in and working from home, there are 10 others who didn’t have that much advantage. I have been on the Board of Companies in India—Nestle and Kirloskar. In both the companies, it's very impressive how they managed to come back to production very quickly despite the lockdown, and implement safe work practices.

There are many people we cannot avoid working together and having face­to­face interactions—in factories, warehouses, logistic companies, kitchens, restaurants and so on. These are the people who risk themselves and make it possible for others to work from home. We need to give our thoughts to these people, to their courage and to their continued working in a pretty efficient fashion.

Coming to the budget and the economy, given the adverse situation, I must say that this has been a very innovative budget. It has turned around the mood in the economy. Among the welcome points is the focus on capital investments, particularly infrastructure expenditure. Of course, the devil is in the details and let us hope for the best.

I would like to highlight a few issues:

• The tax­to­GDP ratio has remained rock solid at around 10% over several budgets, which is baffling and indicates a structural issue.

Atmanirbhar is a good trigger point. We must focus on design. Whatever we design, we must be able to produce in India. ~ Josh Foulger

• Lack of adequate generation of non­-farm employment has been a matter of concern over the past many budgets. No country, especially in Asia, has grown without high manufacturing and employment growth.

• Manufacturing growth is also linked to export growth. From 2002 to 2012, we had higher manufacturing export growth than China. Since then, it is almost zero growth in manufacturing exports.

• If we keep our exchange rate competitive, we may not need artificial support like PLI.

Naveen: What is your view on FDI in India and how can we spur manufacturing growth?

Josh: FDI must translate to gainful employment and employment for women. Atmanirbhar is a good trigger point. We must focus on design. Whatever we design, we must be able to produce in India.

We need to generate big companies. In the last 15 years, no new big companies have come up. ~ Rakesh Mohan

The next important thing is the supply chain. India has the breadth in supply chain. Very few countries have India's capability in this sphere. Right from fundamental research totrue productization, hardware design, software design, mechanical design and integration, India has strength.

In machines and instrumentation areas, FDI has always been poor and we majorly import these. We take pride in getting imported machines. This budget talks about incentivising machine building in the country. PLI is definitely a right kind of boost. Automobile industry is slowly becoming an ICT industry. If we get the right kind of FDI and we are able to execute it, then India can achieve gainful job-­led growth.

Preetha: We can provide skilling services in Healthcaresector, which can lead to gainful employment. We can exportthese services. Also, Ayushman Bharat will generate 5 millionjobs for the country.

Anu: There is a feel good factor now, perhaps because we arecoming out of the pandemic and bouncing back, and partlybecause of the budget announcements. There is no room forcomplacency, and reforms must stay the course.

In a global research study done by us, we noted thatremote working, digitisation and automation to manageworkforce, health and safety. All these will accelerate in thelong­term and there will be a big churn of jobs. Many moreworkers will be displaced and they have to find newoccupations. We need to simplify skilling and reskilling.

We have seen that 50% of the reforms are made at the stroke of a pen. They must translate to reality. The policies have to be framed in a business­-friendly manner. State governments also have a big role to play in the reform process.

Naveen: Any advice for the corporate leaders?

Rakesh: We need to generate big companies. In the last 15 years, no new big companies have come up. I feel that the money reserved for PLI can be spent for infrastructure development. Since independence, we have been lacking in health and education sectors. We need to give much more attention to coordinated programs in these areas. Companies must focus on R&D.

Preetha: We are getting a lot of support and learnings from our friends in the manufacturing sector. I find that many of the young graduates from business schools come with a menu on their hand and that things have to be as per that menu. We need to learn from the opportunities that stare us in the face. Who would have thought of the opportunities that exist now in digitisation? Let not conventional wisdom cloud the trigger of innovation.

Josh: This is going to be India's decade. $5 Trillion is a milestone around the corner. $10 Trillion is on our way. Manufacturing will be a big part of that. Leaders in the industry must embrace the Atmanirbhar concept and take it forward.

Anu: We are on one more major inflection point in our growth and a much welcome one. During the worst days of the pandemic, we saw the spirit of innovation, can­do nature, agility and whatever­it­takes­to­make­it­happen approach in the leaders. We need that kind of a mindset. The worst thing that can happen is the feeling that we can go back to the prepandemic style of life. Things will not pan out like that. The spirit of openness and lifelong learning, not just for youngsters but for all is very important. �