McKinsey lays out six ways India can accelerate job creation

02 September 2020 5 min. read
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A new McKinsey & Company report reveals India to be in a ‘make or break’ situation, where economic reform could create 90 million jobs in the next decade, while missing this opportunity could spell economic disaster. Below are some of the reforms that McKinsey recommends. 

The crossroads that McKinsey presents is backed by the numbers. By 2030, an additional 60 million people are expected to enter India’s workforce, aiming to work in non-farming economic segments. Add to this another 30 million that will likely migrate from the farming sector. This is not accounting for 55 million women who might join the workforce, provided that India can promote more equitability in society and education.

So at the very least, India needs to generate 90 million non farming jobs over the next decade. Employing this workforce is one thing, but doing so in a way that is gainful for them and the economy as a whole will require an extra push. In fact, McKinsey suggests that India will need to maintain GDP growth of at least 8% over the next decade to meet these goals. This year, the GDP growth has been 4%.

India needs to create at least 90 million more nonfarm jobs by 2030

Part of this can be chalked up to the pandemic. That being said, India’s economy was already showing signs of stagnation before the crisis hit this year.  McKinsey paints a picture of falling domestic investments, dwindling global demand, rising non-performing asset ratios, declining exports, plummeting savings, and a slipping workforce participation rate – all unfolding over the last decade. 

The pandemic and the consequent economic slump has just been the icing on this ominous cake. India now has a crisis to mitigate and an economy to rejuvenate, before it can even think of making the systemic reforms that are necessary to counter the stagnation of the past decade. If these efforts fail, India could end up with a 5% growth rate in the lead up to 2030, “marking a decade of lost opportunity,” according to report co-author and senior partner at McKinsey in Mumbai Shirish Sankhe.

Nevertheless, India has a strong economic foundation to build on. McKinsey has accounted for the next two years as just crisis recovery, following which India will need to make structural reforms. The firm has identified six areas where India will need concerted reform in order to reach target levels of GDP growth, productivity and workforce participation.

Number one is to develop a sector-specific approach. Many an expert in recent years has commented on how India needs to develop manufacturing capabilities in order to be globally competitive. Other sectors that need attention include real estate, agriculture, food processing, retail and healthcare. McKinsey estimates that these segments combined could add more than $6 trillion to India’s GDP by 2030.

Employment, productivity, and GDP growth

For manufacturing, reforms include lower tariffs, better infrastructure, relaxed labour laws and more incentives. In construction real estate, the government needs to promote home ownership by reducing duties, registration fees, relaxing rent control and modernised construction methods. For agriculture, trade tariffs need to be reassessed, while leveling the ecommerce playing field would take the retail sector into the future. Enabling the shift to new models of digital healthcare through regulation is also high on the agenda.

The second change McKinsey suggests is land reform. Redistributing underused public-sector land could cut land costs in India by up to 25%, making home-ownership easier on the one hand, and significantly reducing the cost of business on the other.

Reform number three for McKinsey is to “Create flexible labor markets with stronger social safety nets and more portable benefits.” Businesses – particularly in the manufacturing sector – need more space to craft the size, composition and skills of their staff to meet their specific needs.

India has about 1900 state owned enterprises

Fourth, McKinsey highlights the need for lower power tariffs, which can best be achieved by a change of ownership structures in the power sector. This is already underway at a monumental scale in various parts of India, and McKinsey suggests collaboration between the centre and state to ensure that it is implemented effectively.

Suggestion number five is to privatise state-owned assets, which will not only generate revenues but will also boost efficiency. McKinsey has identified 400 of India’s 1,900 state-owned enterprises (SOEs) that could generate more than half a trillion dollars over the next decade if privatised. A handful carefully selected SOEs, meanwhile, could account for 80% of this value, which offers a strategic roadmap.

The sixth and final reform is a broad-based one, and involves widespread operational reform to enhance the ease and decrease the cost of doing business in India. Being promoted on the World Bank’s Ease of Doing Business Index could propel India to its desired level of global prominence.