India will need to find jobs for additional 90 mn, says McKinsey report

At least 90 million additional people will be in search of non-farm jobs during eight years from 2022-23 to 2029-30 and India needs to grow in the range of 8-8.5 per cent annually to employ them, says McKinsey Global Institute (MGI). The figures do not include 55 million women who may come back to the labour force to “partially correct the historical underrepresentation."

Reaching there would require major reforms which if not carried out could result in a decade of economic stagnation, warned MGI in its report, titled "India's turning point -- An economic agenda to spur growth and jobs".

According to MGI estimates, 60 million new workers will enter the workforce based on current demographics, and an additional 30 million workers could move from farm work to more productive nonfarm sectors.

The report said faster employment growth at 12 million non-farm jobs annually is needed in the post-Covid period till 2029-30, up from just four million created each year between 2012 and 2018.

In this respect, MGI suggested three themes to put the economy on a high growth path – creating global hubs that serve India and the world such as in manufacturing and agricultural exports and digital services; efficiency engines to boost competitiveness, including next-generation financial products and high- efficiency logistics and power; and new ways of living and working, including the sharing economy and modern retail.

Within these three broad themes, MGI found 43 potential business opportunities that could create about $2.5 trillion of economic value in 2030 and support about 30 per cent of the non-farm workforce in 2030.

Within that, manufacturing could contribute one-fifth of incremental GDP by 2030, while construction could add one in four of the incremental non-farm jobs required. Labour- and knowledge-intensive services sectors also need to maintain their past strong growth momentum, it said.

When asked if 8-8.5 per cent growth rate on a sustained basis for eight years is not a wishful thinking, Shirish Sankhe, senior partner at Mckinsey  & Co Said,” I don't think it is wishful thinking. Some reforms were in fact announced and there was some intent as well by the government. But 8-8.5 per cent growth rate for eight years require much bigger reforms. Reaching there depends on how much of them would be carried out.”

In terms of manufacturing, MGI talked about various reforms including a stable and declining tariff regime. Anu Madgavkar, partner at MGI said, ”If you look at high growth manufacturing exporters among Asian emerging markets, we found stable and declining tariff rates. Many of these countries did use incentives to close productive gaps, but in all the successful cases these incentives were conditional to export targets, R&D etc and time-bound. So, while these could be for a short-term, we have to get back to globally competitive tariff regime.”

To capture frontier opportunities, India needs to triple its number of large firms, with more than 1,000 midsize and 10,000 small companies scaling up. India has about 600 large firms with more than $500 million in revenue. They are 11 times more productive than average and generate almost 40 per cent of all exports, the report said.

However, many more are needed: large firms’ revenue contribution to GDP in 2018 was 48 per cent, and India’s potential is to achieve 70 per cent by 2030, in line with outperformer economies, the report said.

Addressing a “missing middle” of midsize firms can enable the emergence of 1,000 more large firms and 10,000 more midsize firms by 2030. Improving access to capital and easing other barriers to business would help the best-performing firms of all sizes climb the ladder of scale and global competitiveness, it said.

Reforms in six areas can raise productivity and competitiveness; more than half could be implemented rapidly via policy or law. These are: (i) sector-specific policies to improve productivity in manufacturing, real estate, agriculture, healthcare, and retail; (ii) unlocking supply in land markets to reduce land costs by 20 to 25 per cent; (iii) creating flexible labour markets for industry, with better benefits and safety nets for workers; (iv) enabling efficient power distribution to reduce commercial and industrial tariffs by 20 to 25 per cent; (v) privatising 30 or so of the largest state-owned enterprises to potentially double their productivity; and (vi) improving the ease and reducing the cost of doing business.

In the high-growth scenario, investment will need to rise to at least 37 per cent of GDP from 33 per cent pre-crisis, with a sharp uptick in private-sector investment. To finance this, some four percentage points of household savings could move to financial products, through measures to unshackle insurance, pension funds, and capital markets, the report said.

Measures like a “bad bank” for non-performing loans and reforms in directed bank lending could reduce capital costs. "Some 3.6 per cent of GDP may be channelled to productive infrastructure and other expenditure through measures to streamline government spending and government-owned assets, along with the tax buoyancy effects of higher growth itself," said the report.

MGI said while the central government’s pro-growth agenda is critical, roughly 60 per cent of the reforms can be led by the states, and all require active participation by the business sector.

State governments could select frontier businesses and set up “demonstration clusters,” for example, manufacturing export hubs, while pursuing other key reforms, including in agriculture, power, and housing.

Businesses would need to commit to productivity growth, develop a long-term value creation mindset, and develop capabilities in innovation, digital and automation, M&A, partnerships, and corporate governance. With this, the coming decade for India could be one of high growth, gainful jobs, and broad-based prosperity, the report said.