India’s economy: Why the time for growth
is now
The
driving forces of the country’s growth—including urbanization, a rising middle
class, and increasing consumer spending—are ripe for companies to seize upon.
The continent of India stands to become one of the largest growth engines
in the world, according to research in a new McKinsey Global Institute (MGI)
report, India’s ascent:
Five opportunities for growth and transformation. In this episode of theMcKinsey Podcast,
McKinsey senior partners Noskir Kaka and Alok Kshirsagar and MGI partner Anu
Madgavkar talk with McKinsey’s Cecilia Ma Zecha about the way forward in a
growth- and productivity-powered India.
Podcast
transcript
Cecilia Ma Zecha: Hello and welcome to this edition of the McKinsey
Podcast. I’m Cecilia Ma Zecha, an editor with McKinsey Publishing in
Singapore. Twenty-five years ago, India embarked on a journey of economic
liberalization, opening its doors to globalization and market forces. The IMF
[International Monetary Fund] expects GDP to grow more than 7 percent this
year, making India the world’s fastest-growing large economy. Powered by a
rising middle class that’s expected to more than triple to 89 million
households by 2025, India has an attractive long-term future and compares
favorably with other emerging markets.
India’s economy: Why the time for growth is
now
What’s the road ahead?
Our guests today are Noshir Kaka, a senior partner in McKinsey’s
Mumbai office, and Anu
Madgavkar, a partner of the McKinsey Global Institute. They are the
authors of a new MGI report on India’s ascent, which outlines five
opportunities for India’s growth and transformation. Also joining us to look at
the implications for domestic and multinational companies is Alok Kshirsagar, a senior
partner and leader of McKinsey’s Asia Risk Practice. Welcome, everyone. Noshir,
let me start with you. What is the road ahead
for India’s economy?
Noshir Kaka: Thank you, Cecilia. First, as you outlined, we are
in an exciting time for India and companies in India,
both multinational as well as domestic. India’s going to be the third-largest incremental GDP growth engine for the
planet by 2030. That’s significant if you think about India’s size relative to
the other massive geographies out there, like China or the US.
What’s powering that growth is two or three
things that are pretty unshakable. First is the trend toward urbanization,
which is going to increase consumption power massively, as well as economic
leverage. The demographic changes that India’s going to go through are, again,
unshakable and undeniable. But I think powering those two or three things,
along with changes in the way the government is functioning as well as changes
in technology, are ensuring that this growth engine has several more cylinders
than the few that we used to originally think about.
That doesn’t mean that this growth is
going to be without air pockets. India is very dependent on external factors,
such as monsoons for agriculture and external investment. But the underlying
trends are undeniably positive to make this one of the largest growth engines
for the world. If you think about the state we are sitting in today,
Maharashtra, if it were a country, it would be the 17th largest country in the
world, in terms of population, just behind Germany.
Cecilia Ma Zecha: Alok, what are the opportunities that you see for
domestic and multinational companies, given that India has so much to work
with, as Noshir said?
Alok Kshirsagar: This is an extremely exciting time for leaders and entrepreneurs in India.
If you look at the most successful companies, they have grown vastly ahead of average GDP growth. The best companies in India grow at 25 to 30 percent a
year. Some of the best banks in India have grown north of 20 percent a year for
20 years in a row.
This is the bit that, when you look at
traditional companies whether domestic or global, they miss the fact that India
grows in jumps and
spurts. When you get your business model right, because so much opportunity exists—whether it’s in
terms of low penetration levels of financial services or low penetration levels of healthcare and other services—when you start to get
your business model right, you grow at 25 or 30 percent, not just 7 percent.
There’s a huge underlying tailwind for all the reasons Noshir talked about. But
if you’re good, you can do two and three times that.
Cecilia Ma Zecha: And Anu, what’s your perspective on India’s growth
and transformation? Is it at a particular inflection point?
Anu Madgavkar: India’s growth is at an inflection point. This is
something we will see pan out over the next 10 to 15 years. One of the core
structural drivers of that growth that Noshir talked about, which was
urbanization, is coming to a tipping point—back to the notion of an inflection
point.
If you look at data across India, it’s
clear that when urbanization rates in districts or in states cross the
threshold of about 35 percent, that’s when we start seeing productivity
benefits kick in. You see higher GDP per capita because the dense cities and
urban centers suddenly get better connected with the rest of the world and
better connected to markets. Citizens have better access to education, health,
and so on.
What’s happening for India as a whole is
that the urbanization rate will cross this threshold for us as a country over
the next 10 to 15 years. For some of the largest states, we will get as much as
50 to 60 percent urbanized by 2030. That’s what’s driving the fact that our
states are as large and will be as large as very significant middle-income
countries are today. For example, Maharashtra plus Gujarat will look like
Brazil.
The Indian policy framework today is to
empower the states more and to decentralize decision making for funding, so you
will see dynamic and vibrant states almost competing with each other for
resources and being much more open to investment. Businesses, therefore, will
have to pick and choose in terms of thinking about their footprint in India.
Noshir Kaka: The growth story is evident in the number itself,
which is 69 megacities, essentially each with a million-plus population. What
most companies struggle with is that India is not a country, it’s a continent.
All of these cities in their own right are almost like mini countries. Getting
down from the massive India to just 69 cities is a great simplification when
people think about India and their strategies to address this market.
If I said, “Well, conquering India is just
about getting 69 destinations right,” it makes the opportunity much more
meaningful. As Anu said earlier, in the MGI work, we’ve seen that these will
cities power a significant portion of GDP growth. If you get these cities
right, you can capture a tremendous amount of opportunity in India.
Cecilia Ma Zecha: How can the private sector develop the right
business models and strategies to address the opportunity of urbanization,
Alok?
Alok Kshirsagar: There’s a huge consumer opportunity. Because, to
Anu’s point, as you get to that 35 percent, the actual per capita GDP on that
particular district more than doubles. So, there’s a huge consumer opportunity
that the private sector needs to recognize.
To amplify Noshir’s
point, some of the demographics are very different. When you go down south, the
demographics are more like southern Europe. You need to know that the consumer growth there is in the relatively older
population. It’s the 50- to 70-year-olds that have the purchasing power because
of various reforms and government payments. Whereas if you go to the northeast
of the country, it’s all in the young—it’s all in the 18- to 30-year-olds.
Going back to this theme that there are
regional business models with different consumer preferences and a big
inflection point: there’s a huge amount of success associated with that. And,
frankly, your ambition needs to be, “I need to grow at 30 percent a year.” If
you’re not growing at 30 percent a year, you’re missing the opportunity.
The second big opportunity with
urbanization is in infrastructure. With the competition among state governments
for resources and an increasing focus on governments as a big part of winning
elections, people recognize that you have
to improve infrastructure. That is everything—from water, sanitation, power,
renewable power, and improving road systems.
There’s a huge
opportunity for both domestic and global companies in the provision of that
infrastructure—often, leapfrogging generations of what’s happened elsewhere
through the use of smart meters, smart technologies, and networked cities. To me, that’s a huge, relatively
untapped opportunity.
We see that with the Smart Cities
competition. Now there are 20-plus of these smart cities where there’s enormous
innovation. One city we’re involved with is Pune, where you can see—whether
it’s in terms of creating citizen engagement or associated infrastructure
services—there is a huge private-sector opportunity.
Cecilia Ma Zecha: Speaking of networks, being connected, having the
right infrastructure, and smart cities, can you all comment on the advance of
digitization in India and how companies and decision makers can harness the
opportunity that digital technologies can offer?
Noshir Kaka: For many years, when you talked about digital and technology in India, one automatically referred to the tech sector that
traditionally has been the sector that served companies globally, out of India,
on their technology needs.
That industry went from
something like $2.5 billion in the late ‘90s to more
than $110.0 billion today. It‘s been a huge force multiplier in India‘s GDP
growth. It created almost 50 percent of all organized jobs in the past five
years in India, that one sector.
What we see now as the opportunity for the
digitization of India is almost five times that opportunity. As large as that
opportunity is—the opportunity to use digital and technologies to enable
India’s growth in education, agriculture, and power, and as Alok talked about,
smart metering and transmission sectors—that is almost five times. That will be
between 20 to 30 percent of India’s incremental GDP growth. That’s why I think
the prime minister’s launch of Digital India, Startup India, and the Skill
India campaigns around some of these technologies is so important.
Because the reality of this is that it’s
going to be another one of those major engines that transforms India. Just to
give you a simple example, India will never produce as many doctors as it
needs—never. It’s just physically impossible if you looked at any healthcare statistics
to get to the number of doctors in rural India that the population really
needs.
Today, with technologies including
remote-healthcare technologies and call-in numbers where you can diagnose
simple remedies in five to ten questions, you’re able to save lives in remote
parts of the country. That’s the change it’s making. It’s not just an economic
change but a huge sociological and human change as well.
Cecilia Ma Zecha: Anu?
Anu Madgavkar: Globally, there are some concerns about how
automation and technologies more broadly are impacting the labor market or the
ability of middle-skill or lower-skill workers to increase incomes. Because
automation, in a way, is eroding the job market.
India comes at it from a different
perspective: with the amount of inefficiency and the barriers to the delivery
of some of these services to people, on the one hand, and on the other hand,
the fact that a large share of the labor market is in the informal and
unorganized sector. You put these two things together, and you find that many
of these digital platforms—which again, we are very much at an inflection
point—we’re going to see them getting near ubiquitous in many ways; for
example, the ability of everyone to have a smartphone that has some form of
digitally verifiable identity and payments. That is such an empowering tool,
that even from a labor-market perspective, we would see innovation in the form
of online talent marketplaces for relatively medium- or even low-skill
jobs—informal jobs in the security business, driver jobs, independent small
operators, and entrepreneurs—just having access to markets because of these
online marketplaces.
From where we come from, it’s a massive
leapfrogging opportunity from almost every perspective. It’s also inspiring
innovation that could have applications and relevance outside India as well.
Alok Kshirsagar: I’ll build on that with two comments. One is, I
think there have been some fundamental regulatory or policy transformations
over the past two years under the current prime minister. First, and most
important, is the passage of the goods-and-services tax, which is going to
create an integrated market in India for the first time. It’s a value-added tax
regime, which is going to dramatically reduce all of the inefficiencies and
barriers within the internal market.
Frankly, we see that as a massive flip as
far as global companies are concerned, because now your ability to drive
intelligent transportation networks, fast logistics, and the delivery of
services is dramatically transformed. The second big part of this is around the
financial infrastructure, such as the provision of what they call theJan-Dhan
Yojana,1which is 100 million-plus bank accounts
enabled by mobile phones.
And the provision of benefits transfer
directly to people’s bank accounts, using their mobile phone and the Aadhaar2unique
identifier. It’s a unique platform—there is no other country in the world that
has this scale of mobile-driven bank accounts with the ability to transfer
money and services directly to the beneficiary without all of the leakages that
have plagued the sector for many, many years.
Cecilia Ma Zecha: What about manufacturing? India’s manufacturing
sector has lagged behind China’s, but there are substantial opportunities to
invest. What’s the appeal to potential investors as a base, certainly beyond
low-cost labor? And how can the companies in the manufacturing sector be as
competitive as possible?
Noshir Kaka: First, to two of the points Alok made earlier,
there has been a fundamental shift in the past few years in India: just to pick
up on one, there is the goods-and-services tax that was passed by parliament a
few weeks ago. Not only does it create enormous advantages in logistics and
taxation, and a whole bunch of other benefits around that, but it dramatically
enables manufacturing in the country. Because, historically, manufacturing was
splintered and fragmented across the country based on where you got the tax break
or where there was advantage. It was not economically or geographically the
best place to manufacture something.
There were quite hilarious consequences
where, essentially, shipment of goods—let’s say 400 kilometers hinterland into
India to the port—was more expensive than taking a container from that port to
Brazil. That is the kind of complexity that India’s logistics networks, enabled
by local state taxes, was creating.
With one landmark amendment, you have
production sites that can scale—and scale not only for the domestic market but
also, as China has done, for the international market. Now, for the first time,
you have a single market, unified across the country, which has a billion-plus
consumers ratcheting up their spending, along with the fact that you can get
efficient logistics to serve international markets. That’s never happened
before.
The second thing is, and I think this is
where India will be different from China and many of the countries that have
jumped on the manufacturing opportunity to expand, is that India’s
manufacturing opportunity will be different. By the nature of where we live and
the times we live in, it will be more technologically enabled.
It may create different types of jobs. It
may not create that many physical jobs, as China has done. But there’s a whole
slew of other jobs it will create. For example, when Anu and I were researching
the Internet report, we came back with
this notion of a technology enabler. What it simply meant was that in villages
in India you don’t have that many people who are
able to use the Internet, or able to use digital technologies, whether it’s for
healthcare, education, or a whole bunch of purposes.
We found that banks and other companies
were having somebody stand next to a kiosk, just showing people how to use it.
Yes, those jobs will be transient for a particular period of time. But those
transient jobs are massive in India. Because you have a population of more than
one billion. You’ll see different types of opportunities. With some of the
landmark legislation, you’ll see a huge opportunity in manufacturing opening up
both domestically and globally.
Alok Kshirsagar: I would also say it’s a favorite pastime here to
compare with China. I think it’s irrelevant, because the real opportunity is,
as Noshir said, in the domestic market. The second thing is that there are
already world-class manufacturing capabilities in India. If you look at auto
components, if you look at pharmaceuticals, if you look at aspects of—
Noshir Kaka: Textiles.
Alok Kshirsagar: Textiles, you actually have those. The real
question for us is not whether or not we do and become the world’s factory in
the way that China has, but what are the relevant aspects of goods and services
for India? What are the new types of jobs in the way that Noshir described?
Where do we have real advantages that we can definitely export? Not only in
auto components and pharma but also, when you start to look at all sorts of
other services, you now see a lot of financial innovation here in terms of
serving bottom-of-the-pyramid customers, that you can scale up, whether it’s
low-cost digital insurance, people‘s credit, or SME [small and medium-size
enterprise] and supply-chain financing. All of those sorts of services are both
enabling the SME sector, which is the big job-growth sector in India, and can
be part of future global supply chains as well.
Anu Madgavkar: Just to amplify the differences or the irrelevance
of comparison with China, India’s model might well be quite different in terms
of not being megascale manufacturing facilities located along the seaboard and
primarily serving an overseas market.
For a whole variety of reasons, India has
had, and perhaps will have even in the future, lower labor mobility and
internal migration than China has. We are much more culturally diverse. The
willingness and the desire to move very far from your own cultural context is
not that high.
That’s a big opportunity as we think about
the goods-and-services tax, which removes artificial barriers. Jobs and
businesses can move to the right areas, which are fundamentally near local
markets. There’s a big segment of midsize cities, the cities that are from half
a million to about 4 million in population, which have a huge potential in
terms of upside to scale up. A much lower share of urban India lives in these
midsize cities.
We would think that many of the jobs could
be around knowledge-enabled services now, thanks to IT, as well as to what in
MGI we call the supplier-proximate industries: where there are advantages to
being near consumers, whether in terms of logistics or of being more responsive
to consumer needs—so whether it’s an auto two-wheeler or specialty chemicals.
There are a whole lot of manufacturing jobs that can be supplier- and
market-friendly locations, given this critical mass that we’re likely to see
not just in a concentrated way but also much more spread out over India.
Alok Kshirsagar: Could I just also say that the infrastructure
point we talked about earlier is also relevant in the Indian context.
Manufacturing for us does not need to be huge, large-scale semiconductor
foundries. For us, having road contractors and road developers scale up is
thousands and tens of thousands of jobs.
There’s effectively the SME supply chain
that Anu talked about. Similarly, when we talk about water treatment, we talk
about appropriate city-based services. Effectively, manufacturing with the
technology capability relevant to our country is hugely important. The
infrastructure sector is where much of the job creation is. There’s an
opportunity here that needs to be in India, for India, as opposed to worrying
about anyone else.
Cecilia Ma Zecha: Let’s move to the discussion about how this
enormous potential can be translated into performance—the challenges that have
to do with execution for companies on the ground. What are your thoughts on the
best strategies?
Alok Kshirsagar: That’s a big question. I’m not sure there’s any
generic answer. But let me share a few thoughts. For the past five years, we’ve
convened a group of CEOs, 30 CEOs, of the largest global companies. We’ve met
in private sessions several times a year to talk about what it will take to win
in India. We all see the opportunity. What does it take to win? What does it
take to execute? There are four or five things I’d like to share that might be
useful.
First is, and it’ll sound soft, but it’s
very real, just commitment through the cycle. As Noshir said earlier, this will
be in spurts. There will be air pockets. But the companies that have been
successful have said, “Look, I’m going to stay firm through the cycle and not
just come in and out of the market.” Because the rest of your domestic
partners, networks, and suppliers are there for good. They’re there for the
long term. If you don’t take a view that, “I’m going to stay in through the
cycle,” you’ll have a hard time being successful.
The second theme is this notion of building
an India-centric business model, and that means identifying the three or four
segments within the country that you want to participate in. It means that—as
many of the Korean electronics companies have done—customizing products to be
relevant to how Indian consumers use them. For example, cars often need to be
designed so that you have six or seven family members, not four. You need to
have electronics in a way that people listen to music and watch TV. So, there’s
a very different way in which you need to understand the Indian consumer and
customize to that. The other aspect of that, which is specific to the
Indian-centric model, is that this is not about selling the product. We have to
sell products and services.
A number of the big industrial or engineering
companies we’ve worked with, big turbine manufacturers and others, struggled
for a long time because they were trying to sell products that were not
relevant. You couldn’t actually install the product in India. You need to have
the capability to both provide the product and the services together; this
means installation, managing the local EPC [engineering, procurement, and
construction] contractor, providing aftersales service at a very high-quality
level, and understanding the complexities and challenges of Indian
infrastructure. Two examples here: one is consumer customization and the second
is product plus service, not just product alone.
The third big point is
around empowering your talent. Multinationals, in particular in India, have struggled over the past few years. Because what’s
happened is the best talent doesn’t want to work in a remote branch office with
no empowerment. You might get people who are fresh graduates who still want a
good brand on their resume, but they leave two years later. They’d rather work
for an entrepreneurial Indian company that’s going to give them huge growth
opportunity.
So, this notion of saying, “Look, I’m
going to have an empowered CEO for this country, given the size and scope,” if
you just have a representative coordinating different global products, you will
fail. You need an empowered CEO, and, frankly, empowered middle management.
What we’re seeing with global companies is
they’re creating global leadership positions out of India. They are located in
India but running Asia, and they are located in India but running the Middle
East or Africa. That has created a different talent proposition. The third big
point that we’ve learned through this CEO forum is that you have to empower the
local organization—not just the CEO, although the CEO is critical, but also create a path for senior leaders—to feel that they have the empowerment, the
entrepreneurship, and the scope. Otherwise, they’ll just go do something else.
The last point I’ll make is having the
right alignment with the government. By the way, this is an important but
sensitive point. People say, “Well, how do we deal with the government at
different levels?” The truth is the best companies do so with absolute
commitment to ethics and values.
What that means in practice is
understanding how you get in line with where the government is already focused.
Those who are focused on Smart Cities, those who are focused on Skill India,
all the points that Noshir was making earlier—you will be much more successful
if you’re in the flow and are able to take advantage of that and demonstrate
that you’re doing good for the country in terms of jobs and employment.
As long as you’re demonstrating that
you’re developing the country, whether you’re domestic or global, you will find
the government is extremely supportive.
Noshir Kaka: To win in India, you need to be relevant in India.
We see too many companies coming into India because they see the consumer
opportunity or they see some opportunity.
But they’re not relevant. They’re not
relevant to what the government is trying to get done. They’re not relevant to
what the people really need. Inevitably, if you play in a small sweet spot,
which is, let’s say, your global sweet spot or your premium-pricing sweet spot,
you will fail for two reasons. Number one, you will create a price umbrella for
competition—local competition—to come and essentially disrupt your business
model. First in India, and then possibly in emerging markets elsewhere. The
second is you won’t be, to Alok’s point, aligned with where the country needs
to go.
Therefore, you will find that there is no
reason for people to care about the company and where it’s going and what it
needs to do. It’s important for companies to know that you have to be relevant
to India. And that’s not just a CSR [corporate social responsibility] activity.
You have to feel that the contribution you are making to the country, in
whatever way or shape or form that the company is passionate about, is relevant
to India and its citizens. That’s what will enable you to be successful down
the road.
The second is that we’ve seen too many
companies sending in what I would call a professional manager, the one who is
absolutely adept at managing the matrix. While that’s helpful in headquarters,
it doesn’t help on the ground. What you need is serial entrepreneurs, people
who are mavericks. Because India is volatile. You will see that volatility.
You need trusted mavericks—someone like
that—to go behind and essentially change the business model, where it is
appropriate, and be trusted by the corporation that, “Yes, I have X, Y, Z
there, and he or she will act with the best values, with the best of intentions,
to make sure the company is both relevant to India as well as to its
international needs.” Those are the companies that are more successful. We’ve
seen them grow enormously quickly, as Alok has said, and be extremely
profitable as well, and create enormous market capitalizations and value based
on that.
Cecilia Ma Zecha: Finally, any famous last words to the global
listener or to those listening in the region that are interested in
accelerating their business in India?
Noshir Kaka: The simple thing I would say is that going big in
India, we are increasingly becoming convinced, is a question of when and not
if. We’ve had a lot of stops and starts. There’s no question about it. There
has been 20 years of promise versus actual performance.
But one thing has been clear even in those
20 years, which is that the cost of being successful in India goes up
significantly every year. You could choose when you want to make India or
another emerging market a real core piece of the global strategy. But every year,
that cost goes up.
Cecilia Ma Zecha: Anu,
Noshir, and Alok, thank you for sharing your insights today. And thank you for
joining us and listening in. If you want to find out more about our work on
India, head over to McKinsey.com.
http://www.mckinsey.com/global-themes/india/indias-economy-why-the-time-for-growth-is-now?cid=podcast-eml-alt-mgi-mgi-oth-1609
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