From Poverty To Empowerment: India's Imperative For Jobs, Growth, and Effective Basic Services

The full report can be found at http://bit.
ly/McKIN-MGI-Pov2Emp
From poverty to empowerment

Indias imperative for jobs, growth and effective basic services
MGI INDIA | February, 2014
The McKinsey Global Institute (MGI) an overview
OVERVIEW

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Focus on long-term fundamental

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Build deep knowledge in core areas:

productivity, competitiveness and growth and key markets technology, labour, natural resources, finance
MGI has invested in significant India research over the years
2014 2010
2007
2001
2
Leadership team for MGIs India poverty to empowerment report

Rajat Gupta
Director, Mumbai office
Shirish Sankhe
Director, Mumbai office
Richard Dobbs
Director, London office
Jonathan Woetzel
Director, Shanghai office
Anu Madgavkar
Senior Fellow, McKinsey Global Institute
Ashwin Hasyagar
Fellow, McKinsey Global Institute
KEY MESSAGES
1 Some 680 million people, or 56% of India, live below MGIs 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)
2 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) sanitation; in addition, hunger is a major issue for the poorest segments, and housing for the urban vulnerable
3 Almost 40% of the Empowerment Gap comes from health care, drinking water and
4 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
5 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
6 Six themes are essential to improve governance across the board (raise institutional
capacity and strengthen external accountability)
4
Contents
The empowerment line What keeps India poor?
Understanding the empowerment gap
Access to basic services The path from poverty to empowerment
India performance on reducing extreme poverty has been encouraging

Headcount ratio of population below Indias official poverty line Percent
45
37
30
22
1993-94 Headcount below official poverty line Million Indias total population Million 404
2004-05 407
2009-10 354
2011-12
270
890
1,090
1,190
1,230
SOURCE: Planning Commission of India; McKinsey Global Institute analysis
We ask what it would take to economically empower every Indian at the very least, through the fulfillment of eight basic needs
SOCIAL SECURITY
Insurance to cover income loss based on 2% premium-to-coverage ratio
FOOD
2,100-2,400 calories, including 60 grams protein and 40 grams fat1, per capita per day for rural-urban
EDUCATION
Access to primary education, and secondary education (substitutable with vocational training), for all children based on accepted norms
ENERGY
Access to clean cooking fuel and electricity for lighting needs, based on minimum energy consumption levels
Basic services HOUSING

215-275 square feet of acceptable housing in ruralurban areas
HEALTHCARE
Access to an essential basket of health-care services across primary, secondary, and tertiary health care
SANITATION
Sanitary latrine in rural households, and underground sewerage with wastewater treatment in urban
DRINKING WATER
70-135 litres per capita per day of piped water supply in rural-urban areas
1 Protein and fat norms for adults SOURCE: McKinsey Global Institute analysis
MGIs 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; 201112 prices
1,544
Others1 Social security Housing2 Education3
221
96
30
208 14 89 37 29
14 25
1,336
221
16 82 106
195
154
Energy Health4
128
232
617
203
580
This means
INR
6,700
1,692 1,228
Per family of five Urban Empowerment Line Rural Empowerment Line
Food
INR
Normative consumption required
Effective public spend on basic services
Empowerment line
INR
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 SOURCE: McKinsey Global Institute analysis
The Empowerment Line has relatively higher requirements for heath, drinking water and sanitation, and education
Official poverty line and Empowerment Line INR per capita per month, 2011 12; 201112 prices
1,336
221
1.5x Others 1 Social security Housing2 Education3 Fuel Health4
Ratio of EL to PL
Difference between EL & PL INR
82 874
185
16
1.2x 1.8x 3.8x 1.2x 5.5x
36 36 78 22 166
108
106
128
28
46 107 472
203 580
37
Food
1.2x
Official Poverty Line5 (2011-12) Empowerment Line (EL), 2012
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 SOURCE: Report of the Expert Group to Review the Methodology for Estimation of Poverty Planning Commission (2009), McKinsey Global Institute analysis
680 million Indians are below the Empowerment Line, against 270 million who are below the official poverty line
Average monthly consumption expenditure INR per capita per month, 2011-12, in 2011-12 prices
3,000 2,500 2,000 1,500 1,000 500 0 0 5
Empowerment Gap1 INR 332,000 crore ($69 billion)2 4% of GDP

INR 1,336
Empowerment line
INR
874
Poverty Gap 1 INR 50,000 crore ($10 billion)2 0.6% of GDP

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
Official poverty line
85
90
Percentile of population (percent)

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 2011March 2012 SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis
10
171 million Urban Indians and 509 million Rural Indians are below the Empowerment Line
2011-12 Empowerment line (average) INR per capita per month
BEL1 population Million
BEL1 Headcount ratio Percent
Urban
171
44
1,692
Rural
509
61
1,228
All India
680
56
1,336
1 BEL Below Empowerment Line

SOURCE: McKinsey Global Institute analysis
11
Urban and Rural India are equally disadvantaged, on a relative basis

Empowerment line and per capita empowerment gap, 2012 INR per month
Urban Rural
521 (31%) 1,692 1,171

1,228
370 (30%) 859
Empowerment line BEL population %
MPCE of BEL population1
Per capita empowerment gap
Empowerment line
MPCE of BEL population1
Per capita empowerment gap
44
171
61
509
Million
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
12
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13
74% of the past reduction in Empowerment Gap was attributable to higher incomes, the rest to more government spending
Empowerment Gap, 2005 12 %; INR thousand crore 1
xx%
BEL population
168 597
764 321 111 332
Empowerment gap, 200405
Impact of increase in population
78%
Share of past poverty reduction %
Gap (201112) holding per capita consumption constant For Below Empowerment Line
For Below Poverty Line
Private consumption growth due to higher incomes
Additional public spend reaching the people1
Empowerment gap, 201112
56%
26%
74%
66%
34%
1 Public spending reaching the people is ~20% of monthly per capita expenditure (MPCE) for below Empowerment Line (BEL) population in 2012.
SOURCE: National Sample Survey Office survey, household consumption survey, 61st (2005) and 68th (2012) rounds; McKinsey Global Institute analysis
14
Two reasons why Indias poor have not been able to meet their basic consumption needs, despite fast GDP growth A
Low productivity improvement and a poor job creation engine
Inadequate and inefficient provision of basic services
Agriculture is plagued by low productivity, high underemployment (20%) and slow productivity growth (2.3% p.a. between 2000-10) and houses 60% of Indias 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
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)
Effectiveness of government spending is low, with 50% of what is spent not translating into real benefits for people
15
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
Productivity and employment by sector 2010
Productivity per worker INR 000 per worker 1,000
Banking & insurance Real estate & business services
Agriculture Industry Services
50 million more non-farm jobs by 2012 could have lifted 100 million more people above the Empowerment Line
800 600 400 200 0 0 5 10 15
Public administration & defense Transport, storage & communications

Trade, hotels & restaurants Other services
Registered manufacturing
Construction Unregistered manufacturing Agriculture
20
25
30
35
40
45
50
55
95
100
Share of employment Percentage

SOURCE: NSSO 66th Round; MOSPI website; McKinsey Global Institute analysis
16
Even in the non-farm sector, Indias glut of low-productivity small enterprises kept average worker incomes low
Share of manufacturing employment by business size Percent
200+ employees 50-199 employees
11
23 8
29 6
65
42 13
52
1-49 employees
84
70
23
46
Thailand 13.1
25
China 31.1
India 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 13.1
Philippines 14.0
Indonesia 12.4
1.5
3.2
2.3
5.7
15.1
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)
SOURCE: Asian Development Bank; Enterprises in Asia: Fostering Dynamism in SMEs ,Key Indicators for Asia and the Pacific (2009), McKinsey Global Institute analysis
17
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
Nominal GDP CAGR
2,500,000 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000,000 750,000 500,000 250,000 0 2000-01
xx CAGR
9%
15%
17%
Basic services2 Other social expenses
20%
Expenditure for growth
20% 16% 9% 17%

7%
16% 16% 9%
2003-04 2007-08
Administrative expenses
19% 14%
Interest Payments
13%
2011-123
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 SOURCE: Indian Public Finance Statistics; Budget documents of Government of India and State governments; IMF
18
Half of government social spending (or INR 285,000 crore) does not benefit the people
2011-12 government spending INR 000 crore Estimated efficiency/effectiveness of government spending % of spending that typically reaches the people
Spend reaching people
Food1
64 52 51
47 36
50
NREGA1
Education2
50
Fuel1
Inefficiencies and leakages INR 285,000 crore not reaching the intended beneficiaries
Health, drinking water and sanitation
If subsidies were 75% efficient in reaching intended beneficiaries, 85 million more people would be above the official poverty line today
1 Estimated by comparing actual government spend to benefits reported as received in NSSOs consumption surveys 2 Estimated by comparing best performing states on health and education outcomes per rupee of spend to average performing states across India
SOURCE: NSSO, government fiscal statistics, MGI analysis
19
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20
Health and food are 60% of the Empowerment Gap; housing is a large unmet need for the urban poor
Empowerment Gap by service and sector, 201112 %; INR thousand crore ($ billion1)
Fuel Housing
107 ($22) 1 32
226 ($47)
10 9
332 ($69) 7 17 19
20
18
Education
Food
21
9
25
Health2
37 -1
Urban
40 -1
Rural
39 -1
Total
Others
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.
SOURCE: NSSO 68th round, McKinsey Global Institute
21
There are three distinct segments below the Empowerment Line

Indias population and Empowerment Gap1 by segment, 2011121 Percent Ratio of Empowerment INR 332,000 cr Line to average MPCE3 ($69 billion 2) 100% = 1.2 billion 0
Empowered
44
38
1.4x
Vulnerable
34
46
1.9x
Impoverished Excluded
17 8
17
Empowerment gap1
2.6x
Population below the Empowerment Line
1 The Empowerment Gap is defined as the aggregate differential between actual private consumption expenditure and the Empowerment Line 2 Using average exchange rate of US$ 1 = INR 48.0769 for April 2011-March 2012 3 Monthly per capita expenditure SOURCE: National Sample Survey Office survey, 68th round; Oanda; McKinsey Global Institute analysis
22
Needs are very different for each segment absolute gap

Consumption gap by segment and service, 201112 INR per capita per month
Urban Rural
Energy
910 46 196 149

292
Housing Education
724 23 187 136

161
415 158 100

184 -20 -7
Vulnerable
638 63 38 79
285
173
Excluded
Food
477 46 36 72
163
160
Impoverished
Health1
227
216
278 25 32 60 24 138
Vulnerable
Excluded
Consumption gap % of Empowerment Line Population by segment Million
Impoverished
66
53
30
63
47
27
12
42
118
45
169
295
1 Includes healthcare, drinking water and sanitation.

SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis
23
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24
In addition to purchasing power, people needs access to basic services we constructed Access Deprivation Score (ADS) to assess access
Overall basic services
Access Deprivation Score
Two types of basic services
Household services deprivation score
Community services deprivation score
Six basic services

Energy deprivation score Water and Housing sanitation deprivation deprivation score score Drinking water and sanitation access Good or liveable housing Education deprivation score Healthcare deprivation score
Nine dimensions
Electricity usage
LPG3 usage
Education infra with regard to norms
Net enrolment ratio
ORS1 usage during diarrhoea
Extent of full immunisation
Health infra with regard to HLEG2 norms
1 Oral Rehydration Solution; 2 High Level Expert Group; 3 Liquefied Petroleum Gas (used as cooking fuel).
25
An average Indian lacks access to 46% of services

Average deprivation scores by basic service (percent)
Two types of basic services
Community level services Household level services
Six basic services
53
Healthcare1
59
Energy
57
Sanitation
23
Education1
18
Drinking Water
5
Housing
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
46
Overall ADS3
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
26
Access to health and education are relatively less responsive to income, while access to energy, water and sanitation seem correlated to income
District data, 2011
Household services Deprivation Score 1 Percent
80 70 60 50 40 30 20 10 0 0 1,000 2,000 3,000 4,000 5,000
Community services Deprivation Score 2 Percent

80
R2 = 0.66
70 60 50 40 30 20 10 0 0 1,000 2,000 3,000
R2 = 0.05
4,000
5,000
Monthly per capita expenditure (average for district) INR

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.
SOURCE: National Sample Survey Office survey, 2011-12; McKinsey Global Institute analysis
Monthly per capita expenditure (average for district) INR
27
Access deprivation has substantial district-level variations (1/2)

MOST DEPRIVED
(Extremely deprived on all services)
126
27%
59%
ADS
1,083
MPCE1 (INR)
DISTRICTS
POPULATION SHARE
HOUSEHOLD SERVICES DEPRIVED

(Extremely deprived on all except health & education)
177
DISTRICTS
18%
POPULATION SHARE
49%
ADS
1,177
MPCE1 (INR)
MODERATELY DEPRIVED
(Moderately deprived on all services)
127
DISTRICTS
26%
POPULATION SHARE
41%
ADS
1,653
MPCE1 (INR)
COMMUNITY SERVICES DEPRIVED

(Deprived on health and education; less so on others)
59
DISTRICTS
27%
POPULATION SHARE
37%
ADS
2,761
MPCE1 (INR)
LEAST DEPRIVED
(Least deprived on health & education; moderately on others)
126
27%
34%
ADS
1,855
DISTRICTS
POPULATION SHARE
MPCE1 (INR)
1 Monthly Per Capita Expenditure SOURCE: Census 2011, District-Level Health Survey 2007-08, DISE 2009-10, MGI analysis
28
Access deprivation has substantial district-level variations (2/2)

Averages
HDS1 CDS2
Percent
ADS
Percent
MPCE3
INR
HDS Percent
70
Category Districts
Categories Most Deprived Household Services Deprived

Moderately Deprived
Percent
62
56
59
1,083
60
57
39
49
1,177
50
41
41
41
1,653
40
Community Services Deprived Least Deprived All-India average
30
20
46
37
2,761
20
38
31
34
1,855
10 10 20 30 40 50 60 70
46
44
46
1,627
CDS Percent
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 SOURCE: Census 2011; District-Level Health Survey, 200708; DISE, 200910; National Sample Survey Office survey, 201112; Forest Survey of India 2011; McKinsey Global Institute analysis 29
Contents
30
We have developed two scenarios to see how rapidly India can move people from poverty to empowerment
Stalled reforms Inclusive reforms
Low job creation and productivity growth in both farm and non-farm sectors would persist Low tax revenue base would constrain the governments ability to spend on social services Inefficiency in service delivery would remain unaddressed
Stimulate job creation and productivity growth across the economy (with particular emphasis on the most labourintensive 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
SOURCE: McKinsey Global Institute
31
Inclusive reforms are needed in four key areas

Inclusive reforms in four key areas
Create new non-farm jobs Million Increase farm productivity Yield (tonnes per hectare)
+75
+115
312
352 2.3
2.0% p.a.
5.5% p.a.
3.9
237
2.8
Increase public spending on basic services INR 000s crore, 2012
Improve effectiveness of public spending Percent
6.7% p.a.
1,088 50 50
25 p.p.
75
570
3.1% p.a.
771
2012
2022 stalled 2022 inclusive reforms reforms
2012
2022 stalled reforms
2022 inclusive reforms

32
which will result in faster poverty reduction and GDP growth

Head-count ratio % of population
BEL1 BPL2
GDP growth rate Percent 10
Compound Annual Growth Rate
56
36
Inclusive reforms
7.8%
8
22 12 7 1
2012 2022 stalled 2022 inclusive reforms reforms
Stalled reforms
5.5%
0 2013
2017
2022
1 Below Empowerment line 2 Below official poverty line

33
Non-farm job creation and farm productivity will drive almost 75% of poverty reduction
Reduction in BEL population Inclusive reforms
74%
26%
Contribution to poverty reduction
56 25
10 4 9 7
Population share 2012 Create new Increase farm non-farm jobs productivity Increase Improve public effectiveness spending on of public basic services spending Population share 2022
34
Even for the extremely poor, non-farm job creation and farm productivity will contribute to about 60% of poverty reduction
Percentage of population 59%
Impoverished and Excluded Below the official poverty line
41%
22
8 4 3 5 16%
1
84%
Vulnerable Above the official poverty line but below the Empowerment line
34
18
1
Increase public spending on basic services
4 6
Improve effectiveness of public spending Population share 2022
Population share 2012
Create new non-farm jobs
Increase farm productivity
35
1 India can create 115 million additional non-farm jobs by 2022, but the stalled reforms scenario will fall 40 million short
Non-farm job potential, Inclusive reforms Million
26 69 237
Non-farm jobs 201222 Stalled reforms Non-farm job creation gap
20
352
115
+115
75
40
2012 non-farm jobs
Change in working-age population1
Change in labour force participation rate2
Farm to non-farm shift3
2022 non-farm jobs
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% SOURCE: National Sample Survey Office survey, 68th round; United Nations Population Division; McKinsey Global Institute analysis
36
1 Indias 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 80 3 27
Compound annual growth rate
Industry
75-80
5.6%1
Others1,2
3.8%
Services
35-40
2.4%1
Manufacturing1
3.9%
Agriculture
20
-0.9%
Total
95
1.9%
Construction1
50
7.4%
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 SOURCE: McKinsey Global Institute analysis
37
1 Reforms that remove barriers to competitiveness and attract investment are key to generating jobs
Non-farm job creation reforms Build multiple self-sustaining job creation engines
A Improve process for timely approval and execution of infrastructure investments B Reduce administrative and compliance burden, especially for MSMEs, in all government and judicial interface C Implementation of GST and removal of specific product-market barriers (policy, taxation)
D Reform land markets and land acquisition process to reduce time and improve predictability
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
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
38
1 Potential shape of a National Infrastructure Delivery Unit
Potential structure
Key functions
Permanent
institutionalised support to the CCI
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
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
4 Actively shape portfolio of large and critical infrastructure projects to ensure optimisation and balance
39
1 Step-wise change in administrative reforms

LONG-TERM (>5 yrs.) MEDIUM-TERM (2-4 yrs.)
NEAR-TERM (<2 yrs.)
Create transparency Launch single website that consolidates 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
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
ILLUSTRATIVE
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
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.
SOURCE: Expert interviews; McKinsey Global Institute analysis
40
1 Step-wise flexibility in labour laws

Catalyze enterprise growth
ILLUSTRATIVE
Make life simpler for MSMEs
Remove requirement
of government approval for retrenchment in the case of industrial enterprises with 100+ employees
Create transparency
Remove restrictions
on female work at night, daily work hours, and weekly work hours
Launch a single userfriendly website that consolidates all labor regulations, organized by type of enterprise
Remove requirement
of government approval and union consultation for changes in terms of work (i.e., standing orders)
Reduce time for filing

of unfair dismissal claim from 3 years to 3 months
Clarify which
inspectorates are responsible for which regulations, penalties per rule, and rights of business during inspections
Pair with direct

unemployment assistance requiring registration with a job placement agency and actively seeking work
Streamline excessive
regulations related to working environment (e.g., wall painting, lighting, spittoons, creches, etc.)
Strengthen employment exchanges
41
1 Job creation engines can generate 11 million jobs, almost one-third of the incremental jobs required over the Stalled Reforms case
Case study Industrial clusters/ towns Rationale Outlay Impact
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. 7.7 million jobs through 5 mega tourism circuits Average salary of INR 80,000 p.a.
Tourism
Pro-poor growthenabling sector and potential to include informal participation
INR 2,000 cr. over 5 years with IRR of 28%
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

Average salary of INR 300,000 p.a.
1.5 million farming households with income increase of 20-80%
42
1 Building industrial clusters is self-sustaining and can yield government IRRs in excess of 20% per year
Setting the aspiration
Economic profile
Cashflows 000 INR crore
120 100 80 60 40 20 0 -20 -40
-60
Net cashflow Capex Opex Revenue
Ramp-up of township launches
IRR 24%
Cumulative Govt
capex of INR 484,000 cr. over 25 years (INR 286,000 cr. by 2022)
54
1 launched in 2014 2 in 2015 3 in 2016 4 in 2017

5 in 2018 5 per year thereafter
Cashflow
positive in year 9
-17
-7
Nominal payback
in year 13
~50% brownfield and ~50% greenfield
3.0 2.5
2.0 1.5 1.0
Direct Indirect
2.8 2.4
1.7 1.3 0.9
35 new job creation engines launched until 2022
Construction
2.0 0.5
0.7
~4.2 mn jobs created in steady state, supporting a population of ~15.8mn
0.5 0
0
2013
0.3 0.1 0.2

2015
0.5
0.7
0.7
2020 2022
43
2 To improve yields, there is a need to focus on all aspects of the agriculture value chain
Technical levers
Soil fertility
Input
Enablers
Seed quality
Irrigation and water management Research and extension
Credit
Farm
Precision farming
Land tenure and governance
Price support
Market
Post-harvest management Market access
44
2 By 2022, India can increase farm yields to 4 tonnes per hectare, comparable to current yields in other emerging economies
Yield (tonnes per hectare)
India
2.3
0.5
0.3
0.2
0.4
0.3
4.0
+72%
2012 yield
Other countries, 201112
Soil fertility
Irrigation
Seed quality
Precision farming
Market access1
2022 yield target
7.4 5.0 5.5
3.1
3.7
4.2
Thailand
Mexico
Indonesia
Malaysia
Vietnam
China
1 Includes post-harvest infrastructure and rural roads.

SOURCE: UN Food and Agriculture Organization; McKinsey Global Institute analysis
45
2 The technical levers need to be supported by nine enabler ideas

1 Enable private trade by reforming APMC Acts
Market access
2 Leverage technology for better price discovery 3 Re-balance price support Price support 4 Reform the crop insurance program 5 Incentivize new technology adoption Research and Extension Credit Land tenure Governance 6 Overhaul the Research & Extension network 7 Improve farmers access to credit 8 Reform land markets to promote leasing 9 Integrate governance at grass roots
46
2 Support to agriculture has emphasised input subsidies over investment in productive assets
Expenditure on subsidies and investments in agriculture INR thousand crore
120,000
Compound annual growth rate Percent

Input subsidy1 Fertilizer Irrigation Output support (food subsidy2)
90,000
21%
13%
60,000
30,000
Gross capital formation 17% Research and extension Post-harvest infrastructure Irrigation infrastructure
0 2002-03
2004-05
2006-07
2008-09
2010-11
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
SOURCE: Planning Commission (2012); McKinsey Global Institute analysis
47
3 Basic services spending should double in real terms over 10 years, shifting towards healthcare, drinking water and sanitation
Per capita1 INR per month, 2011-12
Public spend on basic services Percent; INR 000 crore, 2011-12
6%
2012
13% 7%
42% 571
15%
14% 4%
+517 (+91%)
390
9% 3%
2022
40%
9%
23%
11% 4%
1,088
662
Healthcare DW+S
Education Food
Fuel Social Security
Housing
1 Not accounting for inefficiencies and leakages. NOTE: Numbers may not sum due to rounding.
SOURCE: IPFS; McKinsey Global Institute analysis
48
4 Effective public spending can significantly improve access to basic services across all areas
Access to basic services
Current levels Potential levels in 2021-22 (inclusive reforms)
Access Deprivation Score 2
Water and sanitation Percent

Piped water in the community Toilet penetration
0.0 0.4 0.6
Healthcare Per capita

Subcentres
0.46
0.2
Primary health centres
-63%
0.8
1.0
Community health centres
0.26
District hospitals
Modern Fuel2
Electrification
Enrolment Pupils per teacher
0.17
Students per classroom
Energy Percent
Education Ratio
2012
1 LPG penetration is taken as a proxy. 2 ADS is a population-weighted average of district-level access deprivation score.
2022 Stalled reforms
2022 Inclusive reforms

49
4 Several modes of benefit delivery are available for basic services
BENEFITS
through producers
Fortified food production Subsidised low-cost private/ PPP schools in urban/rural areas
to consumers
In-kind transfer Cash transfer
Midday meals in schools Public Distribution

System (PDS)
Conditional scholarships
for girls and women
Community grants
through Nirmal Gram Puraskar Insurance
Government-run
healthcare institutions
Voucher
Food vouchers Skills vouchers system

with accredited providers
Micro-insurance for
hospitalisation, e.g., Rashtriya Swasthya Bima Yojana (RSBY)
SOURCE: Government of India programs; McKinsey Global Institute analysis
50
4 Government programmes should be made more effective by using 3 themes: external agents, community involvement and tight performance monitoring
Education Health Food
School vouchers
Leverage external service providers (for profit and NGOs) funded by the Govt.
Health vouchers
funded by the Govt.
Cash transfers
service providers will be private
Low cost private

schools
Contracting out (to

for-profits, NGOs)
NGOs, for-profits to
run FPS
PPP schools
(e.g., charter schools) committees
PPP and techenabled PHCs
School management Community health

workers
Involve the community, especially women
Gram panchayat to
identify beneficiaries and monitor FPS performance
Low-cost, semiskilled teachers trained intensively
Village health
committees
Dispensaries in
Women SHGs to run

FPS
micro-entrepreneurs homes availability database
Nationwide
Create performance monitoring mechanisms
Online medicine SMS-based tracking

of patients based on biometric identification
Digital tracking of
supply chain
assessment system
Alternate teacher
certification methods
Digital attendance
recording
Surprise audits Web-based portal for

grievance redressal
51
4 Innovations along 3 dimensions, along with the 3 themes, are essential to drive more effective social services
Private Government
Charter Schools (USA) Smile on w heels (India)
Ignition Process (Bangladesh)
Living Goods (Uganda)
Healthkeepers (Ghana)
Kriti Clinics (India)
Operating model innovations New ways of reaching consumers and providing services New ways of managing resources
SughaVazhvu (India)
Jordan Educational Initiative (Jordan)
Greenstar (Pakistan) CARE Rural Health Mission (India) Eklavya Foundation (India)
Presbyterian healthcare services (USA) Home-based care for HIV/AIDS and TB (Zambia) Satya Bharti schools (India) YMCA Diabetes Prevention Program (USA)
Chunampet Diabetes Program (India) Bridge Academy (Africa)
Rapid SMS (Malaw i)

Sw astha Slate (India) Khan Academy (Global)
Pratham (India)
opAsha (India)
HMRI (India)
Health Services Point (India)

BRAC schools (Bangladesh)
Human Resources
Minas Geiras Assessment System (Brazil)
Technology
Leveraging
existing skills in the community
Arogya Ghar (India)
Escuela Nueva Project (Vietnam) MediCall (Mexico)
New ways to reach

Better supplier capability New products to
enhance effectiveness and efficiency
52
consumers
Creating low-cost skills in community
SOURCE: Literature review; web and press search; McKinsey Global Institute analysis
To strengthen governance, each government role needs both more capacity building and a stronger sense of accountability
Accountabilities
Government roles Political

Legal
Policy making Political
Democratic
Political
Regulatory oversight
Regulatory
Service delivery
Transactional
People
Legal
Legal
Reputational
Reputational
Dispensation of justice
Legal
Reputational
53
Top 6 themes for governance
Simpler laws and greater judicial capacity to enforce the

rights of households and enterprises
6
5 4
Empowered agencies
for high-priority initiatives, given operational flexibility but held strictly accountable for outcomes
Talent and performance management in

the bureaucracy
Transparency
2
3
in public information and service effectiveness, backed by rights-based entitlements to business and citizen services
Robust anti-corruption
framework
Decentralisation
of funds, functions and functionaries
54

From Poverty To Empowerment: India's Imperative For Jobs, Growth, and Effective Basic Services

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From Poverty To Empowerment: India's Imperative For Jobs, Growth, and Effective Basic Services

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The full report can be found at http://bit.

From poverty to empowerment

The McKinsey Global Institute (MGI) an overview

MGI Mission & Aspirations

Provide a fact-base and ideas that

Focus on long-term fundamental

Build deep knowledge in core areas:

MGI has invested in significant India research over the years

Leadership team for MGIs India poverty to empowerment report

The empowerment line What keeps India poor?

Understanding the empowerment gap

Access to basic services The path from poverty to empowerment

India performance on reducing extreme poverty has been encouraging

SOURCE: Planning Commission of India; McKinsey Global Institute analysis

Basic services HOUSING

Per family of five Urban Empowerment Line Rural Empowerment Line

Normative consumption required

Effective public spend on basic services

Difference between EL & PL INR

1.2x 1.8x 3.8x 1.2x 5.5x

Empowerment Gap1 INR 332,000 crore ($69 billion)2 4% of GDP

Poverty Gap 1 INR 50,000 crore ($10 billion)2 0.6% of GDP

Official poverty line

Percentile of population (percent)

BEL1 population Million

BEL1 Headcount ratio Percent

1 BEL Below Empowerment Line

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

521 (31%) 1,692 1,171

370 (30%) 859

Empowerment line BEL population %

MPCE of BEL population1

Per capita empowerment gap

MPCE of BEL population1

Per capita empowerment gap

SOURCE: McKinsey Global Institute analysis

The empowerment line What keeps India poor?

Understanding the empowerment gap

Access to basic services The path from poverty to empowerment

764 321 111 332

Empowerment gap, 200405

Impact of increase in population

Private consumption growth due to higher incomes

Additional public spend reaching the people1

Empowerment gap, 201112

Inadequate and inefficient provision of basic services

800 600 400 200 0 0 5 10 15

Public administration & defense Transport, storage & communications

Construction Unregistered manufacturing Agriculture

Share of employment Percentage

Expenditure for growth

20% 16% 9% 17%

Spend reaching people

Health, drinking water and sanitation

The empowerment line What keeps India poor?

Understanding the empowerment gap

Access to basic services The path from poverty to empowerment

There are three distinct segments below the Empowerment Line

Population below the Empowerment Line

Needs are very different for each segment absolute gap

910 46 196 149

724 23 187 136

415 158 100