India-From Emerging To Surging

Q4'EM_MGIindia_FNL 10/3/01 11:57 AM Page 28
28
India–
From emerging
to surging
Amadeo M. Di Lodovico, William W. Lewis, Vincent Palmade,

and Shirish Sankhe
Photos by Swapan Parekh
In a decade, the country could more than double its gross

domestic product per capita—but only if its government and
people act quickly and decisively.
A decade ago, India and China had roughly

the same gross domestic product per capita.
But at $440, India’s current GDP per capita is only
about half of China’s, and India’s GDP is growing
at a rate of only 6 percent a year, compared with
China’s 10 percent. That 6 percent is no mean feat,
but could India grow faster?
Over the past 16 months, the McKinsey Global

Institute (MGI) has studied the country’s economy
to see what is holding it back and which policy
changes would accelerate its growth.1 We studied 13 sectors in detail—two
in agriculture, five in manufacturing, and six in services. Together, they
1
The study was conducted by the authors as well as by the following McKinsey consultants: Neeraj
Agrawal (Delhi), Angelique Augereau (MGI), Vivake Bhalla (London), Axel Flasbarth (Berlin), Chandrika
Gadi (Delhi), Deepak Goyal (Delhi), Jayant Kulkarni (Dallas), Anish Tawakley (Mumbai), Catherine
Thomas (an alumnus of the Firm), Sanoke Viswanathan (Mumbai), and Alkesh Wadhwani (Mumbai).
The full report is available on-line at www.mckinsey.com.
29
EXHIBIT 1
account for 26 percent of India’s
GDP and 24 percent of its employ- What’s slowing India’s economic growth?
ment. (We also drew on similar MGI Percent
studies carried out in 12 other coun-
tries, including Brazil,2 Poland,3 Current growth rate 5.5
Russia,4 and South Korea.5) Regulations governing

2.3
product markets
Distortions in
1.3
Our study found three main barriers land market
Government ownership
to faster growth: the multiplicity of of businesses
0.7
regulations governing product mar- Other1 0.3

kets, distortions in the market for
Potential growth rate 10.1
land, and widespread government
ownership of businesses (Exhibit 1).
1
Includes transportation infrastructure and labor laws.
We calculate that these three barriers
together inhibit GDP growth by
more than 4 percent a year. Removing them would free India’s economy
to grow as fast as China’s, at 10 percent a year. Some 75 million new jobs
would be created outside agriculture—enough not only to absorb the rapidly
growing workforce but also to reabsorb the majority of workers displaced by
productivity improvements.
Can these barriers be dismantled? We believe that they can if India’s policy
makers choose a deeper, faster process of reform than they have imple-
mented so far.
Barriers to productivity growth

Regulations governing product markets, land market distortions, and
government-owned businesses—the three main barriers to India’s economic
growth—have their depressing effect largely because they protect most
Indian companies from competition and thus from pressure to raise produc-
tivity. Countries with the highest productivity have the highest GDP per
capita (Exhibit 2, on the next page) because the amount of goods and
services each worker produces is the key determinant of a country’s GDP
per capita.
2
See Martin N. Baily, Heinz-Peter Elstrodt, William Bebb Jones Jr., William W. Lewis, Vincent Palmade,
Norbert Sack, and Eric W. Zitzewitz, “Will Brazil seize its future?” The McKinsey Quarterly, 1998
Number 3, pp. 74–91.
3
See Amadeo M. Di Lodovico, Axel Flasbarth, Björn Klocke, William W. Lewis, Vincent Palmade, and
Catherine Thomas, “Sustaining Poland’s hard-won prosperity,” The McKinsey Quarterly, 2000 Number
2 special edition: Europe in transition, pp. 88–97.
4
See Alexei Beltyukov, M. James Kondo, William W. Lewis, Michael M. Obermayer, Vincent Palmade,
and Alex Reznikovitch, “Reflections on Russia,” The McKinsey Quarterly, 2000 Number 1, pp. 19–41.
5
See Martin N. Baily, Cuong V. Do, Yong Sung Kim, William W. Lewis, Victoria Lee Nam, Vincent
Palmade, and Eric W. Zitzewitz, “The roots of Korea’s crisis,” The McKinsey Quarterly, 1998 Number 2,
pp. 76–83.
30 T H E M c K I N S E Y Q U A R T E R LY 2 0 01 N UM B E R 4: E M E R G I N G M A R K E T S
Product market barriers
Taken together, the rules and policies governing different sectors of the
country’s economy impede GDP growth by 2.3 percent a year. India’s liberal-
ized automotive industry shows what could be gained by removing these
rules and policies. The Indian government, as part of its 1991 economic
reforms, relaxed licensing requirements for carmakers and restrictions
on foreign entrants into the industry. Competition increased dramatically,
and the old, prereform automobile plants lost substantial market share.
But demand for new, cheaper, and
EXHIBIT 2
higher-quality Indian-made automo-
Productivity paves the way biles soared, so that employment
Index: United States = 100 in 1996 in the industry rose by 11 percent
110 from 1992–93 to 1999–2000 despite
100 United States (1996)
productivity growth of no less than
90 Germany (1996)
80 Japan 256 percent during the same period.
GDP per capita
70 (2000)
South Korea France
60 United (1996)
(1997)
50
Kingdom
(1998)
India’s current policy regime, at the
40 Poland
(1999)
sector level, has five features that are
30
20
Brazil (1997) especially damaging to competition
Russia (1999)
10 India (2000) and therefore to the productivity of
0
0 10 20 30 40 50 60 70 80 90 100 110 the country’s industries.
Labor productivity
Source: Economist Intelligence Unit; Organisation for Economic Co-operation Unfairness and ambiguity. Many
and Development; McKinsey analysis
policies restrict competition because
they are inequitable and ill con-
EXHIBIT 3
ceived. In telecommunications, for
An unfair advantage example, privately owned entrants
Cost of liquid steel, $ per ton must pay heavy fees for licenses to
operate in prescribed areas, while
Subscale steel mill1 Large-scale steel mill1
347
government-owned incumbents
pay no such fees and are at liberty
80 279
267 to offer local-access and wireless
services nationwide. Moreover, the
rules concerning access to other
operators’ networks are unclear, and
incumbents have used this ambiguity
to delay the start of the privately
owned entrants’ operations. Indeed,
Full cost Costs Actual Full and
evaded2 cost actual cost these regulatory anomalies protect
1
incumbents from competition by
Disguised example.
2
Through evasion of power payments and taxes. deterring some private telecoms from
Source: Interviews; Indian Railways; McKinsey analysis
entering the market at all.
I NDI A — F ROM E M E RG I N G TO SU RG I N G 31
Uneven enforcement. The rules are not applied equally to all companies.
Subscale steel mills, for example, frequently steal electricity and underreport
their sales to avoid taxation. Larger, more visible players can’t get away with
such irregularities, so the less productive companies survive by competing
unfairly (Exhibit 3).
Products reserved for small enterprises. Some 830 products are currently
reserved for manufacture by firms below a certain size. Producers of certain
types of clothing and textiles, for instance, face limits on their spending for
new plants—limits that protect clothing makers that are below efficient
scale. As a result, typical Indian clothing plants have only about 50 machines,
compared with more than 500 in a typical Chinese plant. Restrictions on
imports of clothing from more productive countries protect the domestic
markets of these subscale Indian players.
At present, moreover, their exports are protected too. Several countries,

including the United States, import a guaranteed quota of Indian clothing
each year. Not surprisingly, India’s share of garment imports in countries
without such quotas is much lower than it is in quota countries. As all such
quotas are to be removed over the next five years, Indian exports will be
highly vulnerable unless the sector can become more productive (Exhibit 4).
Restrictions on foreign direct investment. Certain sectors of the Indian econ-

omy—retailing, for example—cannot receive foreign direct investment, and
this prohibition closes off a fruitful source of technology and skills. Best-
practice global retailers, whose international experience helps them to build
operations quickly by tailoring their formats to local environments, have
enabled the retail sectors in Brazil, China, Poland, and Thailand to develop
rapidly. Foreign retailers also prompt local supply chains to improve by stimu-
lating investment and
EXHIBIT 4
productivity growth
in food processing and Quota quandary: Export protection leaves sector vulnerable
wholesaling, for exam- Share of total apparel imports by various countries, percent
ple. Together with land
market reforms (dis- From India From China
cussed later), allowing Imports by top 10

3.2 11.3
quota countries1
foreign direct invest-
ment in food retailing Imports by top 10
1.6 38.1
nonquota countries2
would make it possible
for India’s supermarkets –50% +237%
to increase their market

1
Austria, Belgium, Canada, Denmark, France, Germany, Italy, Spain, United Kingdom, United States.
share to 25 percent 2
Australia, Chile, Japan, Netherlands, Norway, Poland, Singapore, South Korea, Sweden, Switzerland.
Source: International Trade Statistics Yearbook, New York: United Nations, 1999
nationwide in ten years,
EXHIBIT 5
from 2 percent currently, and to
Milking the benefits of competition offer prices that would on average
Yield per milk animal per day, liters be 9 percent lower than those of
3.86 local grocery stores. Indian standards
3.14
of living across the social spectrum
2.19
would rise immediately.
Licensing or quasi-licensing. In
Low Medium High several sectors of the Indian econ-
(Village with milk (Village with 1 direct- (Village with 2 direct-
trader only) collection facility +
milk trader)
collection facilities +
milk trader)
omy—the dairy industry, to give
Relative degree of competition
one example—operators need a
among processors license from the government to
Source: Basic Animal Husbandry Statistics, Indian Department of Animal compete. Although the licensing
Husbandry and Dairying, 1999; Impact Evaluation of Operation Flood on Rural
Dairy Sector, New Delhi: National Council of Applied Economic Research of dairy processors was supposed
(NCAER), 1999; Census of India, 1991; interviews; McKinsey analysis
to ensure high levels of quality and
hygiene, the licensing authority has
in fact prevented high-quality private dairy plants from competing in certain
areas, thus protecting government-owned plants and cooperative dairies
from competition and from any incentive to shed excess labor or improve
operations. Removing these restrictions would increase competition among
processors, forcing them to make improvements by, for instance, using chill-
ing centers and working with farmers to improve cattle breeds and milk
yields (Exhibit 5).
Distortions in the land market
Close to 1.3 percent of lost growth a year, our calculations suggest, results
from distortions in the land market—distortions that have so far largely
been ignored in the public debate. These distortions limit the land available
for housing and retailing, which are the largest domestic sectors outside agri-
culture. Less room to expand in these sectors means less competition among
housing developers and retailers. Scarcity has helped make Indian land prices
the highest among all Asian nations relative to average incomes (Exhibit 6).
Three distortions in the land market are especially significant.
Unclear ownership. Title to most land parcels in India—90 percent by one

estimate—is unclear, and the problem might take Indian courts a century to
resolve at their current rate of progress. This lack of clarity about who owns
what makes it immensely difficult to buy land for retail and housing devel-
opment. Property developers and individual landowners also have trouble
raising financing, since they can’t offer as collateral for loans any land to
which they don’t have clear title. Not surprisingly, most new housing devel-
opments are constructed on land already owned by the developers or the few
insiders who know how to speed up the bureaucratic title-clearing process.
Streamlining this process and revising the laws on land ownership would
boost competition in construction. Competitive builders would improve
their productivity and offer houses at lower prices. The sluggish Indian
construction market would expand dramatically.
EXHIBIT 6
Counterproductive taxation. Low
property taxes, ineffective tax collec- Outlandish: High costs relative to income
tion, and subsidized user charges for Ratio of cost of land per square meter to GDP per capita in 1999;
power and water leave local govern- index: New Delhi = 100
ments unable to recover the cost of Mumbai 115

their investments in infrastructure, New Delhi 100
particularly in suburban areas. In Bangalore 52
Delhi, for example, water is supplied Taipei 22
at only 10 percent of its true cost. Seoul 13
Property taxes collected in Mumbai Jakarta 13
(formerly Bombay) amount to only Singapore 12
0.002 percent of the buildings’ esti- Tokyo 9
mated capital value; the usual ratio in Bangkok 7
developed countries is 1 to 2 percent. Sydney 6
With more efficient collection of Kuala Lumpur 2
higher taxes, local governments
Source: Asia Pacific Property Trends, Colliers Jardine Pacific, October 1999
could invest in the infrastructure to
support new housing developments
on more and larger parcels of suburban land. Customers would have more
choices, and developers would have to compete harder. Further, if developers
could build up to 25 houses in a project instead of the single homes they
more typically construct today, building costs would fall by up to 25 percent.
Conversely, stamp duties6 are extraordinarily high in India: close to 8 to

10 percent of the value of the property changing hands. Not surprisingly,
this expense discourages the registration of land and real-estate transactions.
Inflexible zoning, rent, and tenancy laws. Land in city centers that would
otherwise be available for new retail outlets and apartments is “frozen” by
protected tenancies, rent controls, and zoning laws. Protected tenants cannot
be evicted and will never voluntarily surrender their cheap tenancies, so their
ancient buildings can never be sold or rebuilt. Tenancy laws also restrict com-
petition: subsidized rents, for example, allow traditional inner-city counter
stores to persist in their operational inefficiencies. But in Chennai (formerly
Madras), the capital of India’s southern state of Tamil Nadu, where rent con-
trol and zoning laws are less stringent, modern supermarkets already account
for almost 20 percent of total food retailing compared with less than 1 per-
cent in cities that have higher average incomes, such as Mumbai and Delhi.
6
A tax levied on property transactions.
(Continued on page 44)
W H E A T
SMALL M I LLS
Of India’s 15 million wheat farm-
ers, 70 percent now use some kind
of machinery. But tax policies and
subsidies in the milling sector favor
small, two-person flour mills over
more productive industrial ones.

C O N S T R U C T I O N
BET TER TOOLS

FOR BUILDING
Investing in additional construction
tools would be worthwhile even with
today’s low labor costs. Substituting
wheelbarrows for loads now carried
atop workers’ heads is one of several
measures that could raise produc-
tivity in the construction of brick
houses to 90 percent of the US level,
from the current 15 percent.

R E T A I L
S M A L L- S C A L E R E TA I L
Of India’s total employment, retail
trade accounts for 6 percent—four-
fifths in formats such as street
markets, kiosks, and rural counter
stores. Regulations, including limits
on foreign direct investment, restrict
the spread of more modern formats.

A P P A R E L
M AS S C U S TOM I Z AT I O N
India’s apparel sector comprises
three segments: tailors making
custom garments for domestic
consumers, manufacturers for the
domestic market, and exporters.
The law limits the size of domestic
apparel manufacturers, thereby
restricting this segment’s growth.
In fact, tailors today account for
almost 70 percent of employment
in the industry.
D A I R Y
T H E M I L K Y W AY
The output of milk, a critical source
of protein for most Indians, has
increased more than threefold since
the 1970s, but greater competition
among downstream processors
would raise yields and farm incomes
further. Dairy farming is the biggest
contributor to employment in India.

Government ownership of businesses
Government-controlled entities still account for around 43 percent of India’s

capital stock and 15 percent of employment outside agriculture. Their labor-
and capital-productivity levels are well below
those of their private competitors (Exhibit 7),
since public-sector managers experience little
performance pressure. The near-monopoly status
of government-owned companies in sectors such
as oil, power, and telecommunications, for exam-
ple, ensures that such companies will be profitable
however unproductive they may be. Failing state-
owned companies in industries open to competi-
tion, such as steel and retail banking, can get government support, so that
they too manage to survive despite their inefficiency. In electric power and
telecommunications, the government controls both the large players and the
regulators, thus creating an uneven playing field for private competitors.
India’s electricity sector illustrates how government control of companies can

promote inefficiency. Government-owned state electricity boards lose a stag-
gering 30 to 40 percent of their power, mostly to theft. By comparison, best-
practice private power distributors lose only around 10 percent, mostly for
technical reasons. Government subsidies, and corruption, give public-sector
EXHIBIT 7
Government ownership hinders productivity
Index: United States = 100 in 1998

Government-owned companies Privately owned companies
Labor productivity Capital productivity
Dairy 3.0
Not studied
processing 27.0
Power 10.0 65.0

generation 20.0 80.0
Power transmission 0.5 12.0

and distribution 3.0 60.0
Retail 10.0 Not studied

banking 55.0
25.0 59.0
Telecom
76.0 67.0
Source: Central Electricity Authority; Planning Commission; Department of Telecom Operations; Department of Telecom Services;
interviews; McKinsey analysis
managers less motivation to control theft. Subsidies also limit their incen-
tive to prevent blackouts and to maintain power lines— tasks that private
companies undertake with better results. Privatizing the state electricity
boards would save their government subsidies, amounting to almost 1.5 per-
cent of GDP, and oblige managers to improve their financial and thus their
operational performance. These managers would have to monitor theft and
improve the capital and labor productivity of the facilities.
Dismantling the barriers

Thirteen policy changes would dismantle most of these critical barriers to
higher productivity and growth (see sidebar, “How to make India’s economy
grow,” on the next page). The changes include eliminating the practice of
reserving products for small-scale manufacturers, rationalizing taxes and
excise duties, establishing effective and procompetitive regulation as well
as powerful independent regulators, reducing import duties, removing
restrictions on foreign investment, reforming property and tenancy laws,
and undertaking widespread privatization. If the government carried out
these changes over the next two to three years, we believe that the economy
would achieve most of the projected 10 percent yearly growth by 2005.
Such profound changes would certainly prompt resistance in the name of

social objectives, especially from those protected by the current regulatory
regime. But the fact is that the current policies have not achieved their social
purposes, however worthy: many have been counterproductive. Reserving
products for small companies, for example, has cost India manufacturing
jobs by preventing companies from becoming productive enough to compete
in export markets. Similarly, tenancy
laws designed to protect tenants
have driven up nonprotected rents
and real-estate prices, thus making
ordinary decent housing unafford-
able to many Indians.
Critics might still argue that the

increase in GDP resulting from these
policy changes will all flow to the
already rich. But after carefully
examining the expected effects of
the proposed reforms on the Indian economy, we can see that, once again,
the opposite is true. By creating a virtuous cycle of broad-based growth in
GDP, the changes will benefit every Indian. For example, the real incomes of
farming families—the poorest group—will rise by at least 40 percent over
ten years.
The effects of reform

India’s economy has three types of sectors. Modern ones, with production
processes resembling those in modern economies, provide 24 percent of
employment and 47 percent of output. Transitional sectors provide 16 per-
How to make India’s economy grow

Key sectors
Category Action directly affected
Product 1 Completely eliminate the reservation of products • 836 manufac-

market for small-scale industry; start with 68 sectors tured goods
accounting for 80 percent of output of reserved
sectors
2 Equalize sales taxes and excise duties for all • Hotels and
categories of players in each sector and strengthen restaurants
enforcement • Manufacturing
(such as
apparel, steel,
and textiles)
• Retail trade
3 Establish an effective regulatory framework • Power

and strong regulatory bodies • Telecom
• Water supply
4 Remove all licensing and quasi-licensing restrictions • Banking

that limit the number of players in affected industries • Dairy
processing
• Petroleum
marketing
• Provident-fund
management
• Sugar
5 Reduce import duties on all goods to the levels of • Manufacturing

Southeast Asian countries (10 percent) over five years
6 Remove the ban on foreign direct investment in the • Insurance

retail sector and allow unrestricted foreign direct • Retail trade
investment in all sectors • Telecom
cent of employment and 27 percent of output. Agricultural sectors provide

60 percent of employment and 26 percent of output. The transitional sectors
include those responsible for the informal goods and services consumed by a
growing urban population: street vending, domestic service, small-scale food
processing, and cheap mud housing, for example. Transitional businesses
Key sectors
Category Action directly affected
Land 7 Resolve unclear real-estate titles by setting up fast-track • Construction

market courts to settle disputes, computerizing land records, • Hotels and
freeing all property from constraints on sale, and restaurants
removing limits on property ownership • Retail trade
8 Raise property taxes and user charges for municipal

services and cut stamp duties (tax on property transactions)
to promote the development of residential and commercial
land and to increase the land market’s liquidity
9 Reform tenancy laws to allow rents to move to market levels
Government 10 Privatize the electricity sector and all companies owned • Airlines
ownership by the central and state governments; in the electricity • Banking and
sector, start by privatizing distribution; in all other sectors, insurance
first privatize the largest companies • Manufacturing
and mining
• Power
• Telecommuni-
cations
Others 11 Reform labor laws by repealing section 5-B of the • Labor-intensive

Industrial Disputes Act, by introducing standard manufacturing
retrenchment-compensation norms and by allowing and service
full flexibility in the use of contract labor sectors
12 Transfer the management of the existing transport • Airports

infrastructure to the private sector; contract out the • Ports
construction and management of new infrastructure to it • Roads
13 Strengthen extension services to help farmers improve • Agriculture

their yields
typically require elementary skills and very little capital and therefore tend
to absorb workers moving out of agriculture.
What will happen to the economy if India immediately dismantles all exist-
ing barriers to higher productivity? Our analysis shows that the resulting
increase in labor and capital productivity will boost growth in the overall
GDP to 10 percent a year, release investment capital worth 5.7 percent of
GDP, and generate 75 million new jobs outside agriculture, in both the
modern and the transitional sectors.
Labor productivity
Eliminating all the productivity barriers would almost double India’s rate
of growth in labor productivity, to almost 8 percent a year, over the next
ten years. The modern sectors would account for around 90 percent of the
growth (Exhibit 8), which would remain low in the other two sectors. There
may be small improvements in agricultural productivity, mainly from yield
increases. But the massive improvement in agricultural productivity that
mechanized farming has supported
EXHIBIT 8
in developed countries isn’t likely to
A more productive future for India? occur in India for at least ten years
Index: United States = 100 in 1998
while there is still a surplus of low-
Current labor Expected labor productivity in 2010
cost rural labor to deter farmers from
productivity if reforms fully implemented investing in advanced machines. In
Telecom 25 100 the transitional sectors, enterprises
have inherently low labor productiv-
Retail supermarkets 20 90
ity because they use labor-intensive
Software 44 85 low-tech materials, technologies, or
Automotive assembly 24 78 business formats. So although these
Steel 11 78
sectors will grow to meet rising
demand, their labor productivity
Apparel1 26 65
will stay about the same.
Retail banking 12 62
Power generation 9 52
Capital productivity
Dairy processing 16 46
If all the barriers were removed,
Housing construction1 15 28
capital productivity in the modern
Wheat milling 7 17 sectors would grow by at least
Power transmission 1 50 percent over the next three to
and distribution 9
four years. Increased competition
Average2 15 43
would force managers to eliminate
the tremendous time and cost over-
1
Modern sector only; transitional component excluded. runs of capital projects and the low
2
Extrapolated from sectors studied to overall economy.
utilization of installed capacity—
problems that managers can get away with now, especially in state-run enter-
prises. If equitably enforced, regulation to ensure healthy competition would
prevent the unwise investments that are common today, such as the construc-
tion of subscale and underutilized steel mills.
Investment
Many policy makers and commentators believe that it would take a level of
investment equal to more than 35 percent of India’s GDP—an almost unat-
tainable amount—to make the country’s GDP grow by 10 percent a year. But
our analyses suggest that by eliminating barriers to higher productivity, India
can achieve this rate of GDP growth with a level of investment equivalent to
only 30 percent of GDP a year for a decade, less
than China invested from 1988 to 1998. Although
still a challenge, this 30 percent rate is certainly
achievable, since removing the barriers to produc-
tivity will unleash for investment extra funds
equivalent to the consequent drop in the public
deficit and encourage greater foreign direct invest-
ment. These sources, by themselves, would be
sufficient to increase investment to 30.2 percent
of GDP, from its current level of 24.5 percent.
How would the funds be released? Removing the

barriers to higher productivity would, first, gener-
ate extra revenue for the government through
more efficient taxation—particularly on property—and from privatization.
Second, reform would save what the government now spends on subsidies
for unprofitable state-owned enterprises. As a result, the government’s
budget deficit would decrease by at least 4 percent of GDP, which would
then become available for private investment elsewhere.
Current flows of foreign direct investment into India are worth just 0.5 per-
cent of GDP. Many developing countries, including China, Malaysia, Poland,
and Thailand, consistently attract foreign direct investment worth more than
3 percent of their annual GDP. We estimate that removing the three major
barriers by opening all modern sectors of India’s economy to well-regulated
competition and lifting restrictions on foreign direct investment will increase
it by at least 1.7 percent of GDP within three years.
Employment
Productivity growth and increased investment will create more than 75 mil-
lion new jobs outside agriculture, compared with the 24 million projected as
a result of current policies. Employment in the modern sectors will increase

by around 32 million jobs as higher productivity and lower prices stimulate
demand. Similarly, employment in India’s transitional sectors will grow by
around 43 million jobs. The transitional sectors—
often overlooked by policy makers—will play a
crucial role in India’s evolution from an agricul-
tural to a more modern economy, since it is these
sectors that will initially absorb workers moving
out of agriculture. Agricultural wages will there-
fore rise.
This migration of labor among sectors is a feature

of all strongly growing economies, for though
higher productivity displaces labor in some
sectors, it stimulates higher overall employment.
But what of the workers laid off by overstaffed
companies in newly productive modern sectors? Most of these people will
be able to find work in efficient companies in their own or other growing
sectors. Many overstaffed companies, such as small steel plants, state elec-
tricity boards, and branches of government-owned banks, are located near
towns or cities, where most of the new jobs are likely to emerge. Redundant
workers close to retirement age will be able to take up early retirement pack-
ages, which in India are generally worth three to four years’ salary.
India will be a very different country in ten years, with a GDP of around
$1.1 trillion, if these reforms are undertaken. Average individual Indians
will be more than twice as rich and will probably live in the world’s fastest-
growing economy. Best of all, this is no pipe dream but an achievable goal—
if the government and the people of India act decisively and soon.
Amadeo Di Lodovico is a consultant in the McKinsey Global Institute, where Bill Lewis is the
director and Vincent Palmade is a principal; Shirish Sankhe is a principal in McKinsey’s Mumbai
office. Swapan Parekh is an award-winning photographer based in Mumbai. Copyright © 2001
McKinsey & Company. All rights reserved.

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Q4'EM_MGIindia_FNL 10/3/01 11:57 AM Page 28

Amadeo M. Di Lodovico, William W. Lewis, Vincent Palmade,

Photos by Swapan Parekh

In a decade, the country could more than double its gross

A decade ago, India and China had roughly

Over the past 16 months, the McKinsey Global

Russia,4 and South Korea.5) Regulations governing

regulations governing product mar- Other1 0.3

Barriers to productivity growth

Product market barriers

At present, moreover, their exports are protected too. Several countries,

Restrictions on foreign direct investment. Certain sectors of the Indian econ-

cussed later), allowing Imports by top 10

to increase their market

Distortions in the land market

Unclear ownership. Title to most land parcels in India—90 percent by one

ments unable to recover the cost of Mumbai 115

Conversely, stamp duties6 are extraordinarily high in India: close to 8 to

Of India’s 15 million wheat farm-

ers, 70 percent now use some kind

of machinery. But tax policies and

subsidies in the milling sector favor

small, two-person flour mills over

more productive industrial ones.

BET TER TOOLS

Investing in additional construction

tools would be worthwhile even with

today’s low labor costs. Substituting

wheelbarrows for loads now carried

atop workers’ heads is one of several

measures that could raise produc-

tivity in the construction of brick

houses to 90 percent of the US level,

from the current 15 percent.

Of India’s total employment, retail

trade accounts for 6 percent—four-

fifths in formats such as street

markets, kiosks, and rural counter

stores. Regulations, including limits

on foreign direct investment, restrict

the spread of more modern formats.

India’s apparel sector comprises

three segments: tailors making

custom garments for domestic

consumers, manufacturers for the

domestic market, and exporters.

The law limits the size of domestic

apparel manufacturers, thereby

restricting this segment’s growth.

In fact, tailors today account for

almost 70 percent of employment

The output of milk, a critical source

of protein for most Indians, has

increased more than threefold since

the 1970s, but greater competition

among downstream processors

would raise yields and farm incomes

further. Dairy farming is the biggest

contributor to employment in India.