Academic journal article The McKinsey Quarterly

India-From Emerging to Surging

Academic journal article The McKinsey Quarterly

India-From Emerging to Surging

Article excerpt

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 account for 26 percent of India's GDP and 24 percent of its employment. (We also drew on similar MGI studies carried out in 12 other countries, including Brazil, [2] Poland, [3] Russia, [4] and South Korea. [5]

Our study found three main barriers to faster growth: the multiplicity of regulations governing product markets, distortions in the market for land, and widespread government ownership of businesses (Exhibit 1). 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 implemented 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 productivity. 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.

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 liberalized 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 higher-quality Indian-made automobiles soared, so that employment in the industry rose by 11 percent from 1992-93 to 1999-2000 despite productivity growth of no less than 256 percent during the same period.

India's current policy regime, at the sector level, has five features that are especially damaging to competition and therefore to the productivity of the country's industries.

Unfairness and ambiguity. Many policies restrict competition because they are inequitable and ill conceived. In telecommunications, for example, privately owned entrants must pay heavy fees for licenses to operate in prescribed areas, while government-owned incumbents pay no such fees and are at liberty 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, these regulatory anomalies protect incumbents from competition by deterring some private telecoms from entering the market at all. …

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