Reimagining India: Unlocking the Potential of Asia’s Next Superpower (16 page)

Luckily for India, its fertility rate (the number of children per woman in her lifetime) and its population growth rate have been declining steadily, with the southern states in particular leading the way. But population momentum creates daunting challenges in the future, especially
in the densely populated north. The annual increase in absolute numbers has only just started to decline—India’s population grew by 181 million in the decade to 2011—and a rise of nearly 50 percent in the total number of inhabitants is unavoidable.

So the immediate task is not to control the size of the population but to mitigate and manage the impact of the vast numbers of extra inhabitants already on the way. It is hard to maintain that India has done a good job so far. Good schooling, electricity, fresh water, and even basic sanitation—six hundred million Indians defecate in the open—are in short supply.

Instead of bragging about the uncertain economic benefits of India’s purported demographic dividend, policy makers should be working out how to grow the food, provide the water, build and staff the schools, and construct the roads and power stations that the country’s existing inhabitants, as well as its future ones, so desperately need. It will not be an easy task.

Rajat Gupta, Anu Madgavkar, and Shirish Sankhe

Rajat Gupta is a full-time director and Shirish Sankhe is a senior partner in McKinsey’s Mumbai office. Anu Madgavkar is a senior fellow at the McKinsey Global Institute.

Ballu Bhuiyan’s village in Bihar has no roads, no running water, no doctor, no nurse. Last year, Mr. Bhuiyan found work as a farm laborer for only six months; his family of five sometimes subsisted on a single meal per day. When his three-year-old daughter got typhoid two years ago, probably from unclean water, all Mr. Bhuiyan could afford was to take her to an untrained local health worker. She died. There are 110 million Indians like Ballu who are considered “excluded,” because they lack the basic necessities of life—enough to eat, a decent hut, and a minimum amount of energy.

Life is marginally better for Suman Devi, who lives in Behata, a village of about twenty-six hundred people in Uttar Pradesh. Her husband tills less than an acre of land, and she has two cows. Together, the couple makes just enough to feed their family of six. She walks almost a kilometer a day to collect water because the local well has dried up. Less than one-fifth of the homes in their village have a toilet, and diarrhea is rampant. More than 250 million Indians like Suman Devi are considered “deprived”—below the official poverty line, but better off than the “excluded.”

Bivaji Jadhav migrated to the city of Pune, where he became a chauffeur. He earns enough to support his wife, children, and parents back in his home village. His family does not worry about food, and their home
even has a small color TV. Bivaji’s children are in school. In his village, Bivaji is considered a success. Still, it is a harsh kind of success. He had to borrow from a moneylender at usurious interest rates to secure the rights to his sixteen-square-meter shanty. His wife waits forty-five minutes each morning to buy water from a tanker. Life and health insurance are out of reach. Bivaji Jadhav and his family are considered “vulnerable” to poverty, because one shock to the system—an illness in the family, an accident, or a job loss when the employer moves—can push the family back into poverty. There are 450 million Bivajis in India.

The families described above are composites, based on people and places we know. But they are typical of the 800 million–plus Indians who can be classified as “excluded,” “deprived,” or “vulnerable.” To put it another way, more than half of India’s 1.2 billion people lead lives of quiet desperation. The goal of inclusive growth is to fill the gap between what they have and what they need—basic services that ensure a decent standard of living and a modest sense of security. Our early estimates are that a basic package of essential services (food, drinking water, sanitation, health care, schooling, energy, and housing) can be delivered to the poor for about 6,100 rupees ($130) per household per month. A poor household today consumes just two-thirds of this, and the average “excluded” household less than half.

India already spends a substantial amount of money to bridge the gap between what these households need and what they consume. Subsidies and social spending have grown 2.2 times over the last five years to the equivalent of $103 billion a year. The government spends half this amount on education, a third on food, fuel, and employment subsidies, and the rest on health, drinking water, and sanitation. Hypothetically, were this money simply paid out to needy households, it would be sufficient to eliminate the gap for the “deprived” and “excluded.”

In fact, however, due to poor governance and mismanagement, not much actually reaches the poor. Access to basic services is spotty or, as in Ballu Bhuiyan’s village, nonexistent. Based on government surveys,
only about 20 percent of food subsidies, for instance, reach people below the poverty line. Even where services have been made available, the quality is often poor. Take rural primary education. While school construction has surged and net enrollment has apparently soared (to 96 percent, according to official statistics), there is a one-in-four chance that the teacher is absent, and most fifth-year students cannot read at even second-grade level.

Here are five ideas that will facilitate inclusive growth for India and make a substantial dent in reducing India’s poverty. There are two threads that tie these ideas together. One is improved governance, without which none of these ideas can work. The other is on improving access to regular employment and helping the poor to become more productive—the most “inclusive” economic strategy of all.

1. Build one hundred industry clusters to create up to twenty million new jobs.

The best way to improve the incomes of the poor is to create jobs that help people like Suman Devi and her husband move off the farm. This has been the path that some of India’s Asian neighbors have taken, but India has barely started it. While South Korea’s farm employment fell by 3.9 percent each year from 1975 to 1995, and China’s has shrunk 2.4 percent a year over the last decade, India’s actually grew over the same period (up 0.7 percent a year). We estimate that India needs 135 million new nonfarm jobs in the next decade, in labor-intensive sectors such as manufacturing, construction, and retail. Doing so could bring forty-five million Indians off the farms and raise the incomes of the bottom third above the official poverty line.

Building industry clusters—geographic concentrations of businesses in specific manufacturing fields, such as textiles or electronics—can play a critical role in stimulating job growth. Admittedly, this idea is hardly new. India first tried to create such clusters (called special economic zones, SEZs) beginning in 1965, about fifteen years before China took up
the idea. But the effort had limited success because the government did little, in the form of infrastructure or logistics, to support it. India’s industry clusters today directly account for a tiny percentage of employment.

The experience across China, Dubai, Singapore, Egypt, Malaysia, and many other nations, however, shows that done right, SEZs can help attract foreign investment and create jobs. The key is to put the essentials in place, such as infrastructure, rational taxation, and minimal bureaucracy, and to provide the prerequisites for competitiveness. For example, a food-processing cluster will require cold chains and efficient transport linkages. A chemicals cluster will require the right tax structure for feedstock and products, along with efficient ports and reliable power. In India, where the politics of land is complicated and intense, models that help landowners participate in development will also be required.

One project to watch closely is the proposed Delhi–Mumbai Industrial Corridor, a plan to create infrastructure for twenty-four industrial cities in the relatively well-developed western region. This is still very much a work in progress and faces many obstacles. In principle, though, India needs to complete these kinds of projects and do so rapidly and at scale—to create one hundred such cities, for example—and to focus on poorer states as well as richer ones. Possible result: up to twenty million new jobs.

2. Provide skills training for poor workers.

Like Bivaji Jadhav, 43 percent of India’s poor who have exited agriculture are engaged in low-skill informal services—vegetable sellers, food handlers, handcart pullers, shop clerks, maids, and drivers. These jobs just about pay the bills, but little more. Skills building could be a powerful way to improve incomes for these people.

India’s growing urban middle and affluent class is demanding more skilled urban services (such as trained child care, cooks, nursing aides, hairdressers, shop assistants, plumbers, and electricians). An unskilled house cleaner might make 1,500 rupees ($28) a month. As a trained cook, child minder, or elder-care giver, she could make five times as much. The problem is that poor workers have few avenues to build such skills.

Short training courses (from a week to three months) and certification systems could help workers improve their skills and, thus, their incomes. There are proven ways to do this; these should be identified and scaled up. An Andhra Pradesh–based NGO has trained more than fifty thousand young people for the retail and hospitality industries in three-month programs. An NGO in western India uses mobile vans to offer fifteen-day programs in skilled trades like plumbing to some one hundred thousand rural students. Assessment of these and similar programs are encouraging.

Public funding of five hundred social-sector and private enterprises could offer earn-as-you-learn skill-building programs to poor workers, training some fifteen million people over a decade. The money for such courses could be given as grants to trainers once workers are certified, or workers could get vouchers that allow them to choose among providers. Some programs could evolve into marketplaces that link certified trainees with employers willing to pay for quality. Working with many such programs, the government could make this a major national mission.

3. Unleash private and social innovation in service provision.

India’s social and private entrepreneurs are demonstrating affordable, effective ways to provide high-quality education, health care, water, and sanitation. A Pan-Indian foundation builds water purification plants to provide clean drinking water at less than half what Bivaji Jadhav’s wife pays for untreated water. A social enterprise in Odisha helps build community-shared piped water and sanitation with a tap and toilet in each home—at a fifth of the cost of conventional systems. The group has achieved an 85 percent reduction in waterborne diseases; it is the kind of service that might have saved Ballu Bhuiyan’s young daughter. A Punjab-based for-profit social enterprise provides underserved rural communities with videoconferenced medical advice, at a price of just 20 rupees (37¢) per consultation. Technology-enabled education has shown
it is possible to deliver high-quality outcomes at one-fourth the cost of current spending.

Considering the manifest failures of public delivery, the government should seek to speedily scale up such innovations. It could outsource basic service provision to nongovernment agencies, and ensure cost and quality outcomes through selection, monitoring, and oversight rather than direct delivery. Government can also help to expand proven delivery models by providing venture capital, grants, tax and land incentives, and flexibility in licensing and accreditation.

4. Transfer benefits directly to the poor.

There will always be a certain number of people who need social transfers; the problem is that a large percentage gets lost in transmission. If food subsidies went straight to recipients, in the form of cash or vouchers, rather than distributed through “fair-price” shops, half the current outlay would feed India’s poor. Suman Devi, then, could simply buy what she needs at any store and not rely on the government shops for subsidized rice and cooking oil, where mismanagement (and worse) means these are often out of stock. Giving benefits directly to people could cut the leakage and corruption characteristic of all too many of India’s antipoverty programs.

The government is moving in this direction, enabled by Aadhaar, the digital identification system that is assigning a number to each citizen; the goal is to cover everyone by 2014. Income benefits will be sent directly to an Aadhaar-enabled bank account. The benefits could be immense, as Brazil and Mexico’s successful cash-transfer programs have proved. In both countries, households are required to demonstrate at least 80 percent school attendance and regular health checkups to get benefits. Compliance is tracked through technology; in both cases, outcomes improved. Administrative costs are less than 10 percent, much lower than leakages in India.

5. Name twenty to thirty people to lead important missions.

Misgovernance is part of the reason India does a poor job of helping the poor; improving governance therefore has to be part of the answer. Just
as more jobs, skills, innovation, and direct transfers empower the poor, India needs to empower leaders charged with executing these ideas.

Consider two of India’s most successful public initiatives: the rollout of Aadhaar and the building of the Delhi metro. In each case, the government appointed a leader (Nandan Nilekani, founder of Infosys, for Aadhaar, and Elattuvalapil Sreedharan, a senior engineer with the Indian Railways, for the metro); gave him authority and a budget; backed him up; and monitored his progress. Both missions have succeeded.

India should identify twenty to thirty Nilekanis and Sreedharans and name them to lead designated national priorities. A group of leaders, each entrusted with implementing a single national project from beginning to end—building manufacturing clusters, say, or delivering clean water or building skills partnerships—could change the fabric of India. Individual states could do the same. The leaders would be appointed by the highest government authority and be accountable for outcomes. Success would breed higher expectations from citizens, encouraging the rest of government (and politicians) to raise their game.