McKinsey’s Gautam Kumra on how India can become a long-term outperformer

If India has to get to be a $5 trillion economy from a $2.7-trillion one, we need about 8.1% CAGR economic growth rate. If you look at the employee participation and improved rate, that would be about 2%. So, 6% has to come from productivity growth, says Gautam Kumra, Managing Partner – India, McKinsey India. He also said we need to create conditions for investments in India to be globally competitive and serve the global markets. Excerpts from an interview with ETNOW.

How do you think India can grow to be a $5-trillion economy?
Let me refer to a very significant piece of research that our McKinsey Global Institute has done over the last five years, looking at about 90 countries around the world. Starting with their per capita GDP growth rate for 50 years, what we discovered was that over 18 countries out of the 90 were outperformers. When I say outperformers, I mean they substantially overshot the average per capita GDP growth rates.

If you look at these 18 countries, they come in two groups. One consists of 11 countries that have been recent outperformers and India is one of them, as is Vietnam. There are another seven countries that have been long-term outperformers including Hong Kong, South Korea, Taiwan. We analysed all these and looked at the underlying theme and one of the things we found was that the outperforming 18 markets have basically created a virtuous cycle of demand, income, and productivity. Let us talk a little bit about each one of them.

Take productivity for example. It is in many ways, one of the key determinants of economic growth rate. If India has to get to be a $5 trillion economy from a $2.7-trillion one, we need about 8.1% CAGR economic growth rate. If you look at the employee participation and improved rate, that would be about 2%. So, 6% has to come from productivity growth.

If you look at and analyse productivity growth and break it down into agriculture, manufacturing and services a 6% productivity growth rate cannot be achieved unless the mix of GDP shift substantially in favour of manufacturing. Our sense is that by 2024, if we want to be a $5-trillion economy, we need to add at least 5% GDP points more to the mix of manufacturing in the sector. Otherwise you just do not get there.

For a lot of corporates, the asset utilisation at the company level is very low because demand is not there and till the capacity utilisation hits the roof, there would be no need for going for fresh capex. Plus the cost of capital has been elevated in our country for the last couple of years. But what comes first, the chicken or the egg? Do they wait for the demand to come or do they prepare for demand by creating extra capacities?
You have raised a good point. There is no shying away from the fact that fundamentally the rate at which capital formation is occurring in the country is very low than what it needs to be. Look at China. Over the last 15 years, China has delivered 10% plus growth rate. The rate of capital formation in our country has gone from 30% to 45% over the period.

We are still hovering at about 30%. We cannot wish away the fact that even income increase which is fundamentally a function of the number and quality of jobs, is in fact linked to investments because at the end of the day, it is not the government that is going to create all those jobs. No matter how we look at it, we have to unlock the investment cycle which will actually yield productivity increase. As I said earlier, a lot of the productivity increase is also a function of capital formation. The income increase which is a function of wage growth and employment creation is again a function of investments. So no matter how we look at it, we have to unlock that cycle and despite the current liquidity and credit issues, the issue has not been the lack of capital because globally there has been enough capital but we have not been able to clear and put a framework together where we can attract the capital which can go to many other parts of the world.

There is a race for global capital right now and you have to show your attractiveness and then only credit turn up at your door steps. Otherwise, the competition is very high…
And that is where we fall down.

When you were studying the models of economy which have really broken out of the emerging market and have turned into large economies successfully, how has the partnership from the government and corporates or the private side has been? Who plays what kind of role for the size of the economy to go higher in aggregate?
It is a few things. Firstly, the private firms are of the firm view that building large comparative firms is a critical ingredient to long-term sustained economy and accelerated growth rate. If you look at India versus China and you look at the number of large firms (defined as firms with more than half a billion dollars in top line), today China has five times the number of large firms compared to India.

If you look at the revenues of these large firms as a share of GDP, in India it is about 40% while in China it is about 70%. For us to be a $5-trillion economy, we need to be able to take the number of large firms in this country from 500 to 2,500. We have to generate another 2,000 large firms to really establish that kind of economic growth rate. This will only happen if more of the MSMEs become bigger and more of the mid-sized firms become large firms. That cycle in India is not working as well as it should. In fact, the number of firms that are coming into this large circuit every year has actually been stagnant in India for the last five years.

We are just 2.5% of the global market cap and barely two companies in the $100-billion club. You have put a very interesting point forward that the SME and MSME structure of the economy has efficiency issues, productivity issues and access of capital and whatever capital they get is not at the best of rates. How do you think these guys will really come up the size curve?
This is where the market has to clear but the reality is large firms compared to the MSMEs are 10-15 times more productive. If it is a game about productivity then you have to fix the composition of each and every sector. Fundamentally, where it goes down is you have to go and look within each sector; construction, oil and gas, electronics manRead More – Source

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