McKinsey Global Institute Report on What India Should do...

The McKinsey Global Institute (MGI) is a think-tank set up by the consulting firm to look at broader issues, usually outside the firm and at the level of the economy. MGI rose to prominence in India in 2001 when they presented to then Prime Minister Vajpayee a report on how India could achieve 10% growth. I found that report interesting enough to organize a small internal workshop at IIM Bangalore in early 2002 where we debated the report. At that time, MGI’s prescription was that India needed to focus on raising productivity in the modern sectors of the economy where differentials between India and the best in the world were very high. I wrote a critique of that report in EPW.

So, I was excited when I recently received a new MGI report titled “From Poverty to Empowerment: India’s imperative for jobs, growth and effective services.” Interestingly, the report itself has created hardly a ripple and has not received much attention in the Indian media, having been completely submerged under the deluge of election-related news. That’s a pity, because the report has some interesting insights. What I also found fascinating is how MGI’s views have evolved over time, and become much more sensitive to the Indian context and debates within the country.

The Report

Measurement of poverty is a tricky matter and we have seen several debates triggered by the politics of measurement. While traditional measures have tended to be simple ones based on either income or calorific consumption, there is general recognition that a more multi-dimensional measure would be helpful.

MGI has tried to create its own measure to fill this need, by replacing the poverty line with an empowerment line. According to MGI, to be “economically empowered” is to be able to meet basic needs of food, energy, drinking water, sanitation, healthcare, education and social security at an acceptable level (p. 36).

MGI’s adoption of such a measure is somewhat surprising because it is people like Amartya Sen, usually not the darling of “capitalist” consulting firms, who have been the pioneers of such thinking! Sen has been a major proponent of every individual being entitled to a certain minimum quality of life and dignity!

What is alarming is that by this criterion, as many as 56% of our people (680 million people) lack empowerment. MGI’s calculation is that the average consumption expenditure for a minimum standard of living in India meeting these eight basic needs is Rs. 1544 per person in 2011-12 prices. For a typical 5-member family, that works out to a family expenditure of Rs. 7720. MGI’s estimate is that Government (central and state) spent Rs. 390 per capita on these 8 needs but only Rs. 208 reached each individual (p. 39). The resultant empowerment line of 1336 per capita is 1.5 times the official poverty line (p. 39)

The report estimates that a big reduction in empowerment gap came about between 2005 and 2012, a period of rapid economic growth. 74% of this came from income increases, and 26% from government programs.

The overall empowerment gap is estimated at about $69B. I was relieved when I saw this figure – it doesn’t seem all that high when you think that India’s software exports are about twice this figure and that this is the rough topline of the Aditya Birla group, one of our top industrial groups. I know we can’t just redistribute wealth, but the gap can be bridged with just the wealth of some of our rich industrialists!

Some Interesting Observations

Embedded in this report are some interesting observations:

• India has a missing female work force:  “40% of India’s women in the age group 25-54 were economically active compared to 88% in China” (p. 48).
• The unorganized sector is where the jobs are being created but its productivity is one-fifth that of the organized sector. [I wonder what are the implications of this for the Wal-mart vs. Kirana store debate!]
• MNREGA has increased rural incomes but reduced construction sector productivity! (p. 50). Interestingly, the MGI report refrains from any criticism of MNREGA and in fact when it talks of the lack of safety nets, it looks like being mildly supportive!
• Lack of skills is a critical issue – at the extreme, only 1% of workers in Bihar have received skills training (p. 51).
• India has poor agricultural yield – only half that of China (p. 52).India’s problems in agriculture arise from focusing spending on input subsidies rather than on technology and knowledge diffusion.

The report suggests a more nuanced look at poverty by breaking up the poor into those who have just escaped (but who are still “vulnerable.”), those who are excluded, and those who are impoverished. 

Vulnerable are above the poverty line but below the empowerment line. Using this classification, 30% of the population of urban India is vulnerable.

Such segmentation should be useful as it helps identify the needs and priorities of different groups. While health (40%) and food (19%) together account for almost 60% of the empowerment gap overall, housing is the second largest gap in urban India.

Other Perspectives of the Report

Another measure that the MGI report looks at is access to basic essential services. It estimates nationwide access deprivation at 46% (p. 54)

Access deprivation score (ADS) is used to characterize availability of services in each district. ADS is based on access to 6 services. National ADS is 46%. Most deprived districts are in Bihar and UP.

India’s 9 megacities are “community services deprived” (p. 94) and fall short of being the least deprived agglomerations.

The MGI report suggests that states have districts fitting different archetypes and therefore need different policies for different different districts. I don’t think we see much of this thinking in most states except for declaration of “most backward” districts. Is it time for states to take a more nuanced approach to development within themselves?

The Recommendations

The MGI report recommendations are a mixed bag. They sometimes re-trace existing dogma. They occasionally embrace new ideas. To drive the creation of millions of jobs, the report advocates reforms along predictable lines – cut red tape, improve infrastructure, remove tax distortions, etc.

But I was relieved to see the report refrains from motherhood statements like “enhance competition” that were commonplace in the earlier MGI report.

The four main recommendations are:

• Creation of 110-115m non-farm jobs [nothing new, I guess]
• Increase agricultural yield [easy to say, seems difficult to do]
• Double public spending to expand access to services [I was surprised by this one]
• Increase effectiveness of public spending – best states achieve about 75%

While correctly observing that growth is required to fund public provision of services [for an interesting exposition of this dynamic, see Sanjaya Baru’s The Accidental Prime Minister], the report observes that public spending is the key for the bottom-most layer.

At the same time, there is need for better governance to ensure that the resources invested reach the people they are intended for.

While the report calls for increasing level of investment, there is no specific reference to FDI. Are they just being cautious? Not wanting to take a position? Or just assuming that FDI is inevitable? That’s not clear!

A few things I found interesting about their recommendations:

• They call for the creation of 70-100 job creation engines – “industrial clusters, tourism circuits, food processing parks” (p. 123). There’s nothing new about industrial clusters and food processing parks, so it’s not clear what is distinctive about their recommendations and how they will suddenly do magic.
• I like the recommendation to create a vibrant set of “emerging cities” (p. 127) – the report shows how, compared to China, India lacks intermediate sized dynamic cities. Economic history shows the importance of cities in economic development. While former President Kalam’s dream of PURA is attractive, I have always had my doubts regarding the economic viability of it!
• The report is quite neutral about the new land acquisition laws (p. 136) of which industry associations were quite critical, preferring to wait and watch!
• While agreeing that labour reforms are necessary (the report quotes an OECD study that India has the  second most protective set of laws for workmen), the report calls for labour reforms to be accompanied by greater job security and even suggests unemployment insurance.
• Another interesting suggestion from the report is why not use MNREGA funds for skill development?

The report refrains from being doctrinaire and instead advocates learning from best practices. You might recall my posts on the Amartya Sen – Jagdish Bhagawati debate some months ago. The report takes a middle path saying that both in-kind transfers and cash transfers can work. It proposes a contingency model – where choice depends on context – the report even suggests that the Public Distribution System (PDS) can be reformed using technology.

Tailpiece

A cynical way of looking at this report is that MGI has hedged its bets, and its report allows it to go along with whoever wins the next election. But, to be fair, I think this report has some new insights, and could facilitate some useful debates on what the country should do next.

[All data quoted here is from the report. The comments and views expressed here are personal.]