McKinsey agenda for

India’s economic growth

PRESENTED BY :- ABHISHEK YADAV RAVINDRA KUMAR JAYA CHADDHA

ABOUT • McKinsey was founded in 1926 by James McKinsey.

• 108 offices

• McKinsey & Company is a global management consulting firm

that serves leading businesses, governments, non governmental

organizations, and not-for-profits.

• Earlier McKinsey worked on the economic performance of

Sweden,Australia,france,Germany,Netherlands,brazil,korea,UK,R

ussia,Poland and japan.

About Case study

• On Sep 6,2001 a team from the consulting firm McKinsey

designed a road map to increase India’s growth from 5% to

10%.

• McKinsey did some study then gave :

Barrier for growth.

13 step to avoid the barriers.

Mckinsey study

India and china had roughly same GDP per capita.

McKinsey studied Indian economy to see what is holding back

growth and what policy changes might accelerate it.

Better and new economic policies could improve India’s

situation.

They examined 13 sectors:

• 2 Agriculture

• 5 manufacturing

• 6 service

Identified the barriers to productivity and output growth in each

of these sectors.

Cont..

Investment vs. productivity

• In Normal productivity- measure of work done in a unit of time.

• If we take Indian power sector-

• By privatizing to plug thefts, subsidies and waste, which will first

yield more power and next attract fresh investments.

• According to Stanford professor Paul Romer

• Economists have considered land, labor and capital as being in

lock-step with growth numbers.

• Robert Solow who proposed that technical advances will get

economies to start jogging.

Outcome

• Awareness, laws, enforcement, education and business climate

of a country are conducive to competition and productivity,

things automatically perk up: investment follows, infrastructure

is created , global competitiveness is enhanced and steady

growth is achieved.

McKinsey promise

• To increase the growth of India.

• Growth of more than 4% is denied to India by just three barriers:

distortions in product-markets [2.3%]

distortions in land-markets [1.3%]

state ownership of business [0.7%]

Three Barriers

• Regulations governing products and markets

• Land market distortions

• Government owned businesses

Product Market

Product market barriers and the rules and policies governing different sectors of the economy

delay GDP growth by 2.3 % a year.

5 features especially damaging to competition and productivity:

Inequitable regulation:

• Many regulations restrict competition because they are inequitable and ill-conceived.

• Example:- Telecommunications

Uneven enforcement:

• The rules are not applied equally to all players.

• Example:- Small-scale mills frequently steal electricity and underreport their sales to avoid

tax.

Reservation of products for the small scale enterprises:

• Example:- clothing and textiles

Restrictions on Foreign Direct Investment (FDI):

• FDI is prohibited in certain sectors of Indian economy.

• Example:- Retail

Licensing :

• In several sectors of the Indian economy, operators need a license from

the government to compete

• Example:- Dairy industry

Cont.…

Land Market

Land market distortion includes:

Unclear Ownership:

• Indian courts might take a century to resolve the dispute of ownership.

• Being unclear about who owns what makes it very difficult to buy land for retail and housing

developments.

Counterproductive taxation:

• Low property tax, ineffective tax collection

• With more efficient collection of tax, government could invest in infrastructure.

Government Ownership

• McKinsey proves that the Indian worker is not naturally unproductive

Labor productivity in state unit vs. private sectors are as follows:

• 3:27 in dairy;

• 10:20 in power generation;

• 0.5:3 in power transmission;

• 10:55 in banking.

McKinsey says, "electricity boards lose 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".

13 steps suggested by Mckinsey

• Eliminate reservation of product for small scale industries.

• Equalize sales taxes and excise duties for all categories of players.

• Establish an effective regulatory framework and strong regulatory bodies.

• Remove all licensing restrictions .

• Reduce import duties on all goods to the levels of Southeast Asian countries (10 percent)

over five years.

• Remove the ban on foreign direct investment in the retail sector.

• Resolve unclear real-estate titles by setting up fast-track courts to settle

disputes, computerizing land records, freeing all property from constraints

on sale, and removing limits on property ownership

• Raise property taxes and user charges for municipal services and cut

stamp duties.

• Reform tenancy laws to allow rents to move to market levels 

• Privatize the electricity sector and all companies owned by the central and

state governments. 

Cont.

• Reform labor laws by repealing section 5-B of the Industrial Disputes Act.

• Transfer the management of the existing transport infrastructure to the

private sector.

• Strengthen extension services to help farmers improve their yield.

Cont.

THANK YOU