April 09, 2014

India’s path from poverty from an MGI plan - the insights are applicable to other poor countries

India has made encouraging progress by halving its official poverty rate, from 45 percent of the population in 1994 to 22 percent in 2012.

McKinsey Global Institute (MGI) has created the Empowerment Line, an analytical framework that determines the level of consumption required to fulfill eight basic needs—food, energy, housing, drinking water, sanitation, health care, education, and social security—at a level sufficient to achieve a decent standard of living rather than bare subsistence.

In applying this metric to India, we found that in 2012, 56 percent of the population lacked the means to meet essential needs. By this measure, some 680 million Indians experienced deprivation, more than 2.5 times the population of 270 million below the official poverty line. Hundreds of millions have exited extreme poverty but continue to struggle for a modicum of dignity, comfort, and security. The Empowerment Gap, or the additional consumption required to bring these 680 million people to the level of the Empowerment Line, is seven times higher than the cost of eliminating poverty as defined by the official poverty line.

The full MGI report is here

* 50% of India's public spending on basic services does not reach the people
* 46% of basic services are not within reach for the average Indian household
* 75% of the potential impact [from the MGI plan] will come from jobs and productivity growth
* 70% increase needed in agricultural yields over the next decade
* 50% of public social spending is needed for health care, water, and sanitation, up from 20% today

If India’s recent weak economic momentum persists in the coming decade, in what we have termed the “stalled reforms scenario”, some 470 million people, or 36 percent of India’s population, would remain below the Empowerment Line in 2022 and as much as 12 percent would remain below the official poverty line.

Merely increasing government subsidies can achieve only a fraction of this goal, however. Our estimates indicate that as in the past, almost three-quarters of the potential impact of raising people above the level of the Empowerment Line depends on unlocking investment, job growth, and productivity. More public spending alone, without addressing issues of waste and inefficiency, is likely to deliver at most 8 percent of total potential impact.

The importance of this message cannot be overstated. Government spending is critical to ensure access to basic services, but simply channelling more money into the same programmes without addressing their operations and outcomes will deliver very little.




GI’s research outlines a more ambitious yet economically sound path of inclusive reforms, which could lift 580 million people above the Empowerment Line by 2022, while virtually eliminating extreme poverty. It involves four key priorities:

* Accelerating job creation. India needs to add 115 million new nonfarm jobs over the next decade to accommodate a growing population and reduce agriculture’s overall share in employment. The manufacturing and construction sectors, along with labor-intensive services, can form the backbone of this effort. To support job creation, policy makers can focus on reducing the administrative burden on businesses, accelerating infrastructure projects, making the labor market more flexible, removing market distortions, and expanding vocational training for the poor and uneducated.

* Raising farm productivity. Increasing investment in agricultural infrastructure and implementing reforms to improve market access, rationalize price supports, expand the adoption of new technologies, and streamline agricultural administration and extension services can help to achieve annual yield growth of 5.5 percent. This would bring India’s yields into line with those in other emerging Asian countries by 2022.

* Increasing public spending on basic services. To fill the most critical gaps, public spending on basic services would need to grow in real terms by about 6.7 percent annually through 2022. The fiscal resources will be available if India can achieve faster GDP growth. The share allocated to health care, water, and sanitation, however, needs to double.

* Making basic services more effective. We estimate that half of India’s current public spending on basic services does not translate into improved outcomes for the poor. By 2022, however, that spending can become 50 percent more effective if the nation as a whole matches the standards already set by the best-performing states. Some of the most promising strategies include forming partnerships with the private and social sectors, mobilizing community participation, and using technology to streamline and monitor operations.




The path of inclusive reforms envisages a far more positive alternative, one in which the nation takes steps to stimulate investment, job creation, and farm productivity, as well as dramatically improve the delivery of basic services. These reforms could potentially allow India to achieve an average GDP growth rate of 7.8 percent between 2012 and 2022. This could lift 580 million people above the Empowerment Line, leaving 100 million (7 percent of the population) below it in 2022 and 17 million (just 1 percent) below the official poverty line—virtually eliminating extreme poverty in just a decade.


As China moves up the value chain, India and other emerging economies with low labour costs have an opportunity to capture a larger share of labour-intensive industries by integrating domestic manufacturing with global supply chains. But today an array of barriers limits the ability of Indian businesses—both large and small—to invest and become more competitive, scale up, and create jobs. Revitalising India’s job-creation engine will require decisive reforms and a laser focus on implementation in six high-priority areas:

ƒƒ* Accelerate critical infrastructure for power and logistics. Infrastructure gaps, especially in power and transportation, hinder economic growth, particularly in manufacturing. For better execution of projects, the government could establish a high-level National Infrastructure Delivery Unit in the prime minister’s office to build an integrated view of the country’s infrastructure needs, coordinate across ministries and functions, set and monitor schedules, and address bottlenecks. This unit could work with the Cabinet Committee on Investment to expedite infrastructure projects. A State Chief Minister’s Office could also set up a State Infrastructure Delivery Unit for the same purpose.

*ƒƒ Reduce the administrative burden on businesses. Complex and archaic regulations pose a significant cost, especially for micro-, small, and mediumsized businesses, discouraging both investment and their move into the formal economy. India can reduce this burden in a phased manner, starting with quick wins that require simple changes in administrative rules and procedures rather than new legislation. In the medium term, the rollout of e-government platforms and “one-stop shops” supported by automated government processes can be accelerated, with more fundamental improvements such as selective outsourcing to private-sector providers and extending the Right to Public Services laws to business services as the third phase.

ƒƒ* Remove tax and product-market distortions. India’s many taxes result in high compliance costs, and differences across states and sectors balkanise the national market, harming the ability of businesses to achieve economies of scale. If implemented, the proposed goods and services tax, a harmonised consumption tax across nearly all goods and services, represents a step towards reducing complexity and lowering the tax burden. In addition to cross-cutting tax reform, India can spur growth by removing tax and duty distortions in individual sectors—especially those that will be the most significant sources of non-farm job creation, such as garment manufacturing and tourism.

*ƒƒ Rationalise land markets. In 2013, India enacted the Land Acquisition, Rehabilitation and Resettlement Bill, which was intended to create a framework to deal fairly with the displaced. However, inefficient land markets remain a major impediment to economic growth, as property rights are sometimes unclear and the process for land acquisition is time-consuming. India can reinforce property rights by demarcating land holdings through geospatial surveys and providing standardised title to landowners through digitising records, as Karnataka has done.

*ƒƒ Take phased steps to make labour markets more flexible. At least 43 national laws—and many more state laws—create rigid operating conditions and discourage growth in labour-intensive industries. But ironically, they secure rights for only a tiny minority of workers. India can make its labour market more flexible in a phased manner, and states that have begun this process have higher job-creation rates on average than those that have not. A multitude of rules that restrict terms of work and work conditions can be simplified or eliminated. In the medium term, India could rationalise laws governing dismissal, pairing this with measures to reinforce income security for the unemployed.

ƒƒ* Help poor workers build skills with government-funded mechanisms. Vocational education is needed most acutely by the poorest workers— those with little or no education and those who live in rural areas. There are 278 million Indians of working age in these segments, but they are underserved. Providers such as IL and FS Skills have built effective models that focus on providing low-cost delivery, fostering interactive learning, and teaching skills that are in demand. The government can scale up this approach by giving poor workers vouchers that can be redeemed for vocational training with accredited providers that are subject to monitoring and certification. Workers in informal sectors and the self-employed (for example, caregivers, cooks, nursing aides, hairdressers, shop assistants, plumbers, and electricians) can raise their incomes through skill building. Short training courses of a few months’ duration, along with certification systems, could help.



Source : McKinsey Global Institute


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