McKinsey’s Vikram Malhotra: ‘India Has to Evolve’

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A few years ago, with a 9% plus GDP growth rate, India seemed set to become an economic powerhouse. Growth has now slipped to below 5%, and the country has been likened to a fallen angel. “What went wrong? Most of us have found ourselves asking the question, especially this past year.” With those words, the organizers of the 18th Wharton India Economic Forum, held recently in Philadelphia, introduced the theme of the conference: “Time to Reboot.” Vikram Malhotra, McKinsey & Company’s chairman of the Americas, provided his diagnosis of the challenges, and offered his prescriptions for re-imagining India as a land that fully delivers on its great potential.

What are India’s strengths — and challenges — in the battle to achieve greater prominence in the global economy? Malhotra began with a brief history lesson: Until the 19th century, India and China enjoyed a combined share of almost 50% of global GDP. But their share dropped precipitously after the newly industrialized nations of Europe and the U.S. expanded rapidly. In recent years, noted Malhotra, both China and India have been growing rapidly. Yet it remains to be seen whether India’s rate of growth will rival that of China over the long term.

In this race, natural resources aren’t India’s most significant advantage; rather, it’s the enormous scale and skills of its human capital. As Malhotra noted, one out of every six people in the world lives in India. Even more impressively, one out of every four of the approximately three billion people under the age of 25 today is Indian. “We turn out some 1.5 million college graduates a year. If you think about the power of those demographics and what it might do to the world in 15-20-25 years, it is quite remarkable. That gives us an enormous advantage. It is obvious that this young demographic is a growing market, and that you also have great entrepreneurs.”

India also has some cultural assets and advantages that Malhotra described as soft power. “The emblem of soft power is Bollywood — an industry that is many multiples the size of Hollywood, churning out lots and lots of movies.” There are other symbols: the political system for one, “a boisterous but stable democracy.” In the business world, the CEOs of Microsoft, PepsiCo, Deutsche Bank and several other companies were all born in India.

In many other ways, India has revealed that it “has a pretty good record of getting things done, when India puts its mind to it,” Malhotra noted. For example, thanks to a concerted campaign to eradicate polio, India has now been free of that disease for three years. According to Malhotra, Bill Gates, founder of Microsoft, said that India’s accomplishments in the public health sector can be applied not just to polio but also to other key challenges, such as providing access to clean water and immunization.

India has been the victim of its own rising expectations. But from 2011, things have not gone well.

Further up the scale of technology, India has shown a remarkable ability to enact major engineering projects, Malhotra continued. In the realm of transportation, he noted, the Delhi Metro rivals any subway system anywhere in the world. In the mobile telephone sector, India has managed a revolution involving the use of some 900 million mobile phones. Likewise, the country is making remarkable progress in its electoral system, where more than 800 million people are eligible to vote in the April-May general elections.

The Roots of the Problem

What, then, is the problem? Why is a reboot necessary? India has been the victim of its own rising expectations, Malhotra noted. Many Indians believed that the country would simply take off, but the last few years have shown that it is not the case. From 2011, things have not gone well, especially in physical infrastructure. “The infrastructure is getting worse. It is amazing how lousy it is,” Malhotra said. Although India needs to build at least 13 miles a day of world-class roads, last year it built only five miles a day of mediocre roads, he added. Likewise, in the health care sector, India has only about one bed for every thousand people, at a time when the “acceptable standard” in the industrialized world is three beds per thousand.

Despite its large number of young university graduates, he noted, India’s biggest challenge is really around human development. Some 270 million people are below the official poverty line. Some might claim it is double that number, depending on where you want to draw that line. India is ranked 136 out of 187 countries in the Human Development Index. “Some 26% of the population cannot read or write, and 42% of children under the age of five suffer from under-nutrition or malnutrition,” Malhotra said.

With this as backdrop, Malhotra focused on his prescription for improving India’s competitiveness and the quality of life. “I’d like you to join me on a journey on how you might imagine a very different India by building on some of the strengths that I mentioned earlier.”

Malhotra urged his audience to re-imagine India built around five key dimensions — infrastructure, inefficiency, inequality, innovation and independence, or the five ‘i’s.

The Importance of Infrastructure

Infrastructure is absolutely critical if India is to get to China’s levels of economic development, he said. “The journey has to start now – with the right leadership.” In response to a question from his audience, Malhotra later added, “If we don’t start [to reboot] infrastructure today, I think India is done. If India keeps frittering around on the edges, India will be an irrelevant power 20 years from now. It is a choice that the citizens, politicians and private sector leaders of India must make.”

Malhotra recalled the days when Eastern Europe and Singapore had worse infrastructure than India. But now many of those places have better infrastructure than India. “If they can do it, why can’t India do it?”

The second problem is inefficiency. “It is everywhere,” said Malhotra. In 2013, India was ranked 134 out of 185 countries by the World Bank with respect to the ease of doing business. He added that India is now in the bottom six countries in the world when it comes to enforcing contracts; it takes an average of 1,420 days to enforce a contract, and 196 days to get a construction permit.

“If we don’t start [to reboot] infrastructure today … India will be an irrelevant power 20 years from now.”

Worse, endemic corruption takes a lot of money out of the system. There are infrastructure projects in which anywhere from 50% to 90% of the payments go to the corrupt, he said, noting that the tax system is also broken. Fixing this would provide more money for infrastructure.

An ‘Innovative Country’

“If India can actually deal with the license problem and change the rules for giving permissions, it would be great. We might actually say, once you have registered for a permit, if you haven’t heard back [from the licensing authority] in 60 days, the permit is granted,” Malhotra noted. “That would be a great way to eliminate inefficiency and bribes.” Overall, he stressed, “We need transparency. If the government and the private sector have the will, and [there is] accountability and transparency, we can move on this. Yes, it is a daunting challenge, but we have to move.”

When it comes to innovation, “India is an innovative country; a country full of entrepreneurs,” Malhotra noted. “Nearly 40% of all start-ups in Silicon Valley today are led by a person of Indian origin. If that can happen in Silicon Valley, why not in India?”

India must capitalize on its successful experiences, he said. Less than a decade ago, India had 100 million mobile phones, but now the country has 900 million devices. “If India can do that with mobile technology, can it do that elsewhere?” Responding to his own question, Malhotra said he could imagine three ways that technology could have a major positive impact. The first is by providing more access to the Internet. Only 20% Indians have Internet access, he noted, but “if you can imagine 70% usage, that would make a tremendous difference.… The technology is there, and you can revolutionize education.”

A second dimension of technology is its potential to boost governmental transparency by enabling people to monitor the progress of various projects. Third, Malhotra believes that technology can be used to transform India’s capabilities in the energy sector. “There are people in India who imagine that India could become energy-independent — not just by using technology to produce conventional fuels more efficiently but by developing alternative fuels. If we use technology in a smart way, we can be really innovative in energy, governance, education and many, many other fields.”

Eliminating Poverty

Malhotra urged his audience to strive to eliminate inequality and poverty in India. “I said earlier that there are 270 million Indians below the official poverty line, but when you actually look at some of the basic services — food, energy, housing, social security and education — you will draw the line somewhere else. You will say that, actually, somewhere close to 680 million people are below the line.” To rectify this inequality, he said, India must increase the productivity of its farmers while creating 100 million new non-farm jobs in agriculture.

In the case of independence, collectively, five Indian states are ahead of the game, attracting almost 70% of the nation’s foreign investment, Malhotra said. The reason those states have done so well, he added, is that their governments have taken the lead role in educational and social innovations, rather than leaving such initiatives to the central government.

What is the lesson for India as a whole? “I argue that India has to continue to move away from this notion of centralized planning. The federal government plays a role, but the bureaucracy that goes with it is not a good thing.” In the India of the future, as imagined by Malhotra, empowerment will flow down to the states and the villages. By giving state and local governments a lot more independence, he noted, “It will make an enormous difference in terms of growth, in terms of what India can do.”

Malhotra also challenged Indians to overcome their cynicism about their country’s well-engrained patterns of waste and corruption. “Some people say, ‘We’ve always been like this and, therefore, we cannot change.’ Changes don’t happen overnight; India has to evolve.”

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2 Comments So Far

Arnab Pandey

A very informative piece of writing Sir. Yes India do need to focus on the five I’s to survive the change.

Kevin Horne

Guess we’ll just skip over the moose on the table = India’s widespread political and business corruption,,,