How should India realize its dreams of becoming an economic powerhouse? Rajat Gupta, former worldwide managing director of consulting firm McKinsey & Company, addressed this theme at the annual Wharton India Economic Forum, held in Philadelphia, Pennsylvania, on November 11. In his keynote address, Gupta made the case that India should press forward with its reforms in order to achieve its goals and laid out both economic and social priorities that need to be addressed.
Gupta began by outlining what India has accomplished already. While everyone is aware of India’s success in the services business, he said, there are other industries, like steel, where the country is an up-and-coming player on the world stage. In addition, the country’s financial markets are developing well, the political environment is relatively stable, and the corporate sector is growing strong. The middle class is increasing, and there is a new demand for domestic capital.
At the same time, he warned, the population explosion that is the source of the expanding consumer market also poses a tremendous risk. “If economic growth doesn’t keep pace with the rise in population growth, especially of employable youth, it could make India poorer,” he said.
For economic growth to stay on top of this demographic trend, the country will need to put in place several social and economic reforms. “Should India take its foot off the gas pedal or press forward with reforms? I make the case that it’s vital to press on,” said Gupta. “India has made extraordinary progress. It has become a booming market leader in services and knowledge. It has economic growth rates of 7% [a year] and $6 billion in foreign investment, 120 million cell phone customers. All these are a result of the liberating initiatives [to date]. Is there growth potential still? Yes. The conditions are set for more progress.”
On the economic front, sensible deregulation is crucial, noted Gupta. “There is still too much red tape. Senior managers may spend up to 15% of their time dealing with regulatory issues.” In retailing, defense, banking, and other industries, India has a long way to go to catch up with productivity rates in China. “We’ve seen how deregulation has helped productivity jump in the auto industry,” he noted, adding that similar progress could be made in other fields.
A second area of focus has to be infrastructure improvements, Gupta explained. “So far, India’s success has been in spite of its infrastructure, not because of it,” he said. “We must have planned programs and get new capital to expand them further.” Gupta added that debt markets need to be developed further and that the use of public-private partnerships must be expanded.
The third critical component of economic change is to focus on the manufacturing sector, Gupta said. “No country has become a developed nation without focusing on its manufacturing sector. Outsourcing will create jobs, yes, but it can never provide enough employment to transform rural India. The country must focus on expanding skill-intensive manufacturing jobs, and reform labor laws accordingly.” What sectors should India ramp up first? Food processing, construction, auto components, and electronics, said Gupta. “Food processing and construction, in particular, match well with India’s agriculture business and its infrastructure needs.”
But even if all these economic changes were to occur, such reforms alone are not sufficient to move India to the next level, he noted, adding that India must effect changes in its education, urban development, and health care to stay competitive. He advocated a systemic approach to education reform, noting the grave disparity between literacy rates in China and India. “Reforms must begin in the elementary schools, and a focus on vocational education is needed,” said Gupta. He cited research showing that the teaching of English in India is now lagging behind — and as language proficiency is a major advantage for the country, this could create a problem. To help address all of these issues, India must take a nontraditional approach. “We need to stimulate private sector investment in education, creating flexible ‘education zones’ and opening the industry to nonprofits and foreign universities.”
On the urban front, the migration of Indians from villages to cities has largely occurred without proper management, Gupta explained. “The cities can’t cope with the numbers of people coming in, and services can’t deal with them either. India should adopt a more managed plan for migration, with a more distributed model involving smaller cities.”
Changes in the area of health care are obvious, said Gupta: Among them are sanitation, clean water, and HIV prevention. Diabetes and cardiovascular disease are on the rise. Gupta exhorted the country to focus on preventive measures, not just on cures. “The country needs a strong, healthy workforce. It can’t afford to let people get sick,” he said.
Part of the problem, Gupta explained, is inconsistent policymaking. “In India we heavily tax cigarette manufacturers — which is good — but we promote the small-scale beedi industry, which comprises 90% of India’s tobacco consumption.” Instead of such mismatched strategies, he said, the country needs to develop and implement sound health care public policies.
When asked about his views on having some seats at educational institutions reserved for historically disadvantaged groups, Gupta answered, “I’m very supportive of affirmative action. Maybe the solution is not quotas, per se, but the government should help disadvantaged people. We also need to reduce dropout levels, and there are some organizations working on that. Now, if the government insists on quotas — if that becomes the law — then, okay, let’s make it work. We need to start focusing on training disadvantaged peoples. There is a great need to increase the size of our educational institutions [in order to expand the number of graduates] without compromising their quality.”
On the whole, Gupta was optimistic about India’s ability to overcome many of its current problems. Whether the reforms he supports will actually happen in the near term, of course, remains to be seen.
