The document summarizes key findings from a McKinsey Global Institute report on poverty and empowerment in India. It finds that 680 million Indians, or 56% of the population, live below the empowerment line and lack minimum standards of living. Three key reasons for this are: 1) inadequate job creation and low productivity, especially in agriculture, 2) low productivity of most non-farm jobs, and 3) inadequate and inefficient provision of basic services by the government despite rising social spending. Over half of government social spending does not actually benefit the people. The report estimates the total empowerment gap cost and outlines reforms needed across jobs, agriculture, services, and governance to significantly reduce poverty and empower more Indians.

1. From poverty to empowerment
MGI INDIA | February, 2014
India’s imperative for jobs, growth and
effective basic services
The full report can be found at http://bit.ly/McKIN-MGI-Pov2Emp

2. 1
The McKinsey Global Institute (MGI) – an overview
▪ Help leaders in the private, public,
and social sectors develop a deeper
understanding of the evolution of the
global economy
▪ Provide a fact-base and ideas that
contributes to decision-making on
critical management and policy issues
▪ Focus on long-term fundamental
research and maintain very high
standards of peer review and intellectual
rigor in its work
▪ Build deep knowledge in core areas:
productivity, competitiveness and growth
and key markets – technology, labour,
natural resources, finance
MGI Mission & Aspirations
OVERVIEW
▪ Founded in 1990 as McKinsey’s
business and economics research arm
▪ Distinctive “micro to macro” approach
combines real business experience
with the rigor of world-class economic
analyses
▪ Project teams are led by MGI senior
fellows and draw from top-performing
consultants around the world
▪ Leading global economists, including
Nobel laureates, act as advisers
▪ Research is funded by the partners of
McKinsey independent from any
business, government, or other
institution

3. 2
2014
MGI has invested in significant India research over the years
2001
2007
2010
2

4. 3
Leadership team for MGI’s India ‘poverty to empowerment’ report
Rajat Gupta Shirish Sankhe
Director,
Mumbai office
Director,
Mumbai office
Richard Dobbs Jonathan Woetzel
Director,
London office
Director,
Shanghai office
Anu Madgavkar Ashwin Hasyagar
Senior Fellow,
McKinsey
Global Institute
Fellow,
McKinsey
Global Institute

5. 4
Some 680 million people, or 56% of India, live below MGI’s Empowerment Line and lack
acceptable minimum standards of living; the Empowerment Gap is 4% of GDP in value terms
(about 7 times the official poverty gap)
From 2005 to 2012, 75% of the improvement in living standards was due to rising
incomes, the rest due to government spending; to reduce the gap faster, India needs more
productive jobs and higher effectiveness of government spending (e.g., 85 million people
below the official poverty line could have been lifted to minimum living standards just by
improving delivery of public services)
Almost 40% of the Empowerment Gap comes from health care, drinking water and
sanitation; in addition, hunger is a major issue for the poorest segments, and housing for
the urban vulnerable
Apart from lacking the means, Indians also lack access to 46% of the basic services they
need, with significant variations in the pattern of access deprivation across districts
A path of Stalled Reforms would leave 36% of India below the Empowerment Line and
12% below the Poverty Line in 2022, but the path of Inclusive Reforms can bring these
down to 7% and 1% respectively – while achieving fiscal consolidation and reducing
access deficit in basic services to 17%, from 46% currently. Raising government spending
on subsidies alone delivers just 8% of the total impact. 4 themes are critical
▪ Non-farm jobs deliver >50% of impact; 115 million jobs are needed (38 million more
than Stalled Reforms) through 6 broad-ranging reforms and investments in 70-100 job
creation engines
▪ Agricultural yield growth delivers ~20% of impact, needing 9 farm sector initiatives
and investment rebalancing towards rural infrastructure, research and extension
▪ Public spending on basic services should grow at 7% p.a. in real terms and share of
health, water and sanitation to rise from 20% to nearly 50%
▪ Government spending effectiveness must improve from 50% to 75%, by working with
private and social sector, community involvement and tight monitoring using technology
Six themes are essential to improve governance across the board (raise institutional
capacity and strengthen external accountability)
1
2
3
4
6
5
KEYMESSAGES

6. 5
Contents
▪ The path from poverty to empowerment
▪ What keeps India poor?
▪ Access to basic services
▪ Understanding the empowerment gap
▪ The empowerment line

7. 6SOURCE: Planning Commission of India; McKinsey Global Institute analysis
India performance on reducing extreme poverty has been encouraging
45
2004-05
22
2009-10
30
1993-94
37
2011-12
Headcount ratio of population below India’s official poverty line
Percent
Headcount below
official poverty line
Million
India’s total
population
Million
404 407 354 270
890 1,090 1,190 1,230

8. 7
We ask what it would take to economically empower every Indian – at
the very least, through the fulfillment of eight basic needs
SOURCE: McKinsey Global Institute analysis
2,100-2,400 calories, including
60 grams protein and 40 grams fat1,
per capita per day for rural-urban
215-275 square feet of
acceptable housing in rural-
urban areas
Access to clean cooking fuel
and electricity for lighting needs,
based on minimum energy
consumption levels
ENERGY
FOOD
HOUSING
70-135 litres per capita per
day of piped water supply in
rural-urban areas
DRINKING WATER
Sanitary latrine in rural households,
and underground sewerage with
wastewater treatment in urban
SANITATION
Access to primary education,
and secondary education
(substitutable with vocational
training), for all children based
on accepted norms
EDUCATION
Access to an essential basket of
health-care services across
primary, secondary, and tertiary
health care
HEALTHCARE
Insurance to cover income loss
based on 2% premium-to-coverage
ratio
SOCIAL SECURITY
1 Protein and fat norms for adults
Basic
services

9. 8
MGI’s ‘Empowerment Line’ is the cost of eight basic services, less goods
and services paid for by the government that actually reach the people
SOURCE: McKinsey Global Institute analysis
Normative consumption requirement and Empowerment Line
INR per capita per month, 2011–12; 2011–12 prices
1 Includes clothing, footwear, travel, entertainment, communication, domestic appliances, etc.
2 Includes primary, and secondary education (substitutable with vocational training), costs
3 Includes health care, drinking water and sanitation
154
128
221
221
25
14
Food
Health4
Education3
Housing2
Social security
Others1
Empowerment
line
1,336
580
Energy
203
106
82
16
Effective public
spend on basic
services
208
37 29
89
14
Normative
consumption
required
1,544
617
232
195
96
30
This means
INR 6,700 Per family of
five
INR 1,692
Urban
Empowerment
Line
INR 1,228
Rural
Empowerment
Line

10. 9SOURCE: Report of the Expert Group to Review the Methodology for Estimation of Poverty – Planning Commission (2009), McKinsey Global Institute analysis
1 Includes clothing, footwear, travel, entertainment, communication, domestic appliances, etc.; corresponding category in official poverty line does not include travel
2 Corresponding category in official poverty line includes travel costs
3 Includes primary and secondary education costs; corresponding category in official poverty line includes all education costs
4 Includes healthcare, drinking water, and sanitation; corresponding category in official poverty line includes healthcare only
5 Subcomponents calculated based on of Tendulkar poverty estimation methodology used in 2004-05
Official poverty line and Empowerment Line
INR per capita per month, 2011–12; 2011–12 prices
The Empowerment Line has relatively higher requirements for heath,
drinking water and sanitation, and education
128
185
221
107
0
874
Food
Health4
Fuel
Education3
Housing2
Social security1.5x
Others1
Empowerment
Line (EL), 2012
1,336
580
203
106
82
16
Official Poverty
Line5 (2011-12)
472
37
28
46
1.2x
1.8x
3.8x
1.2x
5.5x
1.2x
36
36
78
22
166
108
Difference
between EL
& PL
INR
Ratio of EL
to PL

11. 10
1 The Empowerment Gap and the Poverty Gap are defined as the aggregate differential between actual private consumption expenditure and the consumption
requirements of the Empowerment Line and the poverty line, respectively
2 Using average exchange rate of $1 = INR 48.0769 for April 2011–March 2012
Average monthly consumption expenditure
INR per capita per month, 2011-12, in 2011-12 prices
SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis
680 million Indians are below the Empowerment Line, against
270 million who are below the official poverty line
Empowerment line
Official poverty line
0
500
1,000
1,500
2,000
2,500
3,000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Percentile of population (percent)
INR 874
INR 1,336
Empowerment Gap1
INR 332,000 crore ($69 billion)2
4% of GDP
Poverty Gap1
INR 50,000 crore ($10 billion)2
0.6% of GDP

12. 11
171 million Urban Indians and 509 million Rural Indians are below the
Empowerment Line
SOURCE: McKinsey Global Institute analysis
1 BEL – Below Empowerment Line
2011-12
BEL1 population
Million
BEL1 Headcount
ratio
Percent
Empowerment
line (average)
INR per capita
per month
All India 680
Rural 509
Urban 171
61
56
44 1,692
1,228
1,336

13. 12
Urban and Rural India are equally disadvantaged, on a relative basis
SOURCE: McKinsey Global Institute analysis
1 MPCE – Monthly Per Capita Expenditure, average; BEL = Below Empowerment Line
2 Empowerment gap defined as a the monetary value of the difference between actual private consumption expenditure and the consumption required under Empowerment line
Empowerment line and per capita empowerment gap, 2012
INR per month
RuralUrban
Per capita
empowerment gap
521
(31%)
MPCE of
BEL population1
1,171
Empowerment
line
1,692
Per capita
empowerment gap
370
(30%)
MPCE of
BEL population1
859
Empowerment
line
1,228
BEL population
%
Million
44
171
61
509

14. 13
Contents
▪ The empowerment line
▪ What keeps India poor?
▪ Understanding the empowerment gap
▪ Access to basic services
▪ The path from poverty to empowerment

15. 14
74% of the past reduction in Empowerment Gap was attributable to
higher incomes, the rest to more government spending
SOURCE: National Sample Survey Office survey, household consumption survey, 61st (2005) and 68th (2012) rounds; McKinsey Global Institute analysis
Empowerment
gap, 2011–12
332
Additional public
spend reaching
the people1
111
Private
consumption
growth due to
higher incomes
321
Gap (2011–12)
holding per capita
consumption
constant
764
Impact of increase
in population
168
Empowerment
gap, 2004–05
597
1 Public spending reaching the people is ~20% of monthly per capita expenditure (MPCE) for below Empowerment Line (BEL) population in 2012.
Empowerment Gap, 2005–12
%; INR thousand crore 1
Share of past
poverty
reduction
%
For Below
Empowerment Line
For Below
Poverty Line
74%
66%
26%
34%
56%78%
xx% BEL population

16. 15
Two reasons why India’s poor have not been able to meet their basic
consumption needs, despite fast GDP growth
Inadequate and inefficient
provision of basic servicesB
Low productivity improvement and a
poor job creation engineA
Agriculture is plagued by low
productivity, high underemployment
(20%) and slow productivity growth
(2.3% p.a. between 2000-10) and
houses 60% of India’s “working poor”
Non-farm job creation has been
inadequate: India created just 65
million new non-farm jobs in the last
decade, not enough to move workers
out of agriculture
Low productivity of jobs: 65-75% of
non-farm jobs are in the unorganised
sector, 84% of manufacturing
employment in tiny enterprises of less
than 50 workers
Low workforce skills: almost 70% of
the workforce is not educated beyond
primary school
Effectiveness of
government spending is
low, with 50% of what is
spent not translating into
real benefits for people
Despite rapid overall
growth, public spending is
insufficient in critical areas
such as healthcare, water
and sanitation
There is wide variation in
public spending, and
hence outcomes, across
states and sectors (urban
vs. rural)

17. 16
Over half the workforce (and 60% of the working poor) are in agriculture
where productivity is one-third to one-half that of the next two sectors
955550
800
1001050 45403530252015
Productivity per worker
INR ‘000 per worker
1,000
200
400
600
Share of employment
Percentage
0
Banking & insurance
Real estate & business services
Transport, storage & communications
Public administration & defense
Trade, hotels & restaurants
Unregistered manufacturing
Construction
Agriculture
SOURCE: NSSO 66th Round; MOSPI website; McKinsey Global Institute analysis
Registered manufacturing
Productivity and employment by sector
2010 ServicesIndustryAgriculture
50 million more non-farm jobs by 2012 could
have lifted 100 million more people above
the Empowerment Line
Other services

18. 17
Even in the non-farm sector, India’s glut of low-productivity small
enterprises kept average worker incomes low
SOURCE: Asian Development Bank; “Enterprises in Asia: Fostering Dynamism in SMEs,”Key Indicators for Asia and the Pacific (2009),
McKinsey Global Institute analysis
70
46
25
65
841-49 employees
50-199 employees
200+ employees
China
23
52
Thailand
13
42
Indonesia
6
29
Philippines
8
23
India
6
11
1.5 15.15.72.33.2
13.1 31.113.112.414.0
1 Both manufacturing & non-manufacturing businesses
2 Productivity data is only for small enterprises (i.e., 5-49 employees) and does not include micro enterprises (i.e., 1-4 employees)
Share of manufacturing employment by business size
Percent
Value add per worker
for 200+ employee
businesses1
2005, USD ‘000 per year
Value add per worker
for 5-492 employee
businesses1
2005, USD ‘000 per year

19. 18
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2,500,000
Interest
Payments
Administrative
expenses
Expenditure
for growth
Other social
expenses
Basic
services2
2011-1232007-082003-042000-01
SOURCE: Indian Public Finance Statistics; Budget documents of Government of India and State governments; IMF
Note:
• Data for 01-02 and 02-03 was not available, so their values have been calculated by interpolating along the graph
• Data for 11-12 is as per revised estimates
• Values differ slightly from calculations for 2009-10 shown previously, as this only takes into account fiscal expenditures; also tertiary education is included in basic
services head for this graph
Government social spending for basic services has risen faster
than GDP over the past decade to INR 570,000 crore ($118 billion)
Government (Centre and state) fiscal expenditure
INR crore
9% 15% 17%
CAGRxx
9%
17%
7%
13%
16%
16%
16%
9%
20%
20%
19%
14%
Nominal GDP CAGR

20. 19
Half of government social spending (or INR 285,000 crore)
does not benefit the people
SOURCE: NSSO, government fiscal statistics, MGI analysis
1 Estimated by comparing actual government spend to benefits reported as received in NSSO’s consumption surveys
2 Estimated by comparing best performing states on health and education outcomes per rupee of spend to average performing states across India
2011-12 government spending
INR ’000 crore
Estimated efficiency/effectiveness of government spending
% of spending that typically reaches the people
Health,
drinking water
and sanitation
36
Fuel1
47
Education2
51
NREGA1
52
Food1
64
If subsidies were 75% efficient in reaching
intended beneficiaries, 85 million more people
would be above the official poverty line today
Spend
reaching people
Inefficiencies
and leakages
50
50
INR 285,000 crore not reaching
the intended beneficiaries

21. 20
Contents
▪ The empowerment line
▪ What keeps India poor?
▪ Understanding the empowerment gap
▪ Access to basic services
▪ The path from poverty to empowerment

22. 21
Health and food are 60% of the Empowerment Gap; housing is a large
unmet need for the urban poor
SOURCE: NSSO 68th round, McKinsey Global Institute
9
25 20
10
332
($69)
-1
39
19
17
7
Rural
226
($47)
-1
40
18
9
Urban
107
($22)
Health2
Others
Education
Food
Housing
Fuel
Total
21
37
-1
32
1
Empowerment Gap by service and sector, 2011–12
%; INR thousand crore ($ billion1)
1 Using average exchange rate of US $1 = INR 48.0769 for 1 April 2011 to 31 March 2012.
2 Includes health care, drinking water, and sanitation.

23. 22
There are three distinct segments below the Empowerment Line
SOURCE: National Sample Survey Office survey, 68th round; Oanda; McKinsey Global Institute analysis
India’s population and Empowerment Gap1 by segment, 2011–121
Percent
1 The Empowerment Gap is defined as the aggregate differential between actual private consumption expenditure and the Empowerment Line
2 Using average exchange rate of US$ 1 = INR 48.0769 for April 2011-March 2012
3 Monthly per capita expenditure
1.9x
1.4x
2.6x
Ratio of Empowerment
Line to average MPCE3
44
100% =
Excluded
Impoverished
Vulnerable
Empowered
Empowerment
gap1
INR 332,000 cr
($69 billion2)
17
46
38
0
Population below
the Empowerment
Line
1.2 billion
8
17
34

24. 23
Needs are very different for each segment – absolute gap
SOURCE: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis
Consumption gap by segment and service, 2011–12
INR per capita per month
1 Includes healthcare, drinking water and sanitation.
292
161 285
163 25
63
Health1
Food
Education
Housing
Energy
Vulnerable
278
138
24
60
32
Impoverished
477
160
72
36
46
Excluded
638
173
79
38
Vulnerable
415
184
-20
100
158
-7
Impoverished
724
216
136
187
23
Excluded
910
227
149
196
46
Consumption gap
% of Empowerment
Line
66 53 30 63 47 27
Urban
Population by
segment
Million
12 42 118 45 169 295
Rural

25. 24
Contents
▪ The empowerment line
▪ What keeps India poor?
▪ Understanding the empowerment gap
▪ Access to basic services
▪ The path from poverty to empowerment

26. 25
In addition to purchasing power, people needs access to basic services
– we constructed Access Deprivation Score (ADS) to assess access
SOURCE: McKinsey Global Institute analysis
1 Oral Rehydration Solution; 2 High Level Expert Group; 3 Liquefied Petroleum Gas (used as cooking fuel).
Electricity
usage
LPG3
usage
Drinking
water and
sanitation
access
Good or
liveable
housing
Education
infra with
regard to
norms
Net
enrolment
ratio
ORS1
usage
during
diarrhoea
Extent of
full immu-
nisation
Health infra
with regard
to HLEG2
norms
Energy deprivation
score
Water and
sanitation
deprivation
score
Housing
deprivation
score
Education
deprivation score
Healthcare
deprivation score
Household services
deprivation score
Community services
deprivation score
Access Deprivation
Score
Overall basic
services
Two types of
basic services
Six basic
services
Nine
dimensions

27. 26
An average Indian lacks access to 46% of services
SOURCE: McKinsey Global Institute analysis
1 Healthcare metrics include ORS, immunisation and infrastructure; education metrics include net enrolment and classroom and teacher availability;
energy includes electricity and LPG usage
2 LPG penetration is taken as a proxy
3 ADS is a population-weighted average of district-level access deprivation score
Average deprivation scores by basic service (percent)
Based on 9 parameters across these
6 basic services, we find that the Access
Deprivation Score (ADS)3 for India is 46%
i.e., on average, Indians do not have access
to 46% of basic services
Two types
of basic
services
Six basic
services
Community
level services
Healthcare1
Education1
Household
level services
Energy
59
Drinking Water
18
Sanitation
57
Housing
523
53
46
Overall
ADS3

28. 27
0
10
20
30
40
50
60
70
80
0 1,000 2,000 3,000 4,000 5,000
Household services Deprivation Score1
Percent
Monthly per capita expenditure
(average for district)
INR
0
10
20
30
40
50
60
70
80
0 1,000 2,000 3,000 4,000 5,000
Community services Deprivation Score2
Percent
Monthly per capita expenditure
(average for district)
INR
Access to health and education are relatively less responsive to income,
while access to energy, water and sanitation seem correlated to income
SOURCE: National Sample Survey Office survey, 2011-12; McKinsey Global Institute analysis
R2 = 0.05R2 = 0.66
District data, 2011
1 Household services Deprivation Score = distance of each district from the point of no deprivation in household services.
2 Community services Deprivation Score = distance of each district from the point of no deprivation in common services.

29. 28
Access deprivation has substantial district-level variations (1/2)
SOURCE: Census 2011, District-Level Health Survey 2007-08, DISE 2009-10, MGI analysis
MOST DEPRIVED
(Extremely deprived on all services)
HOUSEHOLD SERVICES DEPRIVED
(Extremely deprived on all except health & education)
MODERATELY DEPRIVED
(Moderately deprived on all services)
COMMUNITY SERVICES DEPRIVED
(Deprived on health and education; less so on others)
1 Monthly Per Capita Expenditure
126
DISTRICTS
27%
POPULATION
SHARE
59%
ADS
1,083
MPCE1 (INR)
177
DISTRICTS
18%
POPULATION
SHARE
49%
ADS
1,177
MPCE1 (INR)
127
DISTRICTS
26%
POPULATION
SHARE
41%
ADS
1,653
MPCE1 (INR)
59
DISTRICTS
27%
POPULATION
SHARE
37%
ADS
2,761
MPCE1 (INR)
LEAST DEPRIVED
(Least deprived on health & education; moderately on
others)
126
DISTRICTS
27%
POPULATION
SHARE
34%
ADS
1,855
MPCE1 (INR)

30. 29
Access deprivation has substantial district-level variations (2/2)
SOURCE: Census 2011; District-Level Health Survey, 2007–08; DISE, 2009–10; National Sample Survey Office survey, 2011–12; Forest Survey of India 2011;
McKinsey Global Institute analysis
1 Household services deprivation score = distance of each district from the point of no deprivation in household services.
2 Community services deprivation score = distance of each district from the point of no deprivation in community services.
3 Monthly Per Capita Expenditure
Averages
Categories
HDS1
Percent
CDS2
Percent
ADS
Percent
MPCE3
INR
Most
Deprived
62 56 59 1,083
Household
Services
Deprived
57 39 49 1,177
Moderately
Deprived
41 41 41 1,653
Community
Services
Deprived
20 46 37 2,761
Least
Deprived
38 31 34 1,855
All-India
average
46 44 46 1,627
10
20
30
40
50
60
70
10 20 30 40 50 60 70
HDS
Percent
CDS
Percent
Districts
Category

31. 30
Contents
▪ The empowerment line
▪ What keeps India poor?
▪ Understanding the empowerment gap
▪ Access to basic services
▪ The path from poverty to empowerment

32. 31
We have developed two scenarios to see how rapidly India can move
people from poverty to empowerment
SOURCE: McKinsey Global Institute
Stalled reforms
▪ Low job creation and
productivity growth in both
farm and non-farm sectors
would persist
▪ Low tax revenue base would
constrain the government’s
ability to spend on social
services
▪ Inefficiency in service delivery
would remain unaddressed
Inclusive reforms
▪ Stimulate job creation and
productivity growth across the
economy (with particular
emphasis on the most labour-
intensive sectors)
▪ Rising incomes would support
higher tax revenues that
enable increased public
spending on basic services
▪ A concerted push for more
efficient delivery by the
government machinery would
make public spending yield
greater results

33. 32
3.9
2.8
2.3
352
312
237
1,088
771
570
2022 – inclusive
reforms
2022 – stalled
reforms
2012
75
5050
2022 – inclusive
reforms
2022 – stalled
reforms
2012
Inclusive reforms in four key areas
Inclusive reforms are needed in four key areas
SOURCE: McKinsey Global Institute analysis
Create new non-farm jobs Increase farm productivity
Million Yield (tonnes per hectare)
Increase public spending on basic services Improve effectiveness of public spending
INR ’000s crore, 2012 Percent
2.0%
p.a.
5.5%
p.a.+115
+75
6.7%
p.a.
3.1%
p.a.
25
p.p.

34. 33
10
9
8
7
6
5
0
Inclusive
reforms
Stalled
reforms
202220172013
… which will result in faster poverty reduction and GDP growth
SOURCE: McKinsey Global Institute analysis
1 Below Empowerment line
2 Below official poverty line
7
36
1
12
22
2022 – inclusive
reforms
2022 – stalled
reforms
2012
56
BPL2
BEL1
Head-count ratio
% of population
GDP growth rate
Percent
Compound Annual
Growth Rate
7.8%
5.5%

35. 34
Non-farm job creation and farm productivity will drive almost 75% of
poverty reduction
SOURCE: McKinsey Global Institute analysis
Contribution
to poverty
reduction
74% 26%
Population
share 2022
7
Improve
effectiveness
of public
spending
9
Increase
public
spending on
basic services
4
Increase farm
productivity
10
Create new
non-farm jobs
25
Population
share 2012
56
Reduction in BEL population – Inclusive reforms

36. 35
84% 16% Contribution
to poverty
reduction
Percentage of population
Even for the extremely poor, non-farm job creation and farm
productivity will contribute to about 60% of poverty reduction
SOURCE: McKinsey Global Institute analysis
4
Increase farm
productivity
1
Create new
non-farm jobs
6
Population
share 2012
6
Population
share 2022
18
Improve
effectiveness of
public spending
34
Increase public
spending on
basic services
Impoverished
and Excluded
Below the official
poverty line
Vulnerable
Above the official
poverty line but
below the
Empowerment
line
1
5
3
4
822
59% 41% Contribution
to poverty
reduction

37. 36
India can create 115 million additional non-farm jobs by 2022,
but the stalled reforms scenario will fall 40 million short
SOURCE: National Sample Survey Office survey, 68th round; United Nations Population Division; McKinsey Global Institute analysis
35220
26
69
237
2012 –
non-farm
jobs
Change in
working-age
population1
2022 –
non-farm
jobs
Farm to
non-farm
shift3
Change in
labour force
participation
rate2
Non-farm job potential, Inclusive reforms
Million
1 Working-age population, defined as 15 years and above, assumed to grow at 1.4% per annum based on demographic profile
2 Labour force participation rate assumed to rise by 2.6 percentage points
3 Share of farm sector in total employment assumed to fall from 49% to 37%
+115 40
115
75
Non-farm
jobs
2012–22
Stalled
reforms
Non-farm
job creation
gap
1

38. 37
India’s industrial sector will need to lead the way on job creation,
especially in construction and manufacturing
Incremental job creation in Inclusive Reforms scenario, 2012–22
Headcount, million
Compound annual
growth rate
SOURCE: McKinsey Global Institute analysis
3.8%
3.9%
7.4%Construction1
Manufacturing1
Others1,2
80
50
27
3
95Total
Agriculture 20
Services 35-40
Industry 75-80 5.6%1
2.4%1
-0.9%
1.9%
NOTE: Numbers may not sum due to rounding
1 Calculated assuming 80 million new industry and 35 million new services jobs
2 Includes mining and quarrying, electricity, gas and water supply
1

39. 38
Reforms that remove barriers to competitiveness and attract
investment are key to generating jobs
SOURCE: McKinsey Global Institute analysis
1
Build multiple self-sustaining
job creation engines
Non-farm job creation reforms
B Reduce administrative and compliance
burden, especially for MSMEs, in all
government and judicial interface
Reform land markets and land
acquisition process to reduce time and
improve predictability
D
C Implementation of GST and removal of
specific product-market barriers (policy,
taxation)
A Improve process for timely approval and
execution of infrastructure investments
E Make the labor market more flexible,
along with boosting income security for
workers
F Build skills for poor workers to enable
them to move into more productive work
▪ Make focused public
investment in centres for job
creation – build trunk
infrastructure, skills and
market linkages in greenfield
and brownfield locations
focused on labour-intensive
sectors e.g., industrial
clusters, tourism, food
processing
▪ Plough back the resources
generated from such
government investments into
development

40. 39
Potential shape of a National Infrastructure Delivery Unit
SOURCE: McKinsey Global Institute analysis
1
▪ Permanent
institutionalised support
to the CCI
▪ Reporting to the prime
minister
▪ Specifically accountable
for infrastructure
outcomes
▪ Empowered to resolve
bottlenecks.
▪ Governed by an
outcomes-based MoU
▪ Led by an empowered
and accountable ‘chief
executive’
Key functions
1 Actively coordinate various arms
of government and entities
involved in project implementation
2 Plan for critical linkages across
ministries and functions, set and
monitor schedules, and facilitate
implementation
3 For projects above a certain size,
evaluate feasibility and contain
costs
4 Actively shape portfolio of large
and critical infrastructure projects
to ensure optimisation and balance
Potential structure

41. 40
Step-wise change in administrative reforms
SOURCE: Expert interviews; McKinsey Global Institute analysis
1
LONG-TERM (>5 yrs.)
MEDIUM-TERM (2-4 yrs.)
NEAR-TERM (<2 yrs.)
Create transparency
▪ Launch single website that con-
solidates all rules and
regulations businesses face,
organized by type of enterprise
and state
▪ Clarify which inspectorates are
responsible for which
regulations, penalties per rule,
and rights of business during
inspections
▪ Make case judgments
(i.e., precedent) in contractual
disputes publicly available
Reduce direct cost to do business
▪ Allow new businesses to be registered with no paid-in minimum
capital
▪ Streamline the tax system to simplify number of different taxes
and reduce overall tax take
Reinforce property rights
▪ Make cadastral information (i.e., land ownership) available online
through a central website
▪ Reinstate property rights as a fundamental right in the
constitution
Optimize interactions with
government
▪ Allow self-assessment for
corporate taxes
▪ Create a framework for self- &
third-party certification for
inspections deemed less critical
to the public good
▪ Institute risk-based inspections
for import & export cargoes
…
▪ Establish specialized commercial
court for contractual disputes
▪ Create single government
window for starting a business
and getting a construction
permit
▪ Launch electronic platform for
sub-mitting & processing trade
docs
…
▪ Reform inspections regime –
e.g., focus inspections on
highest-risk businesses, institute
expedited redressal
mechanisms, reinforce
punishments for bribe-taking, etc.
ILLUSTRATIVE

42. 41
Step-wise flexibility in labour laws
SOURCE: Expert interviews; McKinsey Global Institute analysis
1
Catalyze enterprise
growth
Make life simpler for
MSMEs
Create transparency
▪ Launch a single user-
friendly website that
consolidates all labor
regulations, organized
by type of enterprise
▪ Clarify which
inspectorates are
responsible for which
regulations, penalties
per rule, and rights of
business during
inspections
▪ Remove restrictions
on female work at
night, daily work
hours, and weekly
work hours
▪ Remove requirement
of government
approval and union
consultation for
changes in terms of
work (i.e., standing
orders)
▪ Streamline excessive
regulations related to
working environment
(e.g., wall painting,
lighting, spittoons,
creches, etc.)
▪ Remove requirement
of government
approval for
retrenchment in the
case of industrial
enterprises with 100+
employees
▪ Reduce time for filing
of unfair dismissal
claim from 3 years to
3 months
▪ Pair with direct
unemployment
assistance requiring
registration with a job
placement agency and
actively seeking work
▪ Strengthen employ-
ment exchanges
ILLUSTRATIVE

43. 42
Job creation engines can generate 11 million jobs, almost one-third
of the incremental jobs required over the Stalled Reforms case
SOURCE: Expert interviews; McKinsey Global Institute analysis
1
Industrial
clusters/
towns
▪ High value-add
manufacturing
with good growth
potential and
significant impact
on productivity
▪ INR 15,000 per
year (INR
~484,000 cr.
investment over
25 years) with
IRR of 25%
▪ 4.2 million jobs through
35 industrial towns in steady
state; 2.0 million jobs by
2022
▪ Average salary of INR
450,000 p.a.
Tourism ▪ Pro-poor growth-
enabling sector
and potential to
include informal
participation
▪ INR 2,000 cr.
over 5 years
with IRR of 28%
▪ 7.7 million jobs through
5 mega tourism circuits
▪ Average salary of INR
80,000 p.a.
Food
processing
▪ Labour-intensive
sector in rural
areas and impact
farmers through
improved
productivity
▪ INR 3,400 cr.
over 5 years
with IRR of 37%
▪ 1 million jobs through
30 food parks
▪ Average salary of INR
300,000 p.a.
▪ 1.5 million farming
households with income
increase of 20-80%
Case study Rationale Outlay Impact

44. 43
Building industrial clusters is self-sustaining and can yield
government IRRs in excess of 20% per year
SOURCE: McKinsey Global Institute analysis
Setting the aspiration Economic profile
▪ ~4.2 mn jobs
created in steady
state, supporting a
population of
~15.8mn
▪ Cumulative Gov’t
capex of INR
484,000 cr. over
25 years (INR
286,000 cr. by
2022)
▪ Cashflow
positive in year 9
▪ Nominal payback
in year 13
▪ Ramp-up of township
launches
– 1 launched in 2014
– 2 in 2015
– 3 in 2016
– 4 in 2017
– 5 in 2018
– 5 per year
thereafter
▪ ~50% brownfield and
~50% greenfield
▪ 35 new job creation
engines launched until
2022
Cashflows
‘000 INR crore
54
40
60
120
-20
20
0
100
80
-40
-60
-7
-17
Net cashflow
Revenue
Opex
Capex
3.0
2.5
2.0
1.5
1.0
0.5
0
2.8
2.4
2022
0.1
2013
0
2.0
0.7
0.7
0.5
1.7
2020
1.3
0.9
0.7
0.5
0.3
2015
0.2
Construction
Indirect
Direct
24%IRR
1

45. 44
To improve yields, there is a need to focus on all aspects of the
agriculture value chain
SOURCE: McKinsey Global Institute analysis
2
Technical levers Enablers
Input
Farm
Market
Price
support
Precision
farming
Post-harvest
management
Soil fertility
Irrigation
and water
management
Market access
Credit
Research
and
extension
Land
tenure and
governance
Seed quality

46. 45
By 2022, India can increase farm yields to 4 tonnes per hectare,
comparable to current yields in other emerging economies
SOURCE: UN Food and Agriculture Organization; McKinsey Global Institute analysis
1 Includes post-harvest infrastructure and rural roads.
4.00.3
0.4
0.20.3
0.5
2.3
+72%
2022 yield
target
Market
access1
Precision
farming
Seed
quality
IrrigationSoil fertility2012 yield
2
Yield (tonnes per hectare)
India
Other
countries,
2011–12
7.4
5.5
5.0
4.2
3.7
3.1
ChinaVietnamMalaysiaIndonesiaMexicoThailand

47. 46
The technical levers need to be supported by nine ‘enabler’ ideas
SOURCE: McKinsey Global Institute analysis
2
Enable private trade by reforming APMC Acts1
Re-balance price support3
Reform the crop insurance program4
Research and
Extension
Overhaul the Research & Extension network6
Credit Improve farmers’ access to credit7
Land tenure Reform land markets to promote leasing8
Price support
Incentivize new technology adoption5
Governance Integrate governance at grass roots9
Market access
Leverage technology for better price discovery2

48. 47SOURCE: Planning Commission (2012); McKinsey Global Institute analysis
13%
Support to agriculture has emphasised input subsidies over
investment in productive assets
1 Does not include electricity subsidy accruing to agriculture and subsidy to indigenous urea production
2 A part of the food subsidy is actually a consumer subsidy rather than a producer subsidy, but a break-up is unavailable
Expenditure on subsidies and investments in agriculture
INR thousand crore
21%
17%
2
Compound
annual
growth rate
Percent
0
30,000
60,000
90,000
120,000
Output support
(food subsidy2)
Input subsidy1
 Fertilizer
 Irrigation
Gross capital formation
 Research and extension
 Post-harvest infrastructure
 Irrigation infrastructure
2010-112008-092006-072004-052002-03

49. 48
Basic services spending should double in real terms over 10 years,
shifting towards healthcare, drinking water and sanitation
SOURCE: IPFS; McKinsey Global Institute analysis
1 Not accounting for inefficiencies and leakages.
NOTE: Numbers may not sum due to rounding.
3
571
+517
(+91%)
2022 1,08840% 9% 23% 11%
9%
4%
3%
2012
15%
6%
42%
13%
14%
7%
4%
HousingFuel
Social
Security
Food
Education
DW+S
Healthcare
Public spend on basic services
Percent; INR ’000 crore, 2011-12
Per capita1
INR per month,
2011-12
390
662

50. 49
Effective public spending can significantly improve access to basic
services across all areas
4
SOURCE: McKinsey Global Institute analysis
1 LPG penetration is taken as a proxy.
2 ADS is a population-weighted average of district-level access deprivation score.
Sub-
centres
Primary
health centres
Community
health
centres
District
hospitals
Students per
classroom
Pupils per
teacher
Enrolment
Electrification
Modern
Fuel2
Toilet
penetration
Piped
water in the
community
Healthcare
Per capita
Education
Ratio
Energy
Percent
Water and
sanitation
Percent
0.0
0.2
0.4
0.6
0.8
1.0
Access to basic services Current levels
Potential levels in 2021-22
(inclusive reforms)
Access Deprivation Score2
-63%
0.26
0.46
0.17
2022
Stalled
reforms
2022
Inclusive
reforms
2012

51. 50
Several modes of benefit delivery are available for basic services4
SOURCE: Government of India programs; McKinsey Global Institute analysis
through producers …
Fortified food production
to consumers …
Subsidised low-cost private/
PPP schools in urban/rural
areas
In-kind transfer
▪ Midday meals in schools
▪ Public Distribution
System (PDS)
▪ Government-run
healthcare institutions
Cash transfer
▪ Conditional scholarships
for girls and women
▪ Community grants
through Nirmal Gram
Puraskar
Voucher
▪ Food vouchers
▪ Skills vouchers system
with accredited providers
Insurance
▪ Micro-insurance for
hospitalisation,
e.g., Rashtriya Swasthya
Bima Yojana (RSBY)
BENEFITS

52. 51
Government programmes should be made more effective by using
3 themes: external agents, community involvement and tight
performance monitoring
SOURCE: McKinsey Global Institute analysis
4
Education Health Food
Leverage
external service
providers
(for profit
and NGOs)
▪ Cash transfers –
service providers will
be private
▪ NGOs, for-profits to
run FPS
▪ Health vouchers
funded by the Govt.
▪ Contracting out (to
for-profits, NGOs)
▪ PPP and tech-
enabled PHCs
▪ School vouchers
funded by the Govt.
▪ Low – cost private
schools
▪ PPP schools
(e.g., charter schools)
▪ Gram panchayat to
identify beneficiaries
and monitor FPS
performance
▪ Women SHGs to run
FPS
▪ Community health
workers
▪ Village health
committees
▪ Dispensaries in
micro-entrepreneurs’
homes
▪ School management
committees
▪ Low-cost, semi-
skilled teachers
trained intensively
▪ Nationwide
assessment system
▪ Alternate teacher
certification methods
▪ Digital attendance
recording
▪ Digital tracking of
supply chain
▪ Surprise audits
▪ Web-based portal for
grievance redressal
▪ Online medicine
availability database
▪ SMS-based tracking
of patients based on
biometric
identification
Involve the
community,
especially
women
Create
performance
monitoring
mechanisms

53. 52
Innovations along 3 dimensions, along with the 3 themes, are
essential to drive more effective social services
SOURCE: Literature review; web and press search; McKinsey Global Institute analysis
Khan Academy
(Global)
Chunampet
Diabetes
Program (India)
SughaVazhvu
(India)
MediCall
(Mexico)
HMRI
(India)
Bridge Academy
(Africa)
opAsha
(India)
Charter Schools
(USA)
Ignition Process
(Bangladesh)
Pratham
(India)
Living Goods
(Uganda)
YMCA Diabetes Prevention
Program (USA)
Arogya Ghar
(India)
Health Services Point
(India)
BRAC schools
(Bangladesh)
Satya Bharti schools
(India) Escuela Nueva Project
(Vietnam)
Minas Geiras
Assessment System
(Brazil)
Swastha Slate
(India)
Jordan Educational
Initiative (Jordan)
Eklavya Foundation
(India)
Presbyterian healthcare
services (USA)
Smile on wheels
(India)
Home-based care for
HIV/AIDS and TB
(Zambia)
Greenstar
(Pakistan)
Rapid SMS
(Malawi)CARE Rural Health
Mission (India)
Kriti Clinics
(India)Healthkeepers
(Ghana)
Government
Private
▪ New ways to reach
consumers
▪ Better supplier capability
▪ New products to
enhance effectiveness
and efficiency
▪ Leveraging
existing skills in
the community
▪ Creating low-cost
skills in community
▪ New ways of reaching consumers
and providing services
▪ New ways of managing
resources
4
Technology
Human
Resources
Operating model
innovations

54. 53
To strengthen governance, each government role needs both more
capacity building and a stronger sense of accountability
SOURCE: McKinsey Global Institute analysis
Accountabilities
Government roles
Policy
making
PeopleRegulatory
oversight
Service
delivery
Dispensation
of justice
Transactional
Reputational
Reputational
Reputational
Political
Legal
Political Political
Regulatory
Legal
Legal
Legal
Democratic

55. 54
Top 6 themes for governance
Transparency
in public information and
service effectiveness,
backed by rights-based
entitlements to business
and citizen services
Decentralisation
of funds, functions and functionaries
Talent and
performance
management in
the bureaucracy
Robust anti-corruption
framework
Simpler laws and
greater judicial
capacity to enforce the
rights of households and
enterprises
Empowered agencies
for high-priority initiatives, given
operational flexibility but held strictly
accountable for outcomes
1
2
34
5
6