5 areas of focused reform to raise productivity in Indian firms

India’s magnetism in the world economy lies in its immense growth potential. The aftermath of the pandemic is a great opportunity for the nation to start afresh by weeding out the factors that are restricting growth and optimizing the elements that can accelerate growth. In this context, McKinsey and Company has published an expansive agenda that can spur economic growth and jobs.

A portion of the McKinsey study focuses on outlining and exploring six areas where introducing sector-specific reforms can increase productivity and competitiveness in manufacturing, agriculture and food processing, real estate, retail and healthcare. The study projects that together these five sectors can contribute $6.3 trillion of GDP in 2030, in comparison with $2.7 trillion in 2020.

1. Manufacturing

The manufacturing sector alone can potentially generate $1.25 trillion of GDP in 2030 by increasing its contribution by over 120%. But to transform this into reality a vast policy framework must be first put in place with three key components:

• A steady and declining tariff regime without inverted duty structures
• Building manufacturing clusters that port-proximate, have free-trade warehousing, rapid approval processes and more liberal labor laws.
• Providing targeted, conditional and time bound incentives and curb cost disadvantage.

2. Construction

The construction sector can also increase its contribution to GDP from $250 billion in 2020 to $550 billion in 2030. To boost real estate, registration fees stamp duties and tax burden of homebuyers can be reduced. Liberalizing tenancy related regulations and rent-control measures can attract more investment into real estate. Construction of affordable housing at scale using modern construction methods should be encouraged to reduce costs and increase productivity.

3. Agriculture and food processing

Focusing on agricultural exports of higher value like fisheries and livestock, dairy, spices, pulses, vegetables and fruits, etc. can generate up to $95 billion. Potential reforms in the sector include barrier-free trade in between the states by changing the Agricultural Produce Marketing Committee Act and deregulating supply and distribution of agricultural produce by amending the Essential Commodities Act.

4. Retail

Retail in India is moving towards new models of modern trade and e-commerce from old traditional models. Indian firms will need flexibility to operate across all trade formats. To make that possible, regulatory intervention should be minimalized and FDI policy should be made product and business model agnostic.

5. Healthcare

There is ample scope in Indian healthcare, but it would require public sector funding to increase access to superior quality healthcare and increase medical tourism. To this end India might need to double its healthcare spend from 3.5% of GDP to 6.4%. Healthcare productivity can also be boosted by encouraging telemedicine and virtual healthcare business models.

In the context of these sector-specific requirements following 5 reform measures are recommended:

Reduce cost of industrial and residential land use by unlocking land supply

By bringing several key reforms, the cost of land can be brought down by 20-25% and availability of land for construction can be increased. This will make buying a house more affordable for many Indians.

Make labor markets more flexible while strengthening social safety nets and amplify portable benefits

The economy will be more productive when there is vibrancy and enhanced scope of growth. By relaxing labor laws, the government can allow businesses more freedom to shape their workforce in terms of size, skills and composition as per the changing needs.

Reduce power tariffs for commercial and industrial (C&I) use, by shifting to new business models of power distribution

Government can curb power tariffs by as much as 20-25% by introducing several reforms. Privatization of power distribution or transitioning to franchising models are some possible measures. Direct subsidy transfer and optimizing smart-meter penetration are some other policy level changes to start with.

Monetize assets owned by government and increase efficiency by privatizing over 30 state-owned enterprises

Productivity can be doubled through large scale privatization but will require an apt institutional framework. Out of 1900 state-owned enterprises, about 400 can be privatized and by 2030 the potential proceeds could yield $540 billion.

Reduce cost and improve ease of doing business

India’s World Bank ranking with regards to ease of doing business has risen from 130 to 63 in 2020. However, more needs to be done to enable faster development and growth of businesses. Adoption of global best practices wherever required can help businesses compete with other emerging economies.

If these changes are deliberated upon and enacted with haste, it can propel the engine of the Indian economy faster and give it the jumpstart it needs to move from the recovery mode to the rapid growth mode.