India needs to grow by 8% in order to provide employment to new entrants: McKinsey Report

India needs to sustain 8-8.5% annual growth to gainfully employ the 60 million new workers expected to join the workforce by 2030, according to a McKinsey report released on Wednesday. The report titled ‘India’s turning point – An economic agenda to spur growth and jobs’, said the economy would have to create 90 million new non-farm jobs by 2030 along with increasing productivity of the labour force by 7% to avoid a decade of low 5% annual growth.

The 90 million figure accounted for people seeking to shift from the agriculture sector to other sectors for employment, it said. “Compared to the need of creating 12 million jobs per year, we have been creating 4 million jobs per year over the last 5-6 years. So this calls for tripling of the annual job creation rate to keep unemployment in check,” said Gautam Kumra, MD, McKinsey India. The rate of economic growth was a function of both employment and productivity growth, according to Kumra, and both would have to rise for India to achieve the envisaged high level of growth.

The report highlighted the role of construction and manufacturing in contributing to job, productivity and GDP growth. “Manufacturing alone has the potential to deliver 20% of the incremental GDP that’s needed and at the same time create some 11 million more jobs,” said Anu Madgavkar, partner at the McKinsey Global Institute, adding that this would have to be accompanied by a high productivity-oriented model involving automation.

Similarly, the construction sector had the potential to create one in four of the non-farm jobs needed along with improvements in productivity by application of modern techniques. “Construction is actually the heavy lifter that will provide millions of job opportunities to workers moving out of agriculture. So this is a 24 million job creation potential opportunity,” Madgavkar said. Businesses would also have to scale-up from midsize to large and from small to midsize to achieve the envisioned growth. According to the report, India had only 600 large companies with over $500 million in revenue. It called for 1,000 mid-sized firms to scale up to large size and for 10,0000 small firms to climb up to midsize.

This ‘missing middle’ was the most vibrant and dynamic part of the economy which spurred innovation and there was a need for easier financing and structural reforms to enable their growth, according to Madgavkar. In order to finance such high levels of growth, the report estimates India will need $2.4 trillion of annual investment capital by 2030. The issue here is not so much the amount as it is the mix of capital, said Madgavkar. “We need it in equity and equity-related risk capital type of instruments because that’s really what companies find challenging,” she said.

The report suggested a range of reforms to deepen capital markets like addressing tax and regulatory barriers in the insurance and pension fund sectors. It also recommended creating a bad bank to take on the non-performing assets of the banking sector. Such a move would address the risk-aversion of the sector and lower the elevated cost of credit for Indian commercial borrowers, it said.

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