India’s Century: How to drive Sustainable, Inclusive Growth?
The past year has seen multiple global events impact growth and economic and energy security. Amidst these headwinds, India – with a resilient economy and strong domestic demand – is poised to take on the challenges of subdued global demand and energy self-sufficiency. The theme of this year’s annual convention, “India’s Century: How to Drive Sustainable, Inclusive Growth?” saw prominent speakers and eminent panelists discuss about the path ahead for the country in the coming years.
When we talk about the India’s century, sustainability needs to be the core of the discussion.
Mr N K Premachandran, Member of Parliament, Lok Sabha
The practice of management plays a very important role in building the future of our country. The application of highly sophisticated management technology is able to resolve most of the issues. As a policy maker, I have the strong belief that we will be able to resolve most of the contentious issues facing our country if we have a proper and scientific management of the resources in a planned manner.
Inclusive growth: A key national agenda
Sustainable and inclusive growth is one of the most important subjects to be discussed in the light of the structural economic reforms being pursued aggressively in our country for the last three decades. It is significant to note that during the last budget session, Her Excellency, the President of India, in her presidential speech to the joint session of the parliament, began her address with the term ‘inclusive development.’ The Honorable Finance Minister, Ms Nirmala Sitharaman also began her budget speech with the sentence on ‘inclusive development.’ She also enlisted seven priorities that have been described as ‘seven pillars’ or Saptarshi to drive the country in the amritkaal—the next 25 years up to 2047. The first of these priorities is inclusive development. The government believes in sab ka sath, sabh ka vikas.
In the never ending rights for economic growth by all nations, unfortunately, we have forgotten about the term sustainability. The modern concept of sustainable development was defined in the year 1987 by the Brundtland Report, as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’ When we talk about the India’s century, sustainability needs to be the core of the discussion.
Two schools of thought
There are two schools of thought on this-one, the socialistic point of view and second, the neoliberal economic point of view. I would like to prescribe a mix of both. India opened its doors to the outside world in mid-1980s and beginning of 1990s with our policies of liberalization, privatization, and globalization. Since then, the economic and social growth of the nation has been rising. In the current world economic conditions, we are exposed to anything and everything in any part of the world.
We saw the 2008 world economic crisis and later the European economic crisis. In these crises, India was the least affected because of its economic stability, which was mainly due to its strict economic policies along with the support of its strong public sector presence, especially in the banking and insurance sector. The lesson from such crises is that the future lies in controlled and monitored globalization. More focus has to be placed on self-sustaining policies and those that support domestic companies. That is why the government of India under the leadership of Hon’ Prime Minister Shri Narendra Modi is talking about the ‘make in India’ program.
Focus on domestic sectors
It does not mean that we must restrict FDI, FPI or trade relations. Our focus needs to be on domestic sectors—the public sector as well as the private sector. This may seem like a socialistic ideology. However, this could be the biggest weapon in a capitalistic market, by providing a competitive market space between the multinational companies and local companies. This can happen only if the public sector undertakings are well protected and supported by the government. Since the PSU are supported by the government institutions, they have a level of accountability to the customers and people. We also need a strong private sector. It has played a major role in building our nation.
Looking at a microscopic level, the future depends on self-subsistence or inclusive development. During the pandemic, we saw an overnight shutdown of borders and boundaries, which were opened in the year 1991. On a macro level, we witnessed unprecedented disruption of supply chains, shortage of food, power failure and disruption in economic markets. But on a micro scale, we witnessed shortage of food in stores, rationing, salary cuts and loss of jobs. As we were not self-sufficient, we depended on other nations for access to our daily requirements. Therefore, the first step of inclusive growth is self-subsistence.
Reality is different
The basic principle of liberalism is that wealth creation leads to development and employment. But unfortunately, this is not happening in our country. We have the best growth in the world—6.6% GDP growth, which we have achieved even after the pandemic. We are able to contain the revenue deficit as committed in the last budget. India has become the fifth largest economy in the world and we are trying to become $5 trillion economy. But if we examine the ground realities, there are many worrying factors.
In the global hunger index, India has shifted from 101 to 107. In the human development index, out of 142 countries, it is in 132 or 133. There is an exponential growth of unemployment in the country. As per the latest economic survey report, 16.7% of the total population in the country is coming within the purview of multi-dimensional poverty index. These show that inclusive and equitable development is not being addressed in a proper manner.
The undernourished children of today, after 15 or 20 years will become the future of the country. Mahatma Gandhi said that the future of India lies in its villages. This was the idealism or foresight of Mahatma Gandhi. He explained that the real India lies in its seven lakh villages. If Indian civilization is to make its full contribution to the growth of a stable world order, it is this vast mass of humanity that has to be made to lead again.
Rejuvenate traditional industries
Self-sustenance can be implemented by rejuvenating the geography-specific traditional industries. This need not be seen as a concept of anti-globalization. Rather, this could be an opportunity for developing some of the loss-making traditional industries. If utilized properly through value addition and proper marketing on a global level, the export potential of such products can be tapped. This will be pro-globalization, as they utilize local labour and local resources. These industries employ the indigenous people of that geographic location. Industries in third world countries are mainly labour intensive and have a high potential for employment and utilization of local resources.
I represent the Kollam Lok Sabha constituency (in Kerala) which is considered as the cashew capital of the country. More than 1.5 lakh cashew workers are there. Because of international competition after the structural economic reforms, 95% of all the cashew factories are now closed and 1.5 lakh workers are jobless. They live in poverty and survive only because of the MGNREGA.
COVID-19 has shed light on the importance of subsistence. In this world of globalization, we are all interconnected. From an economic point of view, this is necessary and unavoidable. However, this also forces us to choose a cheaper product or service from another country rather than producing it locally, such as the cashew industry. The future of globalization is not buying better quality product or service from outside, rather making the better product here, for our self-subsistence. We need to create a competitive environment between the private sector and the public sector to maintain a balance of profits, for the companies as well as the customers.
Islands of prosperity, however rich, will not be sustainable in any way. We have to address the basic issues faced by the downtrodden people, the scheduled castes, other backward communities and economically weaker sections and people belonging to the northeast and states like Jammu Kashmir. Then only, the fruits of our development and growth will reach the all the citizens, in all regions.
Becoming a growth outperformer
Mr Jaidit Brar, Sr Partner, McKinsey
Amongst so many parts of the world, it is in India where there is a lot of excitement about growth potential and opportunity. We could potentially double our GDP. I’m not saying that there are no challenges, but at least the trajectory and the platform for achieving that are clear.
Rather than discussing too much of the macro trends, let us see what each of us, as people who are leading businesses and institutions, can do to really enable and accelerate this overall potential. Within that, the first theme is: How do you enable your own companies to become growth outperformers? Second, we find that being inclusive and sustainable is not only an obligation, but it is actually the only way to do it.
The one-in-five club
Our research shows that if you take the top companies in the country (we looked around 1000 companies), one in five companies in the last 10 years—and this includes the COVID years—has grown at two to three times the GDP, i.e., more than 15%. The top 10% of these have been growing at 23% per annum. It means that if you are in this one in five club and take this aspiration over the next 10 years, you will become four times your current size. Is it that only smaller companies managed to achieve this growth? No. One third of these companies were smaller companies but even many large companies have been able to achieve this kind of growth.
Growth is our oxygen
Growth is the only oxygen which creates a virtuous cycle, which a country like India needs. Growth starts with a lot of capacity creation. It requires a lot of investment in equipment, supply chain and enabling infrastructure. To grow at two, three times the rate of GDP, it requires real innovation in creating new products and services and in particular, for underserved segments. Innovations and new business models fundamentally change the cost structure and create accessibility for all. That’s where real growth comes from.
If we have to invest so much, we’re also answerable to our shareholders. We found that companies which were able to deliver a 15% CAGR, created almost 4X shareholder value in five years. Growth enhances profitability. Half of the one-in-five club (that is, one in 10 companies) were able to expand their profit margins significantly.
We have heard the famous saying that top line is vanity and cash flow is sanity. But interestingly, from our study, what is very clear is that growth and profitability go together. A majority of growth outperformers grew profits, even faster than revenues. Growth mindset becomes a big enabler, because, companies that think about growth and look to generate surplus for growth are relentless on cost and value engineering. Secondly, they are very focused on the quality of revenue and not just the revenue. Third, companies are forced to fundamentally reexamine their business models. They ask questions such as: How do you go to market? Are you selling a product? Or are you selling that product bundled into a service?
We are all excited to read the news of large aircraft orders being placed from India. But look at the other side of that. In the last 10 years, Indians have been able to get personal mobility. A set of companies with growth mindset, are making use of that.
The challenges
There are so many challenges in achieving this growth. In addition to supply chain shortages, inflation, COVID and talent shortages, India is a highly competitive market. Real opportunity comes on the other side of each of those challenges. We also looked at the track record of companies which were not growth outperformers and how easy or tough, it is for them to change their trajectory.
About 30% of slow growing companies will remain slow growing companies in the next five years but another 30% have become the fastest growing companies. If you’re a fast growth company, you have reasonable odds-one in four chances—that you can stay as a fast growth company. But if you’re slower, you have to put in a fair bit of effort. There’s one third chance that you can turn around your growth trajectory dramatically.
The lessons
What have these companies done right? They always start with the mindset of growth. If you do not set a high aspiration, it is very tough for growth to happen. The second factor is the choice of where you play—the choice of the sector you are in and within that sector, how you find the hidden opportunities and allocate resources in a very thoughtful way. In a market like India, just your core business will not support this kind of growth. You must relentlessly look at adjacencies.
There are some industries like financial services and information technology which have grown so dramatically. A significant amount of unbanked people have got banked, leading to the underlying expansion of credit. So half of the financial services companies, just by the pure presence in the right sector, have grown so much. Given the amount of disruption that is happening in India, there is so much more opportunity.
Breakout sectors
There are so many more breakout sectors. The manufacturing base is expanding and supply chains are getting created either on PLI or a bunch of other things. Interestingly, it’s not the core opportunity but the tier two and tier three opportunity which comes with it, which is more significant. For example, it’s not just about what’s happening in the hydrogen space but the hydrogen value chain that matters. It’s not just the electric vehicle but all the value chains which are getting created with that. Water is also an important part of inclusive growth.
The underlying building material sector is growing at only 6 or 7%. But plumbing pipes, faucets and some segments are growing at 15 to 20. This is because of the penetration and the usage and the fact that there is a big opportunity in getting a lot more of piped water.
Do not despair, if you are in a sector, like industrials or some other sector, which you feel does not have that much opportunity. The reality is that in every sector, there are hidden opportunities. For example, take states. The top five states have grown at 1.52 times the average. The next 100 or 200 cities are growing at 10 to 12%. There is a huge amount of underserved segments in the country and you can create products and services for them.
We find that the chunk of the growth comes from the core business. You can see for Asia that a third of the growth comes from adjacencies and breakouts. If you allocate all your resources to your core business and do not think hard enough about adjacencies, it will not be that easy to grow. But if you are active in identifying those, then they will give you a huge amount of space and tailwinds.
Sustainability
Along with growth, sustainability is very important. The most exciting thing about sustainability is that 80% of India, which will exist in 30 years from now is yet to be built. For us, it’s not a challenge of retrofitting but building the future in a smarter way. We have to build additional capacity in various sectors, which are traditionally thought of as polluting sectors. Each of this is an opportunity. Apart from renewable power, material circularity, sustainable agriculture and supply chains and everything associated with EV and green hydrogen present significant opportunity for value creation.
Inclusion
Finally, comes the question of inclusion, which is even more significant than sustainability. Inclusion is not a choice anymore. Unless you think inclusive, where will you find the talent and new markets to go? We have seen that the productivity of plants, which have significant amount of women employees, is very high. After COVID, people are leveraging gig workers. A lot of talented people who may not want to work full time, make a huge difference to those companies. Many of the adjacent opportunities come from the underserved markets and regions.
So, please set very bold aspirations for your companies on growth. It is possible that there is a playbook. Two, think about resource allocations very hard and in particular resource allocation, which will come with all the sustainable opportunities. Three, as you think about your own talent, your own workforce, and investments, look at the underserved regions and parts. They will become huge unlocks for your growth and make you more inclusive.