COVID-19 is an unprecedented humanitarian challenge for all countries. India has made a concerted effort to flatten the pandemic’s curve. Now attention is shifting to reopening the economy while containing the virus: a conundrum many other nations are also grappling with. On May 8, our McKinsey experts sat down to talk about some of the measures India can take to stabilize and support households, businesses and its financial system as they deal with economic losses. How can India recover?
Oliver Tonby: You are listening to the Future of Asia Podcast by McKinsey & Company. I am Oliver Tonby, your host and Chairman of McKinsey Asia. In this series, we feature leaders from across the region to discuss the forces, the opportunities, and the challenges that are shaping the future of Asia.
Welcome everyone. Welcome to this edition of the Future of Asia Podcasts. Today, we’re going to talk about getting ahead of the coronavirus, specifically, saving lives and livelihoods in India. This is very relevant. India is a huge country, a population of 1.4 billion. It has been on a growth trajectory up until recently, and I think we’ve started to see some very material impacts of coronavirus.
Today, I am joined by Gautam Kumra, the managing partner of McKinsey in India, and Anu Madgavkar, who is a partner in McKinsey Global Institute, based in India. Both of them have researched and done a lot of practical work in and around coronavirus in India recently. Let me start with a question to you, Gautam, what are the implications of COVID-19 pandemic for India, both in terms of lives and livelihoods?
Gautam Kumra: Thank you, Oliver. As you all well know, I think COVID-19 is the defining global health crisis of our times, and is by far the greatest humanitarian challenge that the world has faced since World War II. And I think it’s fair to say that India has not been spared.
I think India has moved pretty quickly, implementing a pretty proactive national lockdown. As you know, the government announced we are now in stage three of what is likely to be a seven-week lockdown, with the goal of flattening the curve and really giving the country some time to prepare for possible eventualities.
The last thing I’d say is the impact on business will be profound, and livelihoods will be profound. What will be interesting is the impact will weigh a lot by sectors. On one hand, we hope to see some sectors that will hopefully rebound after a blip, perhaps pharmaceuticals technology. There’ll be others, which have a very uncertain future like financial services because it depends on what happens to the real economy. And then there are others like automotive and oil and gas that I think are headed for a pretty difficult, deep recession, and then a longer recovery.
Oliver Tonby: Thank you, Gautam. We’re going to come back to some of that, but I’m quite keen also to get Anu into the conversation. Could you give us a little bit, those of us that are not in India, we see pictures on the news from India, and some of them are actually quite scary, to be honest. We see people trying to move between states. What does it feel like on the ground in India these days?
Anu Madgavkar: So I think, Oliver, the picture in India poses many unique challenges, but also India has resilience and a whole set of, I would say, really important strengths, which is seeing us through as we speak on the ground. I think from the perspective of challenges, it’s clear that a very large portion of our workforce, 80–85 percent potentially, are in the informal sector. And when production and consumption comes to a grinding halt as has been unavoidable in this lockdown, this segment is obviously hugely distressed.
And we’ve had many images as you say, of daily wage workers and migrant workers who are stranded, really, without much livelihood. But on the other side, I think we have seen an enormous groundswell of support, organization and capacity in many of our cities. We’ve seen government entities coming together with private sector and social sector entities to really provide, to the best that we can, to really gear up to help support these distressed communities, and also do what we need to do to help gear up the public health system, the quarantine system, the isolation system, the hospitals.
I think we are working actually at a level of alignment and organization that is commendable. And in that sense, the crisis has brought out the best in, I think, many Indians. We are of course clear-eyed about the risks and potential uncertainties for the economy that lie ahead. But with this trilateral effort across government, private sector, and social sector, we do believe that some of these challenges can be faced.
So, I think we are working actually at a level of alignment and organization that is commendable. And in that sense, the crisis has brought out the best in, I think, many Indians. We are of course clear-eyed about the risks and potential uncertainties for the economy that lie ahead. But with this trilateral effort across government, private sector, and social sector, we do believe that some of these challenges can be faced.
Oliver Tonby: Thank you, Anu. So Gautam, anything to add? What does it feel like on the ground in India now?
Gautam Kumra: Well, look at a very personal level, Oliver, I think is we are going through one of the strictest lockdowns that I think any of us have seen in the world. I think the country has been divided as a matter of heart between the red, orange and green zones. And further, not just at the level of several hundred districts, but also within certain districts, certain zones have been put under containment zones.
So depending on where one is living. I think if you ever happen to be living in one of the containment zones, you can’t even step out to get groceries, and even that is being delivered to you at your doorsteps.
If you happen to be living in one of the green zones, which interestingly, well, as of last week, I was in an orange zone, as of today, I’m in a red zone. So things change all the time. But, so depending on if you are in the orange zone there are certain, at a person level, you have the liberty to do certain things. You could go out to the grocery shop, you can access some of the individual retailers that have been allowed to keep open. And so that’s what it feels like on the ground.
I think to Anu’s point, the other thing, it is a little disconcerting when you see lots of people [do see] on the streets. I think because the migrant labor challenge has been hard to manage. And I think that is distressing. You do find that the real discussion around livelihood is there for you to see and you even take your car on the streets and you see people sitting on the sides who have been abandoned and looking to get food for the day.
Oliver Tonby: And building on that, you’ve been analyzing various scenarios. What could the potential impact of the lockdown be on the economy? Gautam, do you want to take a first stab at that?
Gautam Kumra: Sure. As you said, scenarios is the keyword all over because there’s just so much uncertainty about how the future might unfold. I think what the McKinsey team has been doing is to explore a range of scenarios around both the disease and the nature of the response from the health authorities on the fiscal side. We also have a chance to consult with the almost-thousand leaders, including several economists and financial market experts.
At this point, I think we see two sets of scenarios. If the lockdown were to continue in roughly its current form, followed by hopefully a gradual release of some of the supply chains and economy slowly coming back on its feet, we could see this financial year at a negative of 2 to 3 percent. Just to put things in perspective, that could put about 30 millions of lives, jobs at stake. You know, India has about 500 million people in the workforce of which half of them are in the nonfarm. So about 30 million of those in this scenario would be at risk.
There is another scenario where, as the economy comes out of a lockdown, you see a further resurgence of the disease as has been happening in some of the other international markets, which might necessitate more lockdowns and causing even more displacement of supply chains. And in that scenario, we could see a negative GDP growth, this year, of 8 to 10 percent.
Oliver Tonby: Wow. And this compares, Gautam—remind us—to a pre-COVID-19 growth of 6 percent, give or take, is that correct?
Gautam Kumra: Yeah, the pre-COVID-19 I think it’s important to note that India over the last 20 years has grown at 7 percent. Over the last 20 years has grown at 7 percent. If you look at the last six quarters, the growth had declined from a high of about 8 percent, to the last quarter, pre-COVID-19, had fallen to about four and a half percent. We’re safe to say the economy had been slowing down, going into COVID-19. So compared to what we’re talking about here, it’s nothing in comparison to the past. The other thing to note is that in the worst times we’ve had in our history, 1991 was the first major crisis that hit India, our growth was 1 percent. So we had never seen anything in the negative zone in our history.
Oliver Tonby: And I think that just brings it to life. What a complete change this is for a country like India, with a huge population that we talked about. So given that backdrop, Anu, what are some of the measures to stabilize and support household and businesses as they deal with these economic losses? How can India recover from these predicted scenarios?
Anu Madgavkar: So the two, really important constituencies, which will need support are indeed households and workers on one hand, and then a whole slew of businesses on the other. Particularly, in sectors, which are seeing the most output drops and the slowest paths to recovery.
Now on the first, as you think about workers who are out of work and people who depend on them, there’s actually more than perhaps a hundred million such workers in the casual sector. Who will need direct income support to tide over at least this quarter, the government’s made a good start with an early set of announcements around relief measures and the distribution of free food to families that need it. But we will need more than that.
Fortunately, India actually has invested in a very robust digital architecture based on Aadhaar, which is the unique digital identity that every Indian has. And as many as 800 million Indians actually have bank accounts, which are tagged in some shape or form to their identity. So it’s possible to reach out to millions, literally of distressed people and directly transfer benefits to them. And that’s a program that we feel is quite important in the near term. The other piece is actually support to businesses and here we feel it’s really the MSME segment and then large corporates across a few of the sectors that will need critical liquidity support. And the government can ...
Oliver Tonby: What does MSME stand for?
Anu Madgavkar: So MSMEs are micro, small, and medium enterprises. And India’s sort of industry structure has a very long tail of many, many tiny firms and tiny enterprises.
But even if you look at the more organized set of these, we look at all firms with $10 million-plus of revenue in any given year, so these are not the micro end of the MSMEs, but they are small and medium businesses. And this is really a segment that is undergoing extreme liquidity strain at this point. I mean, their revenues have collapsed. Many of them have some kind of fixed cost base to keep running. And if they don’t receive the liquidity they need to tide them over for a quarter or two, we will see very large-scale job loss.
And therefore, I think what is important is to work out a mechanism in which there’s a lot of liquidity in India right now, so banks are sitting pretty flush with liquidity at this point, but of course they are concerned about credit quality and whether they should be lending to stressed enterprises.
So we need a mechanism to actually address the concern of the banks, but also get the liquidity across to these entities who need it so that they stand on their feet and are in good shape once it’s time to reopen and rebuild the economy.
Oliver Tonby: Can you expand a little bit, Gautam was onto this earlier, that this is hitting different sectors quite differently. Can you just expand on that? I don’t know who wants to go first on this one; Gautam or Anu, but which sectors are more impacted? Which ones are less?
Anu Madgavkar: So the segments, or the sectors really, that are actually most impacted are the ones for instance, and this is a common theme we see actually across many economies, India is not different in this case.
But we have seen sectors, like of course, airlines, hotels, and anything to do with travel. We’ve seen sectors like construction and real estate, which have got hit very badly and work is actually reduced to the extent of 70 or 75 percent in many of these sectors. We’ve also seen power, textiles, and logistics with 50 to 55 percent drops in output. So these, I would say, are the most affected sectors. And then there are a set, which are relatively less affected with perhaps quick upsides even possible. And this would include the whole pharma sector, for example, it would definitely include IT and IT-enabled services. Telecom for obvious reasons, with the big surge in digital consumption, that’s actually taking place, and on consumer and retail.
So consumer products and retail as a segment, we’ve actually seen a two-part story. Actually, the consumption of essential goods, food, for example, other kinds of essential services. This has remained quite steady in India because even through the lockdown essential goods and essential services were kept open, but anything that’s discretionary where consumption can be postponed, so people haven’t been going out and buying new clothes or buying electronics and so on and so forth. So, we’ve seen discretionary consumption actually drop 50 to 55 percent in the lockdown and through the current quarter.
Oliver Tonby: Asia’s standing in the world has changed. And it’s clear that where the focus once was on how quickly the region would rise. The reality is now all about how Asia will lead. Keep listening to the Future of Asia Podcast.
I’m going to shift topic now and I’m going to start looking forward. And the next phase, and I know that there’s been talk about reopening. So Anu, how can the lockdown be carefully reopened while managing the infection risk or the re-infection risks, even. Now, this is a conundrum that many other nations are grappling with. Anu?
Anu Madgavkar: Absolutely. I think, like many other nations, we are also figuring out that in some ways it’s easier to lock down than to actually reopen with enough care on the health side, as well as enough confidence in terms of the various actors who actually need to go out there. Not least of whom are actually consumers who need to feel comfortable enough to be out and up and about in addition, of course, to workers, businesses, local government authorities, healthcare workers, and so on. So, it’s actually quite challenging in India. We find that a very granular localized approach is going to be required. India has some 700 or more districts, which are the smallest level of administration so to speak, and of these 700 or so, about 130 districts are called red zones. They’re classified as red zones by the Ministry of Health. And these red zones have relatively higher infection rates and relatively higher growth in infection. Now, unfortunately, or almost, I suppose, it’s to be expected that a lot of the red zones are actually the big cities of India.
You know, they have the most dense population and so forth. So they also account for as much as 40 percent of India’s GDP. It’s in these 130 red zones. And within the red zones, the biggest cities are actually a good one-third, then again, of the GDP of the red zones. So opening up the top 20 to 25 cities in a way that’s very calibrated, that actually serves to isolate and lock down the pockets of infection, the so-called containment zones within these cities, which are pockets of cases. So, we absolutely need to continue managing them very actively and isolating, but the rest of the city or the rest of the district needs to be carefully opened up with the right protocols in place.
And it’s a job that requires, I think, a huge amount of agility and interpretation of what’s allowed and what’s not allowed and real confidence building on the ground in terms of what you can do, both for businesses that operate there, as well as local government authorities who have to make these calls on a hour-to-hour or day-to-day basis.
So we are going to need that kind of capability. And hopefully we will learn very quickly, but it’s going to be quite challenging.
Oliver Tonby: And just to put this into context, we’re talking about India with 1.4, or more, billion people, talking about reopening from lockdown for 1.4 billion people. I don’t think there’s any country that is even close to this level of complexity and challenge, when it comes to reopening.
Gautam, I want to shift topic and talk to you about getting India back on the growth track. What do you see as some of the structural reforms that are needed to put India back on track, so to speak?
Gautam Kumra: So Oliver, as we often say, never waste a crisis. And I think that’s where the opportunity lies for the country. I think to rebuild India and to get it back on the trajectory that it deserves to be, I think India will need to pursue structural reform on multiple fronts.
Let me just mention three, four of them. First is in the housing and the real estate sector. For India to keep its unemployment levels to below 3 percent over the next decade, India needs to produce about 140 million gross jobs. And if you look at that about 40 to 50 million of those would have to come from the real estate and the construction sector. But that will not happen unless fundamental reform is undertaken to bring land prices down, so that [houses] become more affordable for more people in India. So that’s one set of reforms to bring repricing down for land and encourage construction and real estate.
Second, is really around make in India. As you know, the GDP manufacturing contribution of GDP in India is down to almost 17, 18 percent. It needs to be about at least 5 percent higher. The global supply chain disruptions present India an opportunity to compete in many of the pockets that are opening up. But to become competitive, India needs more fundamental reform in energy, labor, logistics. Just to take an example of logistics; logistics’ cost is 14 percent of India’s GDP. By any standard it should be 8 to 9 percent. To bring it down by 5 percent requires us massive reform in railroad mix. We need a national strategy on logistics and so forth.
Third, I would say is financial sector reform. Many, many dimensions. We have to overall increase the level of investment in the country. Really, interest rates in India are about 4 to 5 percentage points higher than China. If you see why that is, one of the reforms that is needed is in how we think about priority-sector lending. So some of the reforms around that, some of the reforms around making the banking sector more competitive. There are many dimensions to the financial sector.
And finally, if I were to set these investments, as you know, India is a global country when put against global standards. And I think a fiscal deficit management is a challenge. We think there is a substantial opportunity to be unlocked through these investments of public-sector companies and through monetization of a lot of valuable real estate and other assets that the government owns.
So just to give you four examples of structural reforms that are critical to get the country back on the growth track.
Oliver Tonby: Thank you Gautam. And frankly, there sounds like there’s enough material to explore there for a separate podcast episode, to be honest. Just to put it in perspective, I heard you saying point number one, creating jobs.
You said we need 142 million jobs in the next 10 years. The US today, the working population of the US today is about 150 odd million people. Just to put that into context, the challenge that we are talking about. These are formidable challenges. I’m sure execution of these reforms is not going to straight forward. But Gautam, if you don’t mind, I’m going to re-invite you to a different podcast to explore that topic.
Rather now, continuing with you Gautam, how do you see the global economic pecking order changing post-COVID-19? If you don’t mind me asking that, we hear a lot of, there’s going to be a shift of the supply chains away from India to other countries, potentially India. Just explore that topic a little bit for me.
Gautam Kumra: So Oliver I’ll just make three comments. I think, firstly, if you step back and this goes back to pre-COVID-19. India have always been seen as the country that has the opportunity to become the third role in a global bipolar world. So you should think of about after the US and China, India absolutely has the potential to be the third role over the next decade.
Having said that, as we see what’s happening now, I think there’s no doubt that the world is looking at diversification of the supply chains away from China. But I think this can play out in two ways. One, I think, as you well know, there’s been a lot of discussion around deglobalization, and I think some of this is going to happen as countries become more protective and more and more companies are going to look at opportunities to shift things on shore.
I recently read about a piece of work about Japan announcing a $2 billion war chest to support companies relocating production back to Japan, which I thought it was interesting.
On the other hand, I think you are going to see supply chains shifting to other low-cost economies. Just look at what had happened to Vietnam. As you well know in your Asia role, I think Vietnam has done a wonderful job, of really going from a current account deficit to a massive current account surplus by positioning that country as a favorite destination for electronics manufacturing. India has such pockets; look at what Bangladesh has done in textiles.
So I think if India were to replicate some of those playbooks that Bangladesh has implemented in textiles and Vietnam has implemented in manufacturing, you think, there is a potential to actually do a lot more manufacturing of things like auto components, electronics, electric assembly, medical equipment, and by doing so, become more relevant.
Oliver Tonby: Thank you Gautam.
Anu, I want to shift to you. One of the collateral outcomes of this crisis has been the pace and reach of adoption of technology, be it working from home, classroom from home, online banking, e-commerce, and what have you. Where do you see this headed long-term, Anu?
Anu Madgavkar: I think this is a very strong and powerful sort of consequence, if you will, of COVID-19 across most countries, and India will be no exception. I think there will be an accelerated push towards more digitization. Now the really interesting part for India is that even pre-COVID-19 India’s economy and people already had tremendous momentum on the digital front with, as I said, 1.2 billion or more digital identity holders in the country and maybe 550 million-odd internet subscribers, 350–400 million smartphone users. So, India was very much in the top two or three, or even number one in many cases on many aspects of digital penetration, digital adoption and usage on the consumer side. And indeed, one of the fastest growing in a set of countries that we looked at. What’s happening, I think, through this COVID-19 phase is that while the consumer was always ready and had shown that he or she was ready to actually adopt more digital services and products, I think what’s happened in this phase is that businesses are really kickstarting the way they think about reaching customers or reaching each other in a B2B context.
I think if India were to replicate some of those playbooks that Bangladesh has implemented in textiles and Vietnam has implemented in manufacturing, you think, there is a potential to actually do a lot more manufacturing of things like auto components, electronics, electric assembly, medical equipment, and by doing so, become more relevant.
There are many sort of digitized business models that are being tested and being proven at very short cycle times. Just because of, you just have no option when you’re in a crisis. For example, a pharma company has to reach doctors and then they experiment with how to do that digitally. And they do that very quickly and prove that the model works.
So I think the readiness to then adopt and actually implement more and more of these models is huge. What this could mean for India going forward is we had actually looked at digital business cases and new disruptive business models across a range of sectors, not just the traditionally digital ones like IT or telecom, but including across financial services, but even in healthcare and agriculture, and logistics, for example. These collectively, we felt could contribute something like almost a trillion dollars of incrementally productivity savings and efficiency for the Indian economy by the 2025–2030 period.
So we think that this will just get a huge boost in some sense, with what we’ve been through in the COVID-19 phase.
Oliver Tonby: So what you’re saying, Anu, is basically that one of the effects of COVID-19 is to accelerate the number of trends that we have already seen. So it’s going to accelerate these even more than the past, is that right?
Anu Madgavkar: That is correct. That is absolutely correct. It’s going to accelerate these because many things are being tested and innovated now. The sheer speed and rate of innovation is, of course, going through the roof now, and digital is playing a very important part in this process.
Oliver Tonby: Gautam, let me ask you a final question. As you look forward into the next normal, what are a couple of things that strike you? What is the next normal going to be characterized by? And are you personally looking forward to it, if I may ask?
Gautam Kumra: Thanks for asking Oliver. Actually, to be honest, I think I’m still imagining what that next normal would look like. There’s a personal hope that some of the great things about the current reality, reducing some of the mindless travel will be something I’m actually looking forward to. I’m also looking forward to, frankly, reconnecting with colleagues and clients, which has been something I’ve been missing.
But I think if I think more broadly, what’s interesting is how I think companies are thinking about the next normal. The other day, we had one of the top three IT services companies in India, which has about 300,000 people globally, mentioned that they expect to have 95 percent of the people continue to work remotely for the next two years. Not for the next two months, but for the next two years. I thought that was fascinating. I had another company mention that they’ve been running their plants at 90 percent capacity with about 30 percent people, which also shows you how much productivity can be unleashed and how much companies have been forced to innovate, to get prepared for the next normal.
And I think I’m looking forward to, I think one of the things that excites me, is India is also one of the fastest digitizing countries in the world. And I think in the next normal, I think India could become an innovator for how technology can be used to meet a lot of unmet needs. Anu talked about health needs, but you can think about health, entertainment, education.
And I think that could be quite a fascinating new world, some parts of which I’m actually quite excited about.
Oliver Tonby: Thank you Gautam. Same question to you, Anu. Are you looking forward to the next normal?
Anu Madgavkar: At this stage, I find it hard to imagine exactly what the next normal will be, for example, I think it’s going to change a lot of basic things for us at many different levels. Gautam talked about the business level, but even at the personal level, if you think about how we are going to be as families. Many Indians actually, of course, have children who are studying overseas or need to move overseas to study, how soon will that happen? What will life for them look like on campuses in other parts of the world? Closer to home, how will you actually continue to care for an older family member who may not be living with you, and concerns about how independent they can be going forward?
So there are, I think a lot of question marks, frankly. Certainly, I think what I embrace and love is this notion, I think two things, one is as Gautam said, the notion of we’re ready to innovate and try different things. We’re not afraid to do that. We will do that. So the digital work from home is one example, but we’re ready to innovate. And the second thing, as I said is the way different constituencies have come together on solutions. I think I find that really inspiring and energizing across the private sector, the social sector, and the government. So there’s a tremendous energy we can unlock together. So, that’s what I look forward to.
Oliver Tonby: Thank you Gautam, thank you Anu, for sharing what India is doing in the face of COVID-19. I think the world has a lot to learn from India here.
I’m going to repeat one sentence that you said, Anu, which was that we are ready to innovate and try different things. And I think India is doing that at scale. And I think the world has many things to observe and watch what happens and then learn from there.
Thank you so much for joining us today. And to the listeners, thank you so much for listening in. Take care everybody.
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