How India’s firms can help propel the country’s economic growth

Gautam Kumra, managing partner in McKinsey’s India office, discusses why it’s important for India’s firms to scale up in size in the next decade, and the three challenges that need to be overcome to achieve this goal.

How can India’s firms can help propel the country’s economic growth?

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Companies and business in India have a very vital role to play in the continuing economic growth rate of the country. India is one of the 18 economies in the world that over the last 50 years has delivered a high economic growth rate.

One of the reasons for that has been the development of large firms. If you look at large firms in India, we have 600 firms more than half a billion dollars in size, which today already constitutes about 40 percent of our exports, 20 percent of our employment in the formal sector. And incidentally, drives about 10 times more productivity than that average mid-size company in India.

Now, for India to produce about 90 billion jobs over the next decade, which is needed to keep unemployment in check, we need to grow at about 8.5 percent as an economy. And to do so, we need to deliver a productivity growth rate of about 6-6.5 percent every year. This cannot be achieved unless we roughly triple the number of large firms in the country from about 600 to roughly 2,000.

To do so, we have to crack three problems. First is actually the “missing middle” problem. If we look at the India corporate system as a ladder, not only we have few companies at the top, the other problem we have is that we do not have enough companies in the middle of the ladder that can move up to the top. In fact, we think there is need for about 10,000 companies to move from being small to medium-size, and medium being between 50 million to about 500 million. And we need about a thousand of these mid-size firms to migrate up to become large firms.

And finally, I think there is also a profitability and productivity imperative. But if that imperative is met, Indian companies can make a real difference to economic growth and job creation.

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