McKinsey lessons for growth: Invest more in R&D, innovation to compete globally

By: | Published: October 20, 2018 4:19 AM

India must encourage large firms, fix education.

economy, india economyBetween 1995 and 2016, the revenue of big companies in outperforming developing economies grew from 22% of the GDP to 64%—comparable with high-income economies—while their contribution to the value added to national GDP grew from 11% to over 27%, or twice the share of comparable companies in the rest of the emerging economies.

At a time when fear of AI and automation shrinking employment for humans is widespread, the McKinsey Global Institute, in a recently-released report, reiterates that automation won’t hurt India much, given the country is still far from the cost-benefit frontier where substituting labour with machines makes sense. Indeed, it says automation could boost the country’s annual labour productivity between 2015 and 2030 by 0.8%—and up to 1.2% for some high-performing emerging economies. Of course, India won’t be able to make much of the automation/AI-assisted jobs if it doesn’t take a big leap in improving education and skilling outcomes. The McKinsey report also highlights that, contrary to the view held by politicians—especially in this government—on how encouraging MSMEs is good for the economy, all high-growth economies have done well primarily due to the number of big companies they fostered. These companies can spend more on R&D and innovation that is needed to compete globally, create larger pools of assets and the higher wages they offer to employees fuels demand in the economy that creates opportunities for smaller businesses. Between 1995 and 2016, the revenue of big companies in outperforming developing economies grew from 22% of the GDP to 64%—comparable with high-income economies—while their contribution to the value added to national GDP grew from 11% to over 27%, or twice the share of comparable companies in the rest of the emerging economies.

Given availability of capital is critical for pushing up growth—capital accumulation contributed 3.8 percentage points to economic growth each year for seven 50-year (1965-2015) outperformers and 5 percentage points for the 11 20-year (1995-2015) outperformers that include India—the role of interest rates and fiscal deficits is seminal. While rapidly spreading AI and globalisation will slow employment creation globally, McKinsey points to the large job-creation potential of labour-intensive exports like garment and shoes, etc. However, much of the gains here—and with China moving away from export-led growth to domestic-demand led growth, there was a huge potential created—have been captured by countries like Bangladesh and Vietnam. India’s rigid labour laws and poor infra continue to hobble it. On government effectiveness—or the perceived quality of a country’s public services, civil service and policy formulation and implementation—Vietnam outranks India; on fostering the growth of big companies, India’s relative performance, based on the size of the economy, lags Vietnam and even Bangladesh. So, while professing to be labour-friendly, successive governments have frittered away the potential labour-intensive exports offered. And, if education is not fixed, AI-led automation, that doesn’t seem much of a threat today, may just prove disastrous a few years from now.

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