India is at a decisive point in its journey toward prosperity. The economic crisis sparked by COVID-19 could spur reforms that return the economy to a high-growth track and create gainful jobs for 90 million workers to 2030; letting go of this opportunity could risk a decade of economic stagnation. A new report from the McKinsey Global Institute identifies a reform agenda that could be implemented in the next 12 to 18 months. It aims to raise productivity and incomes for workers, small and midsize firms, and large businesses, keeping India in the ranks of the world’s outperforming emerging economies.

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A clarion call is sounding for India to put growth on a sustainably faster track and meet the aspirations of its growing workforce. Over the decade to 2030, India needs to create at least 90 million new nonfarm jobs to absorb the 60 million new workers who will enter the workforce based on current demographics, and an additional 30 million workers who could move from farm work to more productive nonfarm sectors. If an additional 55 million women enter the labor force, at least partially correcting historical underrepresentation, India’s job creation imperative would be even greater (Exhibit 1).

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For gainful and productive employment growth of this magnitude , India’s GDP will need to grow by 8.0 to 8.5 percent annually over the next decade, or about double the 4.2 percent rate of growth in fiscal year 2020. Given the uncertainties about economic outcomes during the COVID-19 pandemic, our analysis looks at scenarios beginning in fiscal year 2023, although many of our proposed actions would start well before then, and in fact be implemented in the next 12 to 18 months.

Net employment would need to grow by 1.5 percent per year from 2023 to 2030, similar to the average rate that India achieved from 2000 to 2012, but much higher than the flat net employment experienced from 2013 to 2018. At the same time, India will need to maintain productivity growth at 6.5 to 7.0 percent per year, the same as it achieved from 2013 to 2018. The two objectives are not contradictory; indeed, employment cannot grow sustainably without high productivity growth, and vice versa.

If India fails to introduce measures to address prepandemic trends of flat employment and slowing economic growth, and does not manage the shock of the crisis adequately, its economy could expand by just 5.5 to 6.0 percent from 2023 to 2030, with a decadal growth of just 5 percent and absorb only about six million new workers, marking a decade of lost opportunity (Exhibit 2).

India has a successful track record to draw on: over the past three decades, the country has been one of just 18 outperforming emerging economies to achieve robust and consistent high growth. Pro-growth reforms lifted productivity and helped the country weather shocks and cycles. Real GDP growth has averaged 6.8 percent annually since 1992, and it has been inclusive; economic prosperity has brought significant improvement in living standards. Since 2005, more than 270 million people have escaped extreme poverty.

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Yet India’s economy was already showing signs of weakness before the COVID-19 crisis; in the aftermath of the global financial crisis, its main demand engines of domestic private investment and global demand have stalled. Bank credit to industry slowed, and the proportion of nonperforming assets to total assets tripled to more than 9 percent in the period from fiscal year 2012 to 2019. Exports declined as a share of India’s GDP from 25 to 19 percent between 2013 and 2019. Gross domestic savings and household savings slowed, while labor-force participation fell from 58 to 49 percent between 2005 and 2018. Core sectors, including manufacturing and construction, showed signs of stress.

In order to recover to a high-growth path, India’s sectoral mix would need to move toward higher-productivity sectors that also have the potential to create more jobs. And, within individual sectors, a move toward new business models that harness global trends could drive productivity and demand.

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We find that the manufacturing and construction sectors could achieve the largest acceleration in sector GDP growth relative to the past. In the coming decade, manufacturing productivity has the potential to rise by about 7.5 percent per year, contributing more than one-fifth of the incremental GDP in our estimates. Construction could add as many as one in four of the incremental gross jobs. In addition, both labor-intensive and knowledge-intensive sectors will have to sustain and improve on their past strong momentum. We estimate that about 30 million farm jobs could move to other sectors by 2030 as part of a high-growth strategy.

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India needs to leapfrog ahead to achieve the employment and productivity growth needed. Fortunately, it has many opportunities to do so. Global trends such as digitization and automation, shifting supply chains, urbanization, rising incomes and demographic shifts, and a greater focus on sustainability, health, and safety are accelerating or assuming a new significance in the wake of the pandemic. For India, these trends could manifest as three growth boosters that become the hallmarks of the postpandemic economy. Within these three growth boosters, we find 43 potential business opportunities that could create about $2.5 trillion of economic value in 2030 and support 112 million jobs, or about 30 percent of the nonfarm workforce in 2030 (Exhibit 3).

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Growth booster 1: Global hubs serving India and the world

This theme offers as much as $1 trillion in economic value. To achieve this, India will need to work now to grasp opportunities presented by forces such as rising wages in other parts of Asia, trade conflicts, and efforts to make supply chains more resilient. Rising flows and volumes of data suggest demand for a range of offshored and nearshored services. Greater affluence and leisure time and a focus on health and safety will also open up opportunities to produce and sell more manufactured goods and services.

India would need to raise its competitiveness in high-potential sectors like electronics and capital goods, chemicals, textiles and apparel, auto and auto components, and pharmaceuticals and medical devices, which contributed to about 56 percent of global trade in 2018. India’s share of exports in these sectors is 1.5 percent of the global total, while its share of imports is 2.3 percent. It could also build on its traditional strength in IT-enabled services to reflect digital and emerging technologies like artificial intelligence (AI) and machine learning–based analytics. The country also has an opportunity to develop high-value agricultural ecosystems, healthcare services for India and the world, and high-value tourism.

Growth booster 2: Efficiency engines for India’s competitiveness

The business models in this grouping can eliminate inefficiency in areas that underpin a competitive economy: power, logistics, financial services, automation, and government services. In each case, opportunities for value-creating market-based models could emerge, generating about $865 billion in economic value by 2030. Examples include next-generation financial services, such as innovation in digital payment offerings, new flow-based lending products, asset resolution and recovery models that could make insolvency processes more streamlined and effective, and a larger range of risk capital investment vehicles such as alternative investment funds. Automation of work and Industry 4.0 could bring greater efficiency; for example, about 60 percent of manufacturing-sector output could leverage predictive maintenance, smart safety management, and product design. These in turn can lift productivity in plants and factories by 7 to 11 percent. Many workers in these roles will require retraining and redeployment, and some may be displaced. Other opportunities exist in efficient mining and mineral sufficiency; high–efficiency power distribution, which could reduce power tariffs to commercial and industrial customers by 20 to 25 percent; and a push to greater e-governance.

Growth booster 3: New ways of living and working

Indian businesses can create economic value of about $635 billion by 2030 if they can tap into the shifting preferences of Indians aspiring to a higher standard of living. Safer, higher-quality urban environments, cleaner air and water, more convenience-based services, and more independent work in the new ideas-based economy are all opportunities to create millions of productive jobs in service sectors. Among other examples, India has the opportunity to introduce a robust planning approach for its top cities, which have low capital investment per capita and are less productive than they should be. In retail, if India could increase the share of e-commerce and modern trade to 20 percent and establish digitally enabled supply chains, this could generate $125 billion in economic value by 2030 and lift the productivity of 5.1 million storekeepers and e-commerce workers. Climate change mitigation and adaptation also are creating opportunities, such as more energy-efficient buildings and factories. India could more than triple its renewable energy capacity, from 87 gigawatts to 375 gigawatts, and increase the share of wind and solar energy in power generation from about 7 percent to best-in-class 30 percent. Finally, digital communication services provide opportunities in universally available, affordable, high-speed internet connectivity and fast-growing digital media and entertainment ecosystems.

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Large companies with revenues exceeding $500 million have been significant drivers of growth and innovation in India and other outperforming emerging economies. India has about 600 such firms. They are 2.3 times more productive than midsize firms, account for almost 40 percent of total exports, and employ 20 percent of the direct formal workforce.

Compared with corporate peers in some other emerging economies, however, India has fewer large firms relative to GDP. Large Indian firms contributed revenues equivalent to 48 percent of nominal GDP in 2018. That is 1.5 to 1.6 times less than China, Malaysia, and Thailand—and 3.5 times less than South Korea.

India’s large firms have also not achieved their productivity or profitability potential. Overall productivity levels are on average one-tenth to one-quarter those of peers in other “outperformer” economies. And their profitability, measured as return on assets, has declined since 2012, from 1.9 to 1.2 percent. Profits are also concentrated: just 20 of the country’s large firms contribute 80 percent of the total profit.

One factor underlying these trends is that India has a “missing middle” of midsize firms that typically grow into formidable competitors of larger rivals. For example, peer-emerging economies have almost twice as many midsize firms per trillion dollars of GDP (Exhibit 4).

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The upward mobility of small and midsize firms matters because it influences the degree of competitive pressure to which large firms are subjected. The higher such pressure, or contestability, the greater the likelihood that only the most efficient and high-performing firms will survive at the top. In some other emerging economies, it is harder for big firms to stay at the top. In China, for example, 66 percent of companies in the top quintile of firms by economic profit have been replaced over the past two decades. In India, by contrast, only 57 percent of top companies were replaced. In some sectors in India, including automotive and chemicals, the figure is even lower.

In order to achieve higher, system-wide productivity, India would need to raise the level of contestability and enable 1,000 or more midsize and small firms to scale up to large firms, and 10,000 or more small firms to scale up to midsize. That in turn will require capital: we estimate that these firms will need about six times the amount of capital currently used, of which about half needs to be risk capital.

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To seize the frontier business opportunities—and help increase the productivity and competitiveness of India’s firms—we outline reform options on six key themes:

Introduce sector-specific policies to raise productivity in manufacturing, real estate, agriculture and food processing, retail, and healthcare

We estimate these sectors could contribute $6.3 trillion of GDP in 2030, compared to $2.7 trillion in 2020. Of this total, the manufacturing sector has the potential to generate $1.25 trillion of GDP in 2030, more than double the $500 billion it accounted for in 2020. Putting in place a holistic policy framework with three components would be a key step forward. First is a stable and declining tariff regime, with inverted duty structures removed. Second, building well-functioning port-proximate manufacturing clusters, with free-trade warehousing zones, faster approval processes, and more flexible labor laws. Third, providing incentives, which are targeted, time bound, and conditional, and reduce the cost disadvantage India faces in comparison with other outperforming emerging economies.

The construction sector has the potential to more than double its GDP to $550 billion, from $250 billion in 2020. In the real estate sector, homeownership could be encouraged by rationalizing stamp duties and registration fees to reduce costs to buyers, and offering greater tax incentives. Regulatory amendments in tenancy and rent-control policies could bring additional investment into rental stock construction. Large-scale affordable-housing contracts could enable modern construction methods that can increase productivity and reduce costs.

India also has the potential to generate up to $95 billion in high-value agricultural exports, with growth driven predominantly by livestock and fisheries, pulses, spices, fruits and vegetables, horticulture, and dairy, among others. Possible reforms include changing the Agricultural Produce Marketing Committee Act to ensure barrier-free interstate trade and amending the Essential Commodities Act to deregulate the supply and distribution of agricultural commodities. The government announced these reforms as part of its COVID-19 package, but they will require the support of specific policies implemented at the state level.

In retail, if traditional models are to give way to a larger share of e-commerce and modern trade, India will need a level playing field across trade formats, which would imply minimal regulatory intervention and a foreign direct investment policy that is agnostic to business models and products.

In healthcare, India’s potential to increase access to quality healthcare and attract medical tourism will require ramped-up spending and investment from the public sector. India currently spends about 3.5 percent of GDP on healthcare, but we estimate that it could nearly double spending to 6.4 percent of GDP in line with benchmarks. India could also increase healthcare productivity by enabling new business models, including telemedicine.

Unlock land supply to reduce the cost of residential and industrial land use

Buying a home is financially out of reach for many Indians, and the high cost of land is a key reason. For companies, high-cost land puts a brake on expanding productive capacity. We estimate that, by enacting several key reforms, India has the potential to reduce land costs by 20 to 25 percent and increase the supply of land available for construction. Steps toward achieving this could include mapping out 20 to 25 percent of public and state-owned enterprises’ land that is suitable for construction and currently underused, and leasing out portions at affordable prices to private developers.

Create flexible labor markets with stronger social safety nets and more portable benefits

A more vibrant economy will require more flexible labor markets. India continues to place labor restrictions on manufacturing companies, which encourages small firms to remain small. The government could consider reviewing the various laws on the books and examine options to improve labor-market flexibility. Barriers to flexibility could be removed by providing more freedom to manufacturing companies to shape the size, composition, and skills of the workforce, in line with evolving needs.

Reduce commercial and industrial (C&I) power tariffs through new business models in power distribution

Various reform measures could help reduce C&I power tariffs by 20 to 25 percent. These include a shift to franchising models or privatization of power distribution companies in the top 100 cities; the introduction of cost-reflective tariffs for C&I customers and direct-benefit transfers for subsidies; and a focus on smart-meter penetration. While the government announced some of these reforms as part of its COVID-19 package, they may require the support of specific policies implemented at the state level.

Monetize government-owned assets and increase efficiency through privatization of more than 30 state-owned enterprises (SOEs)

Large-scale privatization could more than double productivity and potentially contribute between 0.2 and 0.4 percentage points annually on average to GDP. Privatization would need to be accompanied by an appropriate institutional framework and effective competition. In all, India has about 1,900 state-owned enterprises, of which we estimate about 400 could be privatized. Potential proceeds could be $540 billion between 2020 and 2030 (Exhibit 5). We estimate that just 2 percent of all SOEs could yield as much as 80 percent of all potential proceeds.

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Improve the ease and reduce the cost of doing business

India has made significant progress in the World Bank rankings for ease of doing business; the country rose from 130th overall in 2016 to 63rd in 2020. However, Indian companies still face obstacles ranging from delayed payments for public procurement to tedious and slow processes for obtaining permits. Construction permits, for example, take 106 days, almost double the time in peer emerging markets. These and other issues could be resolved if the government adopted global best practices in relevant areas. For example, to simplify and expedite tax payments, a one-stop shop for a range of taxes could be set up. An “e-governance for business” mission at the state-government level could improve the ease of doing business at the local level.

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We estimate the total capital requirement for this reform agenda at about $2.4 trillion in 2030, compared with about $865 billion in fiscal year 2020. Small and midsize companies will need access to more than $800 billion in capital in 2030. India will also need to finance government expenditure, budgeted in the range of 26 to 29 percent of GDP each year. A triple focus will enable investment to return to about 37 percent of GDP, the level India has achieved in high-growth periods in the past, from 33 percent in fiscal year 2020:

Channel more household savings to capital markets

India can meet the bulk of its investment requirement through domestic sources of capital if it succeeds in raising the household savings rate to 19 percent of GDP from the current 17 percent and, within household savings, to raise the flows to financial rather than physical assets to 11 percent of GDP in 2030, from 7 percent in 2018. That amounts to annual average growth of 12 percent in the pool of capital available for financial intermediation (rather than invested in land or gold). Net foreign capital inflows would also need to rise to about 3 percent of GDP from 1.8 percent. Of this, net foreign direct investment would need to increase to $120 billion (1.8 percent of GDP) from about $30 billion (1.1 percent), in line with peers in Asia. Beyond the sums required, India would need to ensure that a higher share of household financial savings flows to productive firms through a deeper capital market. The overall depth of financial markets in India is about 140 percent of GDP versus an average of about 240 percent among peers.

Reduce credit intermediation costs

The average commercial borrower in India has seen continued high real interest rates, which are more than five percentage points higher than in other outperforming emerging economies. India can reduce its cost of financing by taking steps to reduce the cost of credit intermediation in the banking system. Streamlining public finances, as described in the section below, would help end the “crowding out” of funding by government and also allow market-linked interest rates on government small savings schemes. Other measures include setting up a “special assets bank,” backed by private-sector funding, to help tackle resolution of NPAs. Among several international precedents for such action is Sweden’s establishment of a “bad bank” in the early 1990s.

Streamline public finances to allocate capital more efficiently

We estimate that India has the potential to save about 3.6 percent of GDP on an annual basis, on average over fiscal years 2021–30. These savings could come from a range of measures, including more efficient subsidy and social spending; proceeds from privatization of state-owned enterprises; monetizing assets including roads, railways, ports, airports, power infrastructure, and telecom towers; greater tax buoyancy, particularly driven by faster growth; power-sector reforms; and market-linking small-savings rates.

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About half of the reforms identified in this report can be enacted through a policy or law. Other reforms will require the government to implement initiatives and projects. While the central government’s pro-growth vision and agenda are essential, state governments have a critical role to play. They will need to implement roughly 60 percent of the reforms. Business leaders also have a major responsibility for realizing the high-growth agenda.

The starting point will be a clear and sharp vision, arrived at by the central government in alignment with the business community. For a reform agenda to endure across multiple years, an institutional body could steward the process under the chairmanship of the prime minister, with the right level of empowerment, including for resource allocation, and technical- and domain-specific expertise.

State governments will need to set their visions and blueprints to address key pro-growth priorities. The choices would vary by state depending on local endowments, such as agricultural resources, educated professionals, and port-proximate land. It would also depend on the distance of the state from the productivity frontier and the urgency of bridging the gap, for example, in areas like power-sector distribution losses, logistics cost, and the quality of urban infrastructure. States could then create powerful demonstration effects by taking a few of these ideas and making them work, at scale, in select areas.

Finally, India’s business leaders would need to raise aspirations and commit to productivity growth through a set of frontier business ideas. Businesses need to develop a long-term value creation mindset coupled with a strong performance-oriented culture; both of these create stakeholder value in the long term. A set of winning capabilities are essential if firms are to emerge as large, high-growth, globally competitive businesses. These include customer-centric innovation that focuses on developing expertise in next-generation ideas and greater localization in India; operational excellence and scalable platforms that can cut unnecessary costs; an embrace of automation and emerging AI technologies; the ability to win in discontinuities, including by disregarding established business practices and models to solve problems, and fostering creativity and nimbleness; using well-executed mergers, acquisitions, and partnerships to help scale up; and the ability to build a strong trust-based brand to attract capital, customers, and employees.

The COVID-19 pandemic is just the latest in a line of events that have focused public attention on how companies behave. Exemplary performance—including through well-executed mergers, acquisitions, and partnerships; clear reporting; strong accountability; transparency; a focus on ethical values; brands built based on trust, and purpose—will become even more important in the decade ahead.