Creating Prosperity for a Billion People: Re-architecting the System of Wealth Creation

The world’s financial systems as currently designed enable 1.3 billion of the world’s 7.6 billion people to participate fully with access to formal sources of borrowing and financial savings products. This is clearly an unsustainable model. The unevenness of participation is stark between the South and the North of the world and the West and the East too; only c.70% of adults in the US are fully active participants in its financial system, and a tiny fraction of 8% in Africa. However, it is also divided within nations, between rich and poor, men and women, and between ethnicities. This has provided the fuel for national populism, mass protests and violence. The answer lies in enhancing the system of wealth creation itself. While every nation has a different model and so each will require a different solution, there are broad parameters which are common to the world. One of the countries that now sits between the poorest nations and the middle-income ones is India. India has an opportunity to redesign its system of wealth creation by working with the world at large, and to underpin it with a robust system of enterprise that provides a model for others. 

The rise of prosperity in India is of vital importance to not only its poor and its government’s social and political agenda, but also to democracies at large, aspiring developing nations and to Western nations looking for a powerful ally in Asia. Despite rapid economic development over the last three decades, India today remains a poor country by most Western standards. Half the population lives on less than US$800 per annum in income per capita, and half of India’s adult population has less than US$3,000 of wealth. Nearly 80% of adults, representing c.1.1bn people in total, have less than US$10,000 of wealth, with 80% of assets being non-financial (typically landholdings or jewellery)1, compared to 26% in the US and 47% in China. The vast majority of India’s population therefore continues to live on the margins of the country’s growing economy and financial markets. So, making the 14% of humanity that this population represents full and active participants in the economy and financial system will be the country’s single biggest challenge in the decade(s) to come.

Recent years have demonstrated that rapid progress is indeed possible. To drive financial inclusion, the government fostered and leveraged a unique technology stack consisting of a digital identification program and database, near universal mobile penetration2 and the banking system, to enable the opening of over 400 million bank accounts for the financially underserved and to drive the rapid expansion of digital payments and banking services to the lower tiers of India’s income pyramid.

However, having crossed the hurdle of bringing so many of India’s poor into the banking system, it is critical to now create wealth for them.

Driving true wealth creation on this scale will require the government – along with the private sector and civil society – to address multiple development and inclusion priorities simultaneously. These include further expanding financial inclusion, creating mechanisms for the c.40% of India’s labour force engaged in subsistence level farming to expand its wealth, expanding access to quality healthcare and education and providing housing and social security to all, among others. The totality and magnitude of these represent systemic changes to how India creates and distributes value.

This month’s Sign of the Times takes a closer look at how the system of wealth can be re-architected and identifies twelve critical levers that can create a robust system of enterprise to support India and its poorest, bringing prosperity to one billion people in the world’s largest democracy, galvanising the world to work with her and provide a roadmap for others to consider the world over.


The Benefits of India’s Development to Date Have been Unevenly Distributed 

Over the last two decades, India’s GDP has expanded from US$0.5 trillion in 2000 to c.US$2.9 trillion in 20193. This economic transformation – one of the fastest in the world and mirroring China’s from 1991 to 2006 – has led to significant changes in Indian society. Average per capita income levels have increased fourfold, from c.US$450 to c.US$1,9004 (although median per capita income is only c.US$800), and more than 300m people have been lifted out of absolute poverty5 and the middle class grown. Notwithstanding the severe economic disruption from the coronavirus pandemic in 2020, India is on the path to cross the threshold from lower middle-income to upper middle-income status6 around the end of the decade as things stand today. Of course, India needs to go faster as an aspiring economic superpower and a lynchpin in America’s Asia strategy. 

Importantly, India’s economic journey over the last three decades has not been a straight line, nor has every Indian participated in it in equal measure, with some sections of society clearly benefiting more than others. These disparities broadly fall into one of three categories:

  1. Sectoral Disparities.  Economic growth in India has largely been driven by the services sector, which generates over 50% more output than industry on a per worker basis and more than 3x that of agriculture7. However, the agricultural sector continues to directly employ over c.40% of the country’s labour force, (vs. 11% in the US and 25% in China8), and more than 65% of India’s population is either directly or indirectly dependent on the agricultural sector for their livelihoods9.
  2. Regional Disparities.  The gaps in economic and social development between regions in India are of a width more commonly seen across continents rather than countries10. For example, per capita incomes in its five large city-centric states are almost 4x higher than in its poorest states11 (where the poorest have income levels similar to Sub-Saharan Africa).
  3. Social Disparities.  The legacy of India’s complex caste system has also played a role in the country’s uneven economic growth over the years. Between 1961 and 2012, marginalised caste groups earned anywhere between 8% and 34% less than the national average, while upper caste groups earned 45-48% higher than the national average12.

Collectively, these economic disparities mean that gains over the last two decades have ended up being largely concentrated at the top of India’s economic pyramid: while the average wealth of currently US$17,299 per Indian adult has increased nearly fourfold over the past decade, the current median wealth is only US$3,94313, having increased three-fold over the same period. 

The disparity in wealth is a function of the disparity in income. While data on median income is not readily available, the most recently available study (from 201614) suggested that India’s median per capita income is 57% lower than average per capita income. This would suggest a median income of only c.US$800 currently (or just over US$2 per day per person15). Further, the share of income of the top 10% has increased from c.33% in 1990 to c.55% in 201916, clearly indicating that India’s economic growth has accrued overwhelmingly at the top of the income pyramid, while the rest of India’s population has not fully enjoyed the benefits of development. 

These disparities have been brought into even sharper focus over the last year due to the coronavirus pandemic (and subsequent lockdowns), which have disproportionately impacted the poor, with wages of informal sector workers (c.90% of the overall labour force) declining by c.23% in the last year17, and the overall economy contracting by c.10%, resulting in a c.12% fall in per capita income.

Given these disparities, further inequitable growth will likely come at potentially significant costs, including social unrest (recent protests by farmers againstGiven these disparities, further inequitable growth will likely come at potentially significant costs, including social unrest, political instability owing to anti-incumbency and declining public health due to pollution and environmental degradation new agriculture reforms legislation are illustrative of the disruptions that are possible), political instability owing to anti-incumbency (58% of incumbent state governments were voted out of power in the last 12 elections) and declining public health due to pollution and environmental degradation (India incurs c.US$40bn of costs annually due to air pollution18). It requires truly inclusive growth for India’s economic rise to be sustainable over the long term and enable the country to achieve its full potential.


Taking One Billion People to Prosperity

The Scope of the Challenge, The Need for Systemic Change

India has been called an “improbable democracy”19 given that it has maintained universal suffrage despite its scale, diversity and poverty. But India has proven that a large and poor country can indeed, within the framework of democracy, generate prosperity rapidly and lift masses out of poverty and into the information age. In recent history, it has been far surpassed by its neighbour China which has within a few decades, risen to a global economic and geopolitical juggernaut with a per capita income over US$10,000, more than 5x India’s, using a top-down economic model with an increasingly authoritarian government.

However, China’s increasing economic and geopolitical assertiveness domestically and abroad, coupled with the way it is seen to have handled the pandemic with the rest of the world, has damaged its international standing, leaving the world more determined to find a credibleIndia has the geopolitical, national, economic and moral imperative to prove that it can succeed within and because of its democracy by taking a billion people into prosperity, rapidly alternative for trade, economic and security collaboration. The feasibility or merits of that aside, India is that alternative at this point in time. With over a billion people still living without real wealth (of which c.300m were below the poverty line as of 2019 even before the pandemic hit), India has the geopolitical, national, economic and moral imperative to prove that it can succeed within and because of its democracy by taking a billion people into prosperity, rapidly. This can only be achieved by making fundamental changes to its existing system of wealth creation.

In order to understand the scale of the challenge that India faces in doing so, it is important to look at the evolution of India’s economic position and structure, and the role of its labour force within that, over the last 20 years and its potential evolution over the next 20 years if India were to successfully transition into an upper middle-income country over the next decade and be in a position to become a high-income country by 2040 with its per capita GDP crossing c.US$12,000.


Systemic Change in Wealth Creation, The Overall Architecture of the Shift

I.      Shift from Agrarian-Industrial to a Sustainable Information Age Economy

It is worth understanding India’s potential journey over the next two decades within the context of its journey to date, which can be looked at in three distinct phases20. The first phase from independence until 2006 was a phase of Hardship and Poverty, where India took nearly 60 years to scale to a US$1 trillion economy, dominated by its agricultural sector and growing at an average rate of c.4%, hampered by frequent disruptions. 

The second phase, from 2007 until 2019 was a phase of increasing Economic Liberalisation and Participation, that saw India build scaled industrial and service industries and accelerate to c.7%, scaling its economy to US$2.9 trillion by 2019. 

The third phase, where India will now scale to a US$5 trillion and beyond, rapidly, is one where India will Rise in Global Significance with GDP growth in excess of 8%, and a transition into a scaled global information age economy, driven by five fundamental drivers (demographics, urbanisation, technology adoption, consumption, financial participation). This path of course has been interrupted, albeit briefly, by the coronavirus pandemic – India’s GDP contracted to US$2.6 trillion in 2020. 

However the pandemic has also unleashed a Great Transformation21 globally which is accelerating the global shift to a Sustainable Information Age by accelerating the transition to a digital world (remote working, online education, digital finance, and exponentially higher digital participation) as well as a more sustainable world (through the regeneration of the environment, the shift in focus to responsible capitalism and the realisation that there is nearly unlimited capital available to address critical issues). India’s opportunity lies in embracing the philosophy and principles of openness and capitalising on the shift in global power blocs to prioritise a set of actions which can help it accelerate economically and capture the opportunities unleased by the Great Transformation (see appendix).

II.      Mass Shift in Employment to a Sustainable Information Age Economy

The first critical factor that will drive systemic change is whether India can successfully transition from a primarily agrarian labour force into an information age labour force, albeit with scaled industrial and services sectors. India has already managed a transformation in the scale of its the transformation and now needs to undergo in order to fully exploit its demographic advantages and transition to a sustainable information age economic structure befitting an upper middle-income country.

This structural shift is dual track requiring a parallel in increase in overall labour force participation to c.65% as well as a shift across the three employment sectors. Labour force participation has the added requirement of increasing male labour force participation from 75% back up to c.80% levels it was at in 2010, and very importantly raising female labour force participation from 21% (a level common in the Arab world and North Africa) to at least the c.50% level that most other large emerging and Asian economies (including Indonesia, South Korea, Brazil, Russia, Japan, South Africa, Thailand and the Philippines) have achieved.

The result of this is the creation of c.350 million new jobs over the next 20 years - c.17 million net new jobs annually in the industrial and services sectors (disproportionately for women), compared to c.6m net new jobs created each year over the last 20 years (which were disproportionately for men as women actually dropped out of the labour force)23 – with c.120 million people moving to industry, and c.220 million moving to services.

III.      Step Change in Scale and Productivity of the System

In addition to the increase in the overall labour force participation, scaling needs to drive output. So, the second critical factor that will drive whether India can create mass wealth and prosperity is productivity growth. GDP per worker, in real terms, has increased nearly 3x from c.US$2,000 in 2000 to US$5,500 in 202024. However, there continues to be a significant variance between sectors with services workers are nearly twice as productive as the average, while agricultural workers are less than 50% of the average. 

Overall GDP per worker across sectors increased at c.5% annually in the last 20 years. If this can accelerate to c.7% annually, then combined with the growth of the labour force outlined above (c.3% p.a.), India will be able to drive average GDP growth to c.10% annually (similar to the level that China achieved between 2005 and 2015 when its GDP rapidly scaled from c.US$2.3 trillion to US$11.1 trillion25).

Part of this acceleration can be achieved by changing the mix of the workforce between sectors (productivity is significantly higher in industry and services, so when an agricultural worker moves there, overall productivity accelerates), however, India will also need a secular acceleration in industrial productivity (which would need to double) and to a lesser extend in services (which would need to increase c.30%).

The table below illustrates the impact of an enlarged and restructured labour force combined with an acceleration in productivity growth on India’s total output and per capita income.

Three Scenarios emerge for India in the architecture of its system of wealth creation:

  1. An Evenly Balanced Agri-Industrial-Services Model. Such a system delivers the historic c.6% average GDP growth it has achieved over the last two decades means India’s economy will reach only c.US$10 trillion (or c.US$6,000 per capita) by 2040, just above current upper middle-income levels. 
  2. A Prolonged Transition Model.It requires a systemic change in India’s wealth creation model to scale to a c.US$20 trillion economy by 2040, with c.US$12,250 per capita income, and this entails a qualitative shift in how the system of enterprise works, an increased shift to services, creating 340m new jobs in services and industry, and an acceleration in overall productivity growth, just 2% delivers huge value given the scale of India. This enables India to accelerate to c.8% average GDP growth and scale to US$14 trillion (or c.US$8,700 per capita) by 2040, but still be below its full potential, an upper middle-income nation on average, but with a sizable minority of the population which will not have achieved material prosperity. 
  3. A Sustainable Information Age Model. Systemic Change in its wealth creation model enables India to achieve 10% average real GDP growth, scale to US$20 trillion GDP and be on the cusp of moving from upper middle-income to high-income levels by 2040, with sufficient wealth creation to lift all of its 1.6 billion people into real prosperity.

In summary, the first part of taking a billion people to prosperity requires transforming India’s system of wealth creation. This is a programme of structural change in three parts:

  1. Creating a sustainable information economy, leveraging the pandemic and the continuing digitisation of India.
  2. Shifting employment from agricultural to services, with a strong presence in industrials and a continuing base in agriculture, while driving employment participation, for males but particularly for females.
  3. Enhancing the productivity of the whole system.

This level of systemic change can deliver broad-based economic value creation through re-architecting the system of wealth creation.


Systemic Change in the System of Enterprise for Balanced and Sustainable Mass Wealth Creation

A Key Technology Infrastructure Component for Change Established

India has already made rapid progress in many of these areas over the last several decades and there are a series of ambitious government reforms and initiatives already underway that are looking to unlock the value of these levers individually. Recent years in particular have demonstrated that bold decisions, initiatives and policy reforms such as the rollout of a national goods and services tax, an ambitious financial inclusion scheme, a new insolvency and bankruptcy code, amongst many others, can help change both the nature and direction of the system, quickly.

The technology platform has enabled two key components that are proving vital for progress:

  1. The “India Stack” Provides the Backbone for Mass Financial Inclusion. The government’s “India Stack”, built off a national unique identification database (Aadhaar) to create a set of open APIs (known as the “India Stack”, see inset26) that allow government and businesses to utilise a common digital infrastructure to develop new business and service delivery models. The stack was pivotal in driving the government’s financial inclusion scheme (the Jan Dhan Yojana) by enabling the opening of over 400mn zero balance bank accounts for the poor, attached to which were a suite of financial products and the ability to receive government benefits directly.
  2. From Financial Inclusion to Social and Political Inclusion. Though the stack was originally designed to drive the financial inclusion program, it has a range of other applications (see inset27). For example, the government is now leveraging the stack to rollout India’s COVID-19 vaccination program, the world’s largest, efficiently and fairly. The program has used the Aadhaar and e-KYC APIs to register qualified individuals digitally or in-person through a new application (‘CoWin’) which sits on top of the stack, while the DigiLocker is being used to provide vaccine certificates.

India’s opportunity in driving fundamental systemic change, comes from leveraging this stack as well as applying this level of innovation for each of the 12 levers, building on existing programs, initiatives and policy reforms wherever possible, and launching new initiatives where required, all focused on the same overall strategic objective of creating broad-based prosperity for the over one billion people at the bottom of the pyramid. 


Overview of the Strategic Levers in the System of Enterprise

In order to create wealth for over a billion of its people, India will need a strong system of wealth creation, and to be sustainable, and avoid the National Populism sweeping the West in particular, perceived fairness in the participation in wealth creation, and this in turn will need to be underpinned by a sustainable ‘system of enterprise’. Such a system of enterprise will need to (i) drive rapid scaling of companies, (ii) drive rapid productivity growth, (iii) participation in the benefits of that productivity growth equitably to workers, and (iv) be environmentally sustainable. 

Designing such a system requires activating multiple potential levers simultaneously, unlocking the full potential from each lever and the synergies between them, with the common goal of lifting a billion into meaningful prosperity.

Such a system will need to necessarily have both the ability to generate sufficient employment and wealth creation opportunities along with mechanisms to allow for the participation in that wealth creation effectively to the bottom of the pyramid. To be effective, the key strategic levers will need to be applied over the next decade in a concentrated and concerted programme of change. 

Twelve critical levers are capable of delivering balanced and sustainable growth and are of two types: (1) levers that can create overall prosperity and mass wealth, and (2) levers that are inclusive and therefore leverage the mass population as well as increasing participation in wealth, thereby driving mass inclusion, creating financial security and eliminating poverty. In each of these categories, certain levers are specific to sectors, while others cut across sectors. 

These levers and the target impact India needs to aspire to by 2040 in order to lift a billion people into material prosperity is outlined below: