In a world repeatedly reshaped by shocks—from covid and the Russia-Ukraine conflict to trade wars and the latest energy disruption linked to the West Asia war—resilience is at a premium. Against this backdrop, India has an opportunity to lead and chart new development pathways, said Bob Sternfels, global managing partner at McKinsey & Co, in an interview to Mint.
A multipolar world could open up new leadership pathways that may not align perfectly with the largest economies, said Sternfels, pointing to emerging growth areas such as artificial intelligence (AI) and data centres.
India’s talent, combined with grit and entrepreneurship, gives it a winning edge, said Sternfels, who is serving his second three-year term as head of the consulting firm that has a significant influence across boardrooms and national leaderships.
“In a shifting world order, this is India’s leadership moment on multiple dimensions, as it becomes a strategic imperative for organizations globally to re-orient towards India,” he said.
Sternfels rejected the idea that global trade is diminishing. Instead, it is growing in different ways, he said.
Global trade flow moves like water; if it is blocked somewhere, it finds a different way, said Sternfels, adding that a few free trade agreements were negotiated among countries in the last 12 months, but they do not involve the US. “Other parts of the world are connecting with each other in different ways.”
Sternfels said that since covid, the different exogenous shocks confronting the world have added to the volatility. It has shown that systems for flow of goods, services, capital and labour, were optimized for efficiency, rather than resilience.
Rajat Dhawan, the India managing partner of McKinsey & Co., who was also in the interview, said India has shown resilience against covid and the war-triggered price surges.
Policy priorities
McKinsey’s research has identified ’18 arenas of growth’ for India, with a potential to add $7 trillion to economic output by 2040, Dhawan said, citing intersections of sectors including electric mobility.
In response to queries emailed later on the specific counter-cyclical measures developing nations such as India should pursue to manage the ongoing energy disruptions and volatility, Dhawan suggested three actions that could have the greatest multiplier effect on growth.
“Despite inflationary pressures, India could continue to drive capex-led growth, particularly in sunrise infrastructure sectors in the economy such as renewables, semiconductors, electric vehicles etc. These are sectors that create jobs, have 2-3x multiplier effects in the economy, where import substitution over a period of time could stabilize the exchange rates in turn,” he said.
“Secondly, continue to spur consumption and thirdly, foster energy resilience,” said Dhawan. The third action entails becoming less reliant on imports, driving electrification–not just in mobility, but in household usage as well, pushing renewables and creating the nuclear framework in the country with the right risk mitigation and insurance frameworks put in.
Dhawan said global trade is shifting to resilience. Instead of a unidimensional view of whoever is more advantaged to supply on a cost basis, global flows are moving to a more multivariant version, he added.
Growth and wage dynamics
“It’s very clear that if India continues to grow at a real GDP growth of 6.5-7.5/8%, over a 20-25 year period, and we are able to get to $10,000-12,000 GDP per capita, it gets us to a much superior middle income country zone,” said Dhawan, adding that it would be commendable to achieve this with 1.5 billion plus people.
To a question on concerns around the gap between growth in real wages and corporate profits in India, Dhawan said there is a natural stabilizer between wages and corporate profits. “If wages don’t grow, consumption that is crucial for India’s economy stalls, impacting corporate profits,” he said. “While asset valuations (equity, real estate) might show short-term disproportionate growth compared to wages, these imbalances tend to correct over a 7-9 year economic cycle. Asset prices may stabilize, while wages catch up. Corporate profits and wages are interlinked; a lag exists, but if wages don’t grow, profits eventually suffer.”
In the interview, Sternfels said that ultimately, growth is what brings options. “Without economic growth, you lack employment and choices regarding compensation. The core mantra must be creating the right conditions to fuel outsized growth in India, as this underpins all secondary benefits, including inclusion,” he said.
AI and data centre opportunities
Sternfels also explained that the push on AI and data centres offered an opportunity for India, irrespective of questions around whether there’s an AI bubble or correction.
“Every tech cycle has had inflation and correction, but the underlying trend persists. The need for data and data centres will continue regardless,” said Sternfels. “The bigger question for India is how to use AI as an opportunity for innovation, creating new sectors and job growth, not just for productivity. India should focus on both efficient adoption and creating new businesses.”
Sternfels also said it would be wise to look at the longer term, past near-term valuations, and ensure AI is great for India.