What India needs to do to stamp out poverty
India can potentially achieve an average economic growth rate of 7.8 percent and help eradicate poverty by implementing reforms that boost job creation in the non-farm sector and increase productivity in agriculture, McKinsey Global Institute said in a new report.
India's economy, the third biggest in Asia after China and Japan, grew 4.5 percent in the 2012/2013 fiscal year, slowing from 6.7 percent in the previous one.
(Read more: India's finance minister unveils tax cuts in budget)
Sluggish economic growth, high inflation, and a failure to implement long-term economic reforms have hurt the appeal of local assets in the past year and put India in the 'fragile five' category of emerging markets seen as most vulnerable to an unwinding of U.S. monetary stimulus.
In its report released Thursday, McKinsey said it had developed a new metric called the empowerment line, which determines the level of consumption needed for a person to fulfill basic needs that include food, housing and drinking water, sanitation and health care.
"The report finds that 56 percent of India's population lacks the means to meet all of these basic needs. Some 680 million Indians live below the Empowerment Line—more than 2.5 times the population of 270 million below the official poverty line," McKinsey said. "Without concerted reforms, more than one-third of the population would remain below the Empowerment Line in 2022."
India has a population of about 1.2 billion and the world's biggest democracy goes to the polls later this year.
(Read more: Election year for emerging markets: What to expect)
McKinsey urged reforms in four key areas and first up was accelerating job creation.
"India needs reforms that unlock the economy's potential to add 115 million non-farm jobs by 2022," McKinsey said. "This would absorb the expected growth of 69 million in the working-age population, raise the labor force participation rate by some 2 to 3 percentage points, and reduce the share of farm jobs from 49 percent of total employment in 2012 to 37 percent in 2022."
The second area of reform India should focus on is raising farm productivity, McKinsey said.
According to the consultancy firm, increasing investment in agriculture infrastructure and research can help raise the average farm yield per hectare to about 4.0 metric tons by 2022 from 2.3 metric tons in 2012.
"This would bring India's yields in line with those in other emerging Asian countries. Gains in agricultural productivity would also accelerate the transition of labor to more productive non-farm jobs," the report said.
The last two areas of reform should focus on increasing spending on basic services and making those services more effective, McKinsey said.
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It added that public spending on social services needs to almost double to $226 billion by 2022 from $118 billion in 2012. It said that the impact of increased spending would be "magnified" if more of that expenditure reaches those who need it.
"If India increases funding for basic services but does not improve on this current performance, nearly Rs. 545,000 crore ($113 billion) of social service spending will fail to reach intended beneficiaries in 2022, up from about Rs. 285,000 crore ($59 billion) today," the McKinsey report said.
It pointed to measures put in place by other countries to deliver more effective public services such as using technology to streamline and monitor operations.
— Writing by CNBC's Dhara Ranasinghe. Follow her on Twitter at @DharaCNBC