Roadblocks to India’s competitiveness

Raghavan Parthasarthy | Updated on January 16, 2018

Hardly visible: On the global stage

It needs to produce high value goods, for which skill upgradation policies are in place. But factory jobs are looked down upon

“India seems to be on the right track,” say some US executives I meet as an academic. But there are others with less flattering comments: “I have not seen any Indian brand in stores here… Not even a made-in-India label… How come India could not win a single gold in the recent Olympics?”

Opinion about India in international business circles seems to be deeply divided.

India’s progress

The 2016-17 Global Competitiveness Report ranks India 39th among 138 nations — a 16-place jump from year-ago levels. The report assesses the competitiveness of a nation based on its macroeconomic environment, strategies employed to promote growth such as institutions and policies, and the ability of enterprises to create and sustain value. The nature of the economy and growth measures influence enterprise competency to compete and, in turn, enhance national productivity and prosperity.

India’s progress on global competitiveness is impressive. The economic development initiatives launched by the Modi government two years ago seem to be paying off. However, India remains a factor-driven economy characterised by an unskilled workforce, and heavy reliance on agriculture and extractive industries. Lack of complexity and technological sophistication in its economy limits its ability to offer high-value goods to global markets.

In 2015, India exported $262 billion — compare with China’s $2.3 trillion — of which, over one half was commodities and low tech goods (mineral fuel, clothing) while just 15 per cent was engineered goods (autos, appliances). Notably, India’s share in global merchandise trade has remained stagnant at 2 per cent over the last five years compared to China’s, which has grown from 10 to 14 per cent.

Manufacturing orientation

The Prime Minister’s economic development initiatives hope to rectify this situation through targeted programmes that would equip India for a stronger performance in global trade and competition. Among them is ‘Make in India’, a large-scale campaign to attract foreign direct investments to the manufacturing sector. These investments are designed to create jobs in massive numbers to absorb the country’s burgeoning workforce. More importantly, they are expected to move India up on the development ladder to the ‘efficiency-driven’ stage — exemplified by high-volume diversified manufacturing and the ability to globally market a wide range of value-added consumer and industrial goods.

‘Make in India’ has been well-received. In 2015, India emerged as the top destination for FDIs. Indications are this trend will continue. Encouraging as the news may be, manufacturing assets, ipso facto, will not propel India to the forefront of global merchandise trade and competition. What is additionally needed is a workforce that has complementary industrial skills.

India’s workforce of 500 million is mostly unskilled — by government estimates, 80 per cent has no marketable skills. Alarmingly, less than 10 million are vocationally trained as against 150 million needed by 2022 to transition India as a leading manufacturer. Undoubtedly, it is an uphill task and India has formed a Skill Development Agency to spearhead implementation, jointly with the private sector.

Reports indicate progress toward the goal but also mention tepid enrolment in short-term vocational training and apprenticeship despite the existence of an incentive regime. The reasons are not far to seek — India has never been a blue-collar economy. The educational aspirations of its citizens have historically been centred on academics and university education, driven by ambitions in the administrative and management cadres. By contrast, industrial training has generally been perceived as unglamorous, even undignified. Clearly, the solution to this problem lies in educating India through information distribution and publicity that describes entry jobs in industry and pathways to functional and general management.

Towards innovation

Manufacturing assets and workforce skills will give India the foundation to compete globally on a wide range of products. However, to be distinguished as a leader, India must transform from low-skilled commoditised production to designing and marketing sophisticated, proprietary technologies — it must evolve as an innovation-driven economy.

To realise this, India would need highly talented science and engineering graduates and substantial investment in R&D. India is self-sufficient in the former; it is the latter where the country is deficient. India’s R&D spending of $66 billion in 2015 (0.9 per cent of GDP) pales in comparison to China’s ($410 billion or 2.1 per cent of GDP). What is more troubling is that three-fourths of it comes from the public sector. The low private sector participation could be because of the relatively small size of most Indian firms and consequent lack of scale economies. This problem should resolve itself when manufacturing investments rise.

So, is India globally competitive? The short answer is: It is a work in progress. Evidence suggests that India seems to be on the right track.

The writer is a professor of business policy and strategy, Baruch College, City University of New York

Published on October 25, 2016

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