Manufacturing Competitiveness


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Presentation on Manufacturing Competitiveness based on the piece published in Financial Express on December 9, 2012.

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Manufacturing Competitiveness

  1. 1. Manufacturing Competitiveness of Indian States Amit Kapoor & Anshul PachouriInstitute for Competitiveness, India is an independent, international initiative centred in India, dedicated to enlarging and disseminating the body of research andknowledge on competition and strategy, pioneered over the last 25 years by Professor M.E. Porter of the Institute for Strategy and Competitiveness, Harvard BusinessSchool (ISC, HBS), USA. Institute for Competitiveness, India works in affiliation with ISC, HBS, USA to offer academic & executive courses, conduct indigenous researchand provide advisory services to corporate and Government within the country. The institute studies competition and its implications for company strategy; thecompetitiveness of nations, regions & cities; suggests and provides solutions for social problems. Institute for Competitiveness, India brings out India CityCompetitiveness Report, India State Competitiveness Report, India Economic Quarterly, Journal of Competitiveness and funds academic research in the area of strategy &competitiveness. To know more about the institute write to us at
  2. 2. What is Competitiveness Prosperity Productivity Competitiveness Innovative Capacity© Institute for Competitiveness, India
  3. 3. Defining Competitiveness • Competitiveness is determined by the productivity (value per unit of input) with which a nation or region uses its human, capital and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns on capital, returns on natural resources) – Productivity depends both on the value of products and services as well as the efficiency with which they are produced – It is not what industries a nation or region competes in that matters for prosperity, but how firms compete in those industries – Productivity in a nation or region is a reflection of what both domestic firms choose to do in that location. The location of ownership is secondary for national prosperity – The productivity of local industries is fundamental to competitiveness, just not that of traded industries • Nations and regions compete in offering the most productive environment for business • The public and private sectors should play different but interrelated roles in creating a productive economy© Institute for Competitiveness, India & Michael. E. Porter
  4. 4. Indicators and Enablers of ManufacturingCompetitiveness Productivity Presence of Gross Value Investment Technology Innovation Suppliers Output per Added per in the Sophisticati & Patents and firm Worker sector on Related Clusters Competitive Business Environment© Institute for Competitiveness, India & Michael E. Porter
  5. 5. Levels of Influence on the BusinessEnvironment: Manufacturing Context for Firm Strategy and Rivalry National Cheap Imports from other economies, Incentives for manufacturing Factor Regional Demand Conditions State tax policy ConditionsNationalAvailability of skilled laborForce, land, power, technological Nationaladvancement Related and Growing Population. Rising IncomeRegional Supporting LevelsLocal public education system; RegionalVocational Training Industries Price competitiveness, Distribution Regional Suppliers; Clusters and Logistics Partners© Institute for Competitiveness, India & Michael E. Porter
  6. 6. Manufacturing Sector in India • Manufacturing sector is the backbone of Indian economy which has the potential of creating millions of job opportunities and helping in poverty reduction in the country. • Its importance can be realized by the fact that manufacturing sector employs around 9% of the total workforce estimated around 36 million workforce combining organized and unorganized sector. • For the past 20 years, the share of India’s manufacturing in World’s manufacturing has increased by just 1% and is 1.3% in 2010. • The manufacturing sector of the country is suffering from low labour productivity, shortage of skilled manpower, unsophisticated technology, high taxes, unsupportive policies & cheap imports from other economies.© Institute for Competitiveness, India
  7. 7. Contribution of Manufacturing in GDP % Contribution of Manufacturing in GDP 17.0 16.4 16.5 16.2 16.1 16.0 16.0 15.8 15.9 15.8 15.8 15.5 15.2 15.3 15.3 15.2 15.1 15.1 15.0 14.9 15.0 14.8 14.8 14.4 14.5 14.5 14.1 14.0 13.5 13.0 12.5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 • It is interesting to note that the percentage contribution of manufacturing in GDP has remained nearly constant to 15- 16% for the past twenty years. • This shows that the potential contribution of manufacturing in GDP is yet to achieve.© Institute for Competitiveness, India & RBI
  8. 8. % Contribution in GDP – Sector-wise % Contribution in GDP-India(1991) % Contribution in GDP-India (2010) 19.8 14.6 31.4 20.2 Agriculture Agriculture 14.9 Services Services 15.9 Manufacturing Manufacturing Industry Industry 65.2 48.8© Institute for Competitiveness, India & RBI
  9. 9. World Manufacturing % Contribution in World Manufacturing (1991) % Share in World Manufacturing (2010) Latin America & Latin America & Caribbean 5.8 Caribbean 6.3 European Union European Union 23.1 24.3 India 20.9 India China China 33.0 2.9 1.8 0.8 13.7 United States United States • The contribution of Europe in World Manufacturing has decreased from 33% in 1991 to 20.9% in 2010. This significant decline has come at the cost of rising China whose contribution in World manufacturing has reached 13.7% in 2010from merely 2.9% in 1991. • India on the other hand is just able to increase its share by merely 1% in the past 20 years and was 1.8% in 2010.© Institute for Competitiveness, India & World Bank Database
  10. 10. World Manufacturing 7000 6000 5000 Latin America & Caribbien 4000 EU India 3000 China 2000 US World 1000 0 • Per capita Manufacturing GDP of China had increased by 8 times from 1991 and reached 806 US$ in 2010 while India had just reached 112 US$ in 2010. • China may be succeed to capture the world manufacturing but still its per capita manufacturing GDP is still far behind US which is 6147 US$ in 2010© Institute for Competitiveness, India & World Bank Database
  11. 11. Manufacturing in India : Situation 2000000 1800000 TN 1600000 MH 1400000 Total Persons Engaged 1200000 GJ AN 1000000 800000 KA UP HR 600000 WB PB KE RJ 400000 UK MP OR CH JH AS DL 200000 HP GO BH JK TR ME NA MN 0 0 5000 10000 15000 20000 25000 30000 Total Number of Factories© Institute for Competitiveness, India, Data Source: ASI
  12. 12. Gross Output at Factory Level 12 BH 10 Size of the Bubble denotes the Gross Gross Output/ Fixed Capital ( Per Factory) DL Output ( Per Factory) 8 GO KE JK NA UK 6 MN HR PB AS WB MP MH HP ME UP KA GJ CH TNAN RJ 4 JH OR TR 2 0 -500 0 500 1000 1500 2000 2500 3000 3500 -2 Fixed Capital ( Per Factory) • The two states Maharashtra and Gujarat together forms the 34% of the total Gross output in the manufacturing sector of the country which makes them manufacturing giants of India. • In states like Bihar, the firms are found to be very efficient in using their capital and are producing more than 10 times the gross output on their fixed investments.© Institute for Competitiveness, India, Data Source: ASI
  13. 13. Total Output - Input 1.8 UK 1.6 ME TR HP JK JHOR NA CH 1.4 MN GO RJ KA MH MP AN Totao Output/ Total Input DL PB HR UP TN GJ BHAS KE WB 1.2 1 0.8 0.6 0.4 0.2 0 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 500000 Total Inputs ( Rs in Crore) • The manufacturing sector of Uttarakhand is best able to use its inputs in an efficient manner and has Outputs/Input ratio of 1.6. • The lowest Output-Input Ratio is found is Bihar which is 1.17 and needs to be addressed.© Institute for Competitiveness, India, Data Source: ASI
  14. 14. State-wise Manufacturing Growth 30.0 GO GJ JH % Contribution of Manufacturing in GDP 25.0 TN CH 20.0 KA MH HR PB OR 15.0 UK UP RJ HP AN MP AS WB 10.0 DL KE JK BH 5.0 SK TR AP NA 0.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 CAGR Manufacturing (2006-10) • In states like Goa, Gujarat and Jharkhand, manufacturing contributes to nearly 27% of the total GDP which makes it extremely important for these states to focus on developing policies to foster the development of this sector. • It is interesting to note that manufacturing sector in Odisha and Chhattisgarh had grown by more than 16% against the overall India’s manufacturing growth rate 9.3% for the past five years and driving the future growth of these states.© Institute for Competitiveness, India, Data Source: ASI
  15. 15. Manufacturing: Areas of Concern • Manufacturing in India today requires urgent attention of the policymakers to address the challenges both at the macro and micro level. • There is need to reduce the tax burden especially on the MSME sector to improve their profitability. • More support to enhance the skills of the workers and technology up-gradation is needed from the government. India itself is a very big market due to high demand of manufactured products. • The cost of production has reached extremely high levels with the rising land cost in India which needs to be checked. • The high power costs, lower efficiency and declining availability of quality labor are affecting competitiveness of the Indian manufacturing sector. • Indian manufacturing players needs to pitch on the quality of the product in the western markets rather than focusing too much on the price competition from China.© Institute for Competitiveness, India
  16. 16. Policy Imperatives • The government should adopt the cluster based development strategy to maintain the high growth in the manufacturing sector. • The government needs to develop strategic policy framework to identify and develop innovative clusters which have the great potential in exports and can generate more employment. • There is need to develop investment mechanism to foster public private partnerships to invest in the sick clusters and focus on improving their productivity. • State specific approach towards enhancing the manufacturing competitiveness needs to be adopted. • The clusters which are not export oriented needs to be analyzed that where they can fit in the global value chain of manufacturing. • The manufacturing clusters in India need more marketing and brand building assistance to improve their export competitiveness in comparison to other competitors like China.© Institute for Competitiveness, India
  17. 17. Manufacturing Competitiveness Strategyfor States Each state is at the different stage of development in the manufacturing industry and therefore different strategies need to be adopted to improve the manufacturing competitiveness. Strong Manufacturing States – Innovation Driven Strategy These states need to move towards more technological advancement to improve their efficiency in production. These states should invest in developing advanced skill-sets for manufacturing and become more export competitive. Weaker Manufacturing States- Clusters Development Strategy These states should adopt the cluster based approach focusing on the MSME sector. They need to give more incentives to the industry in terms of tax, power costs and logistics and try to facilitate more private investments in the sector. Medium Manufacturing States- Factors Driven Strategy These states need to focus in lowering down the costs of inputs of production, develop right set of skills and talent and remove barriers in doing business. The states should initiate public private partnership mechanism to attract investments and improve productivity.© Institute for Competitiveness, India
  18. 18. Categorization of States Strong Manufacturing States Gujarat, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, Goa, Haryana, Jharkhand Medium Manufacturing States Chhattisgarh, Himachal Pradesh, Madhya Pradesh, Odisha, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand Weaker Manufacturing States Tripura, Sikkim, Nagaland, Kerala, Jammu and Kashmir, Delhi, Bihar, Assam, West-Bengal© Institute for Competitiveness, India
  19. 19. © Institute for Competitiveness, India