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Manufacturing competitiveness of Indian States


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Manufacturing competitiveness of Indian States

  1. 1. Manufacturing Competitiveness of Indian StatesAnshul PachouriSenior ResearcherInstitute for Competitiveness, IndiaE-Mail:
  2. 2. Defining Manufacturing Competitiveness • Manufacturing Competitiveness is determined by the productivity (value per unit of input) with which the manufacturing sector uses its human, capital and resources. • Manufacturing Competitiveness can be measured at different levels firm, city, state or national level. • Manufacturing competitiveness of a region is dependent on various factors and sub-factors including regulatory structure, business environment, technology sophistication & skills of the workforce.© Institute for Competitiveness, India & Michael. E. Porter
  3. 3. Defining Competitiveness World Economy Broad Economic Areas The business environment at a Group of Neighboring Nations given location is the cumulative outcome of policy at all levels of geography Nation Microeconomic Competitiveness raises the importance of lower levels of geography State, Provinces The allocation of responsibilities across levels of geography is a crucial policy challenge Metropolitan Areas Rural Areas© Institute for Competitiveness, India & Michael. E. Porter
  4. 4. Indicators and Enablers of Manufacturing Competitiveness 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 Business Environment:Manufacturing Context for Firm Strategy and Rivalry National Cheap Imports from other economies, Incentives for Factor manufacturing Demand Conditions Regional Conditions State tax policyNationalAvailability 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. 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
  7. 7. 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
  8. 8. Manufacturing Competitiveness of India: Need of the Study • 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. • 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. • With 75% of the total working population educated till middle school or below, Manufacturing Sector only has the capacity to absorb the large labour pool of the country. (CISCO) • With more than 50% of the total workforce employed in agriculture and generating only 22% of the GDP, manufacturing sector has great potential to employ people and increase income levels. (FICCI)© Institute for Competitiveness, India
  9. 9. Manufacturing Sector in India: An Introduction • India’s manufacturing today is known for its quality, precision and value across the globe. • There is a huge export opportunity for industries such as auto components (US $ 25 billion by 2015), and textile (US $ 50 billion by 2010) which is huge. (CISCO) • With estimated middle class population of 600 million by 2022, there is a huge domestic market in India itself for manufactured products especially consumer goods. • According to KMPG Executive Survey, the manufacturing sector will attract huge investments in coming 2-3 years. • The UN Industrial Development Report puts India as of the top manufacturer. India tops in the production of textiles, chemicals, basic metals, general & electric machinery in developing countries list excluding China. • India is placed second in the Delloite Manufacturing Competitiveness Report. • India has already beaten Brazil in the production of motor-vehicles which is good sign for country’s growth in value added manufacturing.© Institute for Competitiveness, India
  10. 10. India : Sourcing Destination India has big potential to become the best preferred sourcing nation which can be easily understood from success stories below. • Pharmaceutical company AstraZeneca sources active pharma ingredients (APIs) from India for use in its global operations, according to James Chelliah, CFO for branded generics operations at AstraZeneca India. "Over the years [sourcing from India] has been increasing year on year by around 100%. From the sourcing perspective India is ahead of China. • Through a partnership between Suzuki and Nissan, Indian subsidiary Maruti Suzuki manufactures the Pixo model compact car for sale in Europe, according to Mayank Pareek, Maruti Suzuki Indias managing executive officer for marketing & sales. The Indian auto major is likely to start making vehicles for Volkswagen soon; in 2009, the German carmaker bought a 19.9% stake in Suzuki for US$4.5 billion. • At Pfizer India, Thomas Lobo, director of global external supply, says there has been a significant increase in sourcing activity from India with an average annual growth of 35 to 50%. "We source drug formulations, APIs and drug intermediates. India is a leading country in drug product-formulation outsourcing, although we are starting to see competition from other markets, including China.“ (Source: Knowledge@ Wharton, Business Standard)© Institute for Competitiveness, India
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. Labour Productivity in Manufacturing versus Labour Productivityin Agriculture 500 Goa 450 Labour Productivity in Manufacturing (In thousand) 400 350 Haryana Chattisgarh 300 Gujarat Himachal 250 Maharashtra Punjab 200 Jharkhand Uttaranchal 150 Karnataka Andhra Delhi Tamil Nadu Assam Rajasthan Uttar Pradesh Orissa Kerala Madhya Pradesh 100 West Jammu & Kashmir Bengal 50 Bihar Manipur Mizoram Arunachal Tripura Nagaland Sikkim Meghalya 0 0 20 40 60 80 100 120 140 160 180 Labor Productivity – Agriculture (In Thousand)
  17. 17. Emoluments per employee (Manufacturing) Vs Net Valueadded per employee ( Manufacturing) 1400000 Uttarakhand 1200000 Net VAlue Added Per Employee (Manufacturing), ASI Himachal Pradesh Chattisgarh 1000000 Meghalaya Goa Jharkhand Odisha Maharashtra 800000 Jammu & Kashmir Madhya Pradesh Gujarat 600000 Rajasthan Karnataka Bihar 400000 Haryana Andhra Pradesh Uttar Pradesh West Bengal Delhi Punjab Tamil Nadu Kerala Assam 200000 Nagaland Tripura Manipur 0 0 50000 100000 150000 200000 250000 Emoluments Per Employee for Manufacturing
  18. 18. Manufacturing : The China Factor • China is losing its competitive edge in low-cost manufacturing like toys and garments which is moving to other low-cost locations like Vietnam, Indonesia & Sri-Lanka. • In high-end manufacturing where design plays a critical role, India will have a positive edge over China due to their precision techniques and high quality. • Lower costs alone will not tilt the scales, however. Many Western companies head to India for outsourcing manufactured parts and sub-assemblies because China lacks the required expertise. (Knowledge @ Wharton) • Dumping of cheap products in India from Chinese firms had a huge negative impact on Indian domestic Industry in the past especially in consumer goods category.© Institute for Competitiveness, India
  19. 19. 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
  20. 20. Manufacturing: Challenges Faced • Low labor productivity as compared to Asian counterparts. CEOs of the leading export companies think that their productivity is atleast half or one-third of Chinese firms operating in same sector. (CISCO) • Building world-class infrastructure is again a big challenge to support high manufacturing growth. • Indian Manufacturers are operating way beyond their potential and capability. • Insufficient return on Cost of invested capital. • No presence of intelligent production planning • Rising commodity prices and raw material costs. • Low labor productivity. • Lack of efficient capital expenditure decisions and management • Lack of reforms in land, labor and operating environment© Institute for Competitiveness, India
  21. 21. Manufacturing : Opportunity The key sectors which promises a huge and attractive opportunity for the Indian manufacturing sectors are mentioned below. High Technology Exports Clean Technology – Wind, Bio-fuels Heavy and Light Tech Products – Aerospace, Defence Auto & Auto-components Consumer Goods – Textiles, Leather etc© Institute for Competitiveness, India
  22. 22. Ranking Manufacturing Competitiveness • Extensive use of hard data to reflect on Secondary Research performance of states and reduce sampling errors and personal biases. • Selection of indicators & grouping is done in Identification & Grouping of way that inform overall policy for corporate to Indicators take informed decisions while establishing strong framework for assessing policies at Development of Framework for various levels in the manufacturing sector. Analysis • Calibrated weights are applied to the set of indicator values to generate an overall Index Analysis & Calculation of Index score • Principal Component Analysis is used to defining weights for the indicators so as to Rankings of States take care of multi-collinearity • First time index is developed hence Defining Strategy for companies comparison with past rankings is not and policy imperatives for available. This would evolve over a period of government time© Institute for Competitiveness, India
  23. 23. Key Deliverables of the Manufacturing Competitiveness Index • Assess all states of India on manufacturing competitiveness and come out with an integrated index grounded in academic research and measured through hard data • Presents a comprehensive framework of analysis for measuring the manufacturing competitiveness of the states & concentrate on understanding determinants of productivity in the manufacturing sector. • Identification the key pain areas in the states which are affecting the manufacturing sector in their region Capturing basic insights about state performance in manufacturing. • Key strategies with which the companies can increase their productivity in the manufacturing sector in different parts of the country. • Implications & suggestions for the policymakers & key government agencies to enhance the manufacturing competitiveness of their region.© Institute for Competitiveness, India
  24. 24. Manufacturing Competitiveness Framework Factor MSME Industry Conditions Performance Factors Economic Clusters Innovation Conditions Institutional Business Support Environment© Institute for Competitiveness, India
  25. 25. Manufacturing Competitiveness Framework Manufacturing Competitiveness Score ( Manufacturing Productivity) = W1* Factor Conditions Sub-Index score + W2* MSME Performance sub-index score + W3*Industry Factors Sub-Index score + W4* Economic Conditions sub-index score + W5* Clusters Sub-Index score + W6 * Innovation sub-index score + W7* Institutional Support Sub-Index score + W8 * Business Environment sub-index score© Institute for Competitiveness, India
  26. 26. Factor Conditions Availability of Communication Human Capital Infrastructure Credit Credit given to the Road, rail and air Availability and Number of manufacturing infrastructure; access to employees and sector by different availability of internet, telecom workers engaged types of financial power, pollution, services that in different institutions. quality of include land line industries in healthcare et al access as well as manufacturing, pr cellular esence of access, personal vocational training computers etc institutes and excellence centres© Institute for Competitiveness, India
  27. 27. MSME Performance Export Credit & Loans Sickness Productivity Performance Productivity of Exports per Credit and Loans Percentage of labour, output enterprise from both institutional MSME enterprises from plant and the MSME sector. and non- which are sick and machinery. Gross Major industries institutional in suffering from in- Valued Added per contributing to nature. Interests debtedness. per enterprise in the exports and paid and the MSME sector. firms percentage of performance. enterprises which have taken the loan.© Institute for Competitiveness, India
  28. 28. Industry Factors Diversification of Productivity Cost Composition Profitability Capital Formation Factories Productivity of Share of materials Profits and Capital Formation Number of labour, output used and fuels in Income made at done at the sector factories which from plant and the total inputs the factory and and firm level. are currently machinery. Gross and costs. The industry level. operating in Valued Added per amount of interest Total amount of different per factor in the paid and amount debt and debt industries in the industry sector. spend of plant & servicing at the manufacturing machinery. factory level. sector.© Institute for Competitiveness, India
  29. 29. Economic Conditions Difference in Manufacturing State GDP GDP Composition Per capita GDP Manufacturing Growth Rate and other sectors Size of the Division of GDP in Short-term and Per capita GDP of Difference in the economic output various sectors long-term growth the state and growth rate of the of the state. like rate of the share of the manufacturing manufacturing, se manufacturing manufacturing per sector in rvices and others. sector. capita GDP in comparison to overall per capita other sectors. GDP.© Institute for Competitiveness, India
  30. 30. Clusters People Employed Total Number of Nature of Categorization of Type of Clusters in Different Clusters Operations Clusters Clusters Total Number of Different types of Clusters operating Division of clusters Total Number of clusters both clusters in in seasonal, casual like people engaged in services, manufact different and full-time micro, medium different clusters uring and industries existing modes. and small in the state. repairing clusters. in the state. enterprises in various industries.© Institute for Competitiveness, India
  31. 31. Innovation Technical-Know Quality Patents & Technology Used R & D Institutions how Certifications Trademarks Source of Status of Number of quality Total number of Presence of technical-know technology used certifications patents and research and how of the by the taken by the trademarks taken development manufacturing manufacturing manufacturing by the institution, excelle firms like firms like latest or firms in the state. manufacturing nce centres. abroad, domestic outdated. companies in the companies and state. R&D institutions.© Institute for Competitiveness, India
  32. 32. Institutional Support Assistance in State Government Special economic Support in Exports technology up- Banking Support Incentives zones gradation The different Initiatives taken by Different supports Dedicated special Lower interest policy initiatives the state and assistance economic zones rates given by taken by the state governments to provided by the for manufacturing various financial government to increase the state government sector and their institutions for the support the growth of exports for technology up- performance. manufacturing manufacturing of the gradation like firms. growth. manufacturing interest free loans sector. for manufacturing enterprises.© Institute for Competitiveness, India
  33. 33. Business Environment Registered Lock-out and Doing Business Political Regulatory Investments Industry Disputes Conditions Conditions Environment Bodies Total Number of New investments Time taken to Number of Crime and safety Quality of lock-outs and that are expected start a business. Industry Bodies in the bureaucracy, prote disputes occurring to come in the Operating operating in the state, political ction of investors in the factory states through conditions and state and their stability and rights and sector in the letter of intents costs involved in effectiveness in effectiveness of intellectual states. and foreign taking clearances bringing problems the government in property rights. projects approved. and procedures of the implementing Burden of involved. manufacturers to reforms and take regulations the government. decisions. including environment.© Institute for Competitiveness, India
  34. 34. Manufacturing Competitiveness Strategy for 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
  35. 35. 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
  36. 36. 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
  37. 37. Manufacturing: Steps Needed • Supportive policies for the manufacturing sector which eases land acquisition & labor employment. • Focus on growing domestic demand especially in the consumer goods sector. • New Business models which can fit in global manufacturing value chain. • Invite global manufacturing giants to come in & invest in India to cater Asian market easily. • Investment in Skills development centers and vocational training centers through Public-Private partnership model. • Provide support infrastructure in key manufacturing targeted clusters. • Focus on improving the cost competitiveness of the manufacturing sector • Marketing support for the firms to increase their exports in big markets. • Ease the doing business conditions in manufacturing sector to attract fresh investment and improve overall competitiveness of the sector.© Institute for Competitiveness, India
  38. 38. Manufacturing: Steps Needed Building world class Infrastructure (Dedicated freight corridors, Roads, Power etc) People and Skills Development (Vocational Training Institutes, More Training Facilities) Sophisticated use of IT for supply chain management Supportive Policy Investment in R&D (Inviting Companies, Soaps & Tax Holidays) Technology & IPR (More Incentives needed) Best business practices Enhance the Investment Climate in manufacturing sector in Indian States© Institute for Competitiveness, India
  39. 39. Innovation in Manufacturing The manufacturing firms in India needs to capitalize innovation to increase their competitiveness in global manufacturing. The present needs of various innovations needed by manufacturing companies are presented below Innovation in Sourcing of Raw-Materials Process Innovation Decreasing the Product Development Life Cycle Business Model Innovation New Management Techniques Technological Innovation© Institute for Competitiveness, India
  40. 40. © Institute for Competitiveness, India