This paper provides an analytical abstract of various parameters of manufacturing competitiveness of the Indian economy. India's manufacturing exports have risen impressively in the past decade or so and found to be directly linked to the world GDP and inversely related to real effective exchange rate (REER). Indian manufacturing industries have certain inherent strengths and advantages in having a relatively inexpensive, adequate and skilled labour force, cost-effective and competitive prices of goods produced, large manufacturing base and proximity to fast growing Asian markets. India is one of the leading producers and exporters in a number of commodities and enjoys significant advantages in terms of lower labour costs as compared to other economies. Nevertheless, India's competitiveness is lost on account of lower labour productivity and higher input and material costs. To improve the competitiveness of the Indian manufacturing goods, issues like further diversification of export basket, upgradation of export quality, improvement in productivity, increased technology intensity in production, enhanced R&D activity, encouraging business environment, less cumbersome regulatory environment, flexible labour laws, removal of infrastructural bottlenecks and SME related issues need attention of all concerned.

JEL Classification : F 230, L 150, L 600, O 570

Keywords : Manufacturing sector, Competitiveness

Sustained increase in competitiveness of an economy is a hallmark of economic strength and stability of that economy. Worldwide, there has been an increasing awareness, especially among emerging market economies (EMEs), about the need to strive for improved competitiveness to face the realities of the globalised trading environment. In the case of India, such recognition is reflected during the recent years, particularly in the constitution of National Manufacturing Competitiveness Council.

At the current juncture, the Indian economy is at the threshold of entering the big league through a crucial turnaround in its performance. Such a turnaround has been reshaping India's image as one of the emerging economic powers in the world. India has recognised the opportunities stemming from globalisation and accordingly revamped its policies to promote industry and services sectors. India's ability to compete on the global stage is amply demonstrated by the boom in information technology and software services. India has emerged as a destination for outsourcing of not only information technology enabled services (ITES) but also a host of other services including certain manufacturing activities such as automotive components, pharmaceuticals, textiles, etc. India is fast establishing its image as a competitive economy the world over, which assures low-cost and high-quality products. In the recent years, it has achieved certain landmarks in the manufacturing sector. Amongst them, the most important has been the rise of Indian MNCs, which have been on expanding mode and acquiring companies abroad and developing their production base in other countries. In addition, Indian firms are exporting services ranging from call centres to medical diagnostics and tutoring American high school students. In this backdrop, Indian economy could be larger than all the countries in the world other than the US and China in another 30 years and India's growth will remain above 5 per cent through the period (Goldman Sachs, 2003).

Against this setting, this paper makes a modest attempt to assess the competitiveness of India's manufacturing sector, its relative position among the countries of comparable economic size, its strengths and vulnerabilities, the issues to be addressed to strengthen India's competitiveness and to suggest some policy preferences. The scheme of the paper is as follows. Concept and benchmark indicators of competitiveness based on some literature survey is presented in

Section I. Section II analyses the dynamics of India's manufacturing sector exports. Section III critically evaluates India's manufacturing sector competitiveness based on specific factors like openness, unit labour cost, labour productivity and national innovative capacity. A micro-level analysis on the competitiveness of select manufacturing commodities of export importance for India has been set out in Section IV. Section V identifies the critical issues faced by the Indian manufacturing sector while competing in the global market and suggests some measures to improve India's competitiveness. Concluding observations are drawn in Section VI.

At micro level, it is relatively easy to define competitiveness of a firm, which is the ability to do better than comparable firms in sales, market share or profitability; but competitiveness of a country is interpreted broadly on development or growth strategy. However, a narrower, more tractable, definition is to take the country's ability to compete in international trade. Thus, a country may be termed competitive if it is able to sell its products at a lower (or same) price and earn the same (or higher) return as its competitors. Variables such as remuneration of factors of production, exchange rate and productivity through the use of better technical skills and human resource development as also economies of scale are having greater influence in deciding the extent of competitiveness of export products in the globalised setting.

OECD defines competitiveness as the degree to which a nation can, under free trade and fair market conditions, produce goods and services, which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long-term. The World Economic Forum (WEF) defines competitiveness as the ability of a country to achieve sustained high rates of growth in GDP per capita. According to National Competitiveness Council (in USA), competitiveness is the ability to achieve success in markets leading to better standards of living for all. According to it, competitiveness is a concept that is important at a range of levels, from the level of an individual firm to the level of an industry, from the level of a small local region to the level of an association of nation states.

The concept of competitiveness, thus, can contribute to an understanding of the distribution of wealth, both nationally and internationally, if it is recognised that it can be applied at both the enterprise and the country level; when applied at the enterprise level, it relates to profits or market shares; when applied at the country level, it relates to both national income and international trade performance, particularly in relation to specific industrial sectors that are important in terms of employment or productivity and growth potential (UNCTAD, 2004a).

There are two leading surveys on competitiveness at global level that document competitiveness of economies on a regular basis, viz., Global Competitiveness Report [by the World Economic Forum (WEF), Switzerland] and World Competitiveness Yearbook [by International Institute for Management Development (IMD) of Lausanne, Switzerland]. The WEF first introduced Global Competitiveness Report 2001-2002 in 2002, which has since then become an annual publication. The report uses two concepts of competitiveness: Global Competitiveness Index (GCI) and Business Competitiveness Index (BCI). The GCI aims specifically at gauging the world's economies in achieving sustained economic growth over the medium to long-term. Three indices are used for computing GCI, viz., the macroeconomic environment index, the public institutions index, and the technology index. BCI complements the GCI, with its special emphasis on the underlying microeconomic conditions defining the current sustainable level of productivity in each of the countries covered. The underlying concept being that, while macroeconomic and institutional factors are critical for national competitiveness, these are necessary but not sufficient factors for creating wealth. Wealth is actually created at microeconomic level by the companies operating in the economy. The BCI evaluates two specific areas, which are critical to the business environment in each country - the sophistication of the operating practices and strategies of companies, and the quality of the microeconomic business environment in which a nation's companies compete.

In terms of global benchmarking parameters, Global Competitiveness Report 2006-2007 has ranked India at the 43^rd position among 125 economies in terms of the GCI (Table 1). Thus, India has moved two steps higher than the ranking received during 2005. The Indian economy has been progressively integrating with the global market since the initiation of economic reforms in the early 1990s. This has facilitated substantial improvement in the competitiveness of the economy. According to GCI, Singapore, Korea, Malaysia and Thailand are more growth competitive than India. India received significantly higher rankings with regard to Business Competitiveness Index at 27^th amongst 121 economies, recording an improvement by 4 positions. India's business competitiveness as in 2006 was better than some of the EMEs such

as China, Mexico, Indonesia, Philippines and Russia, though it lagged behind other economies such as Singapore, Korea and Malaysia.

According to the World Competitiveness Yearbook 2006, India ranked 29^th among 60 major countries and regions in the world. This is 10 notches up from the 39^th rank India achieved in the previous year (Table 2). As per the rankings, Singapore, Malaysia and China are more competitive than India.

In addition to the overall competitiveness of economies assessed by the WEF and IMD, United Nations Industrial Development Organisation (UNIDO) also published in its annual report, the competitiveness of the industrial sector of a number of economies and their ranking. The UNIDO's Competitive Industrial Performance (CIP) ranking is a benchmark for industrial activity comprising four variables, viz., manufacturing value added per capita, manufactured exports per capita, industrialisation intensity and export quality. Industrial competitiveness ranking of a majority of the South East Asian countries are higher than India. India's rank has slipped down from 36 in 1990 to 40 in 2000 among the list of 93 countries (Table 3).

Before analysing the parameters that determine the competitiveness of the Indian manufacturing sector, it would be useful to understand the dynamics of growing export performance of the Indian manufacturing sector. Manufacturing exports dominate the export basket of the Indian economy and account for nearly 70 per cent of the total merchandise exports. The Indian manufacturing exports have risen faster since the Indian economy started opening up in the 1980s. The manufactured exports as a percentage of India's GDP has increased from 2.5 per cent in 1983-84 to 9.1 per cent in 2006-07 (Chart 1). The depreciation of Indian Rupee since the 1980s, along with liberalisation measures in the trade and exchange rate regimes have contributed to the growth of manufacturing exports of the country. Furthermore, growing integration with the world economy has also aided the expansion of the manufactured exports. It would be worthwhile to revisit the factors that have contributed to the growing exports of the economy.

Several studies have established a significant relationship between export performance and the real exchange rate in India. Joshi and Little (1994) attributed a considerable part of the success in export expansion during the second half of the 1980s to the real exchange rate depreciation. They argue that the depreciation of the real exchange rate by about 30 per cent between 1985-86 to 1989-90 was a critical factor in driving India's exports. Srinivasan (1998) analysed India's exports over 1963-94 and found that real exchange rate appreciation negatively affects export performance. Besides exchange rate, global GDP has also been found to have a positive association with increasing exports of India. In the light of these studies, we would assess the role of these variables in driving India's manufacturing exports.

To begin with, the role of Real Effective Exchange Rate (REER) in driving India's manufacturing sector exports is assessed. For analysing this relationship, we take inverted-REER, which is the reciprocal of REER. The inverted-REER eases the visual introspection so that an increase in REER reflects depreciation, while a decrease appreciation. The near co-movement of manufacturing sector exports and inverted-REER for most of the period (during 1980-81 to 2003-04), validates that REER has been one of the factors in determining our exports (Chart 2). The correlation between the manufacturing

exports and inverted REER is found to be high at 0.66. This indicates that change in REER significantly affects the manufactured exports. The years 2002-03 and 2003-04, however, appear to be aberrations, wherein the exports have increased despite the appreciation of the Rupee. This perhaps suggests that India's manufacturing sector exports are becoming more competitive in the global economy.

Apart from REER, global GDP has also been found to be affecting the India's manufacturing sector exports. It is observed that for most of the period since 1980s, there has been a co-movement of growth in manufacturing exports and global GDP growth (Chart 3). During 1999-2000 to 2004-05, a significant correlation of 0.56 was observed between India's manufacturing sector exports and the global GDP growth, which suggests that the former has started depending upon the latter.

We tried to estimate an empirical relationship among manufacturing exports, REER, and world GDP for the period 1980-81 to 2003-04 through a regression analysis using ordinary least squares (OLS). In the estimate, we found a relationship wherein the manufactured exports (dependent variable) depend positively on world GDP, and negatively on the real effective exchange rate. In the estimation exercise, the variables were log-transformed. A dummy

variable (DUM) was also introduced to capture the effects of devaluation of Indian Rupee (in 1991) on manufacturing exports. DUM assumes a value equal to 1 in 1991 and is 0 for the rest of the years. The estimated relationship is as follows:

LMFGXt = 0.45 LWGDPt - 0.37 LREERt + 0.71 LMFGXt-1- 0.15 DUM
(2.73) (-2.61) (6.26) (-2.05)

Adj. R² = 0.988,
DW-Statistics= 1.33

where, figures in parentheses indicate the t-statistics.

LMFGX = Log of Export Volume (expressed in US dollars)
LWGDP = Log of World GDP
LREER = Log of Real Effective Exchange Rate
DUM = Dummy to capture the devaluation of Indian Rupee in 1991.

The results are on expected lines. Manufacturing exports were found to be positively associated with global GDP. The elasticity estimate suggests that a 10 per cent rise in global GDP enhances India's manufacturing exports by 4.5 per cent. The negative elasticity of export demand with respect to REER during the period implies that the real appreciation of the rupee adversely affects India's manufactured exports.

At a micro level, several studies have been made to assess the competitiveness of India's manufacturing sector. The CII and the World Bank jointly carried out a study in 2002 using various parameters such as investment climate (Government effectiveness, rule of law, graft, and political instability and violence); labour costs; regulatory regime; interest costs; energy costs; delays at custom houses, etc., to measure the competitiveness of the Indian manufacturing sector. For the present study, we have used the following parameters to make a comparative analysis of India's competitiveness vis-à-vis other economies of comparable economic size, particularly the Asian countries.

Openness of an economy can be related to its permissiveness towards cross border movement of goods, services and other factors of production. An increased openness implies higher trade flows and availability of wider range of goods and services to choose from, often at more competitive prices. Also, international trade and investment flows will increase the access to newer and more innovative technologies, which can, in turn, lead to productivity improvements.

Trade openness of an economy has two distinct dimensions - ex-post openness and ex-ante openness. Ex-post openness of an economy refers to the actual inflow of imports and outflow of exports. Ex-ante openness of trade of an economy, on the other hand, relates to the permissiveness of its policy towards exports and imports like levels of tariff and non-tariff measures applied by the country on cross-border trade flows.

We first begin with ex-post openness analysis, which is simply based on the actual trade flows such as the share of trade in GDP or the growth rates of imports and exports. Trade openness measured as the ratio of sum of exports and imports to GDP reveals a continuous increasing trend in India's trade openness since 1987-88. India's openness increased sharply from 15.7 per cent in 1990 to 31.8 per cent in 2003 in the aftermath of economic reforms in the country. However, when compared to other EMEs in Asia such as China, Korea, Malaysia, Thailand, Vietnam, etc., India was not found to be a highly open economy as its trade-GDP ratio is much lower. Even the average tariff rate in India is much higher than these economies. Nevertheless, in terms of economic freedom, when compared with other EMEs in Asia, India is found to be at par with these economies. In terms of investment flows as well, India has lagged behind many of these EMEs (Table 4).

The ex-ante openness is measured by trade barriers. The direct measure of trade barriers includes inter alia average tariff rates or

coverage ratios for non-tariff barriers. India's customs tariff rates have been declining since 1991. The peak rate has come down from 150 per cent in 1991-92 to 40 per cent in 1997-98. In compliance with the WTO requirements, the basic customs duty has further been reduced to make it at world competitive level. The Union Budget 2007-08 has reduced the basic customs duty to 10.0 per cent. Average customs tariff rates, however, remain among the highest in the world. As per the World Development Indicator 2007, out of a set of 132 countries for which data on (simple) average customs tariffs were available, India had one of the highest average tariff rates (Table 5). In terms of weighted mean tariffs also (weighted by the country's trade with each of its trading partner), India has the highest tariff in terms of all products including manufactured products.

The collection rate indicates the incidence of customs duty and also levies/duties other than customs tariffs, which are not in the protective tariffs, viz., special additional duty on imports levied to offset the incidence of domestic trade taxes other than union excise duty borne by domestic producers, countervailing duty on import of goods meant to offset incidence of excise duty on similarly produced indigenous goods. It not only captures the element of protection due to customs duties but also the incidence of other duties/levies, which are in the nature of offsets to mitigate the impact of host of domestic levies for which producers cannot avail of any credit. Collection rates since the 1990s have declined substantially across all commodity groups in India. The most significant reduction in collection rates was observed in 'chemicals', 'man-made fibre' and 'metals' (Table 6).

Import duty collection rates in India remain one of the highest in the world. According to the World Trade Report 2003, (WTO), the ratio of duties collected to imports in India, even during the post 1990s, has been far higher than those levied by other comparable countries. The average import duties collection ratio was much lower at around 3 - 5 per cent in China, Malaysia, Indonesia, Korea and Thailand whereas in India, it was about 24.5 per cent in 1995-2000 (Table 7).

As regards non-tariff barriers (NTBs), any levy other than customs duty or charges may be categorised as non-tariff barriers, which is generally grouped into: (i) import policy barriers; (ii) standards, testing, labelling and certification requirements; (iii) anti-dumping and countervailing measures; (iv) export subsidies and domestic support; (v) Government procurement; (vi) service barriers; (vii) lack of adequate protection to intellectual property rights; (viii) other barriers. Over the years, the NTBs applied by India have been drastically pruned. NTBs in the form of prohibited, restricted, canalised imports and imports requiring special import

license have been cut down and an increase in number of items have been put in the list of freely importable items (Table 8).

Notwithstanding this cut in NTBs, India has one of the highest levels of NTBs among the EMEs. As per the WDI 2005, India had the highest ad valorem equivalent of NTBs at 3.2 per cent followed by Brazil at 2.4 per cent (Table 9).

Taking into account various measures of openness, it is inferred that though India is increasingly becoming an open economy, it lags behind some of the EMEs owing to its higher tariff, import duty, and collection ratio and high level of NTBs.

Another important indicator of competitiveness is the unit labor cost in manufacturing, since labour represents the most important non-traded input in manufacturing activity. Labour costs are also the most easily quantifiable, compared to the cost of capital. Unit labour cost (ULC) is defined as total compensation, C, per hour employed, H, divided by productivity, where the latter is measured as total output (O) per hour employed (Hooper and Larin, 1989). It could be represented as ULC = (C/H) / (O/H).

A rise in a country's ULC relative to other countries leads to a decline in its competitiveness, which would translate into lower global market share. However, empirical evidence suggests that over the long-term, market share for exports and relative unit costs or prices tend to move together (Kaldor paradox). The central problem concerning inter-country comparisons of labour costs is how to translate the costs calculated for individual countries into comparable or common currency units. For the present analysis, the wage rate and ULC, as published in a research article by the Asian Development Bank, has been used. In terms of ULC, as in 2000, India had a competitive edge over Singapore and Korea (Table 10).

On comparing the unit labour cost of few commodities in some EMEs, it is found that except clothing, unit labour cost in India is higher in commodities like food products, textiles, electrical machinery and transport equipments (Table 11). In the case of food products, though unit labour cost in India has declined from 1.74 in 1980 to 1.29 in 2000, it is still higher as compared to other competitors. In textiles, unit labour cost in India not only increased during 1980-2000 but also remained high among some of the EMEs. The unit labour cost in case of electrical machinery though decreased during 1980-2000, it remained higher than Brazil, Indonesia, Philippines, Korea and Thailand. In transport equipment as well, unit labour cost has not only increased in India during the period but also remained the highest amongst these economies.

A comparison of annual wage rates in India with other EMEs reveals that it is much lower than that of Thailand, Singapore, Philippines, Malaysia and Korea (Table 12). However, as in 2000 annual wage rate in Indonesia was found to be much lower than that of India. Labour productivity in Indian industry is also found to be lower. The Investment Climate Survey data (Chart 4 & 5), show that the manufacturing value added per worker and

manufacturing wages per worker were lower when compared to China and Brazil. Nevertheless, India is fast catching-up with other economies as there have been impressive gains in labour productivity growth in the country. Labour productivity growth in India during 1995 to 2001 has all along been better than some countries like Korea, Philippines, China, Japan, Malaysia and Singapore, thus, indicating an increasing level of competitiveness vis-à-vis these economies (Table 13).

International competitiveness increasingly depends on innovation. Local companies’ ability to acquire and deploy technology from around the world cannot sustain competitiveness over a longer period. With the erosion of traditional barriers to entry, competitiveness flows from the ability of companies in a nation to create and then globally commercialise novel products and processes and shift higher-up the innovation frontier as fast as rivals catch up. According to WEF, national innovative capacity is composed of four broad elements, viz., common innovative infrastructure, cluster-specific conditions, quality of linkages and company innovative orientation that define how location shapes the ability of a company to innovate at the global frontier. Overall, it is observed that there exists a strong co-relation between Innovative Capacity Index (ICI) and Business Competitiveness Index (BCI), with some exception. India’s ICI as in 2003 lagged behind Korea, Malaysia, and China. However, in terms of innovation in policy, linkages and strategy, India is ahead of China. In terms of innovative capacity, India also has a competitive edge over Thailand and Indonesia. On the whole, India’s weakness in innovative capacity highlights the fact that it has to put in strenuous efforts to transform from a low technology producer to a high technology cost effective producer (Table 14).

India is one of the leading producers of a number of commodities in the world. India has been a leading producer of textiles, non-metallic mineral products, chemical and chemical products and basic metals amongst the developing countries. It is placed among the top-15 producers in the world in textiles, apparel, leather products, wood products, paper, chemicals, petroleum products, rubber products, non-metallic mineral products, basic metals, metal products, and transport equipments (Table 15). However, the country is facing close and stiff competition from a host of countries, including China, Korea, Singapore, Thailand, Malaysia, Brazil, Mexico, etc., for these commodities (Table 16).

When we look at the commodity-wise labour productivity, it is observed that India has the lowest labour productivity among the select countries in the case of food products (Table 17). It is also observed that input and material cost remained the highest accounting for more than 88 per cent of total value of the output in India. The operating surplus remained the lowest – even less than 10 per cent of the total value of output. On the other hand, except Singapore, the operating surplus in case of other countries had been in excess of