India and the Global Competitiveness Index 2016

The 2016 Global Manufacturing Competitiveness Index (GMCI), by Deloitte Global and the Council on Competitiveness in the United States  shows the ongoing influence manufacturing has on driving global economies.

China tops the list of manufacturing nations again while India stands 11th. However, by 2020 all three North American nations and five Asia Pacific nations (China, Japan, South Korea, Taiwan, and India) are expected to factor in the top 10 leaving the two remaining spots for Germany and the United Kingdom to represent Europe. India is projected to be ranked 5th.

The five Asia Pacific nations of Malaysia, India, Thailand, Indonesia, and Vietnam (MITI-V aka the “Mighty Five”) are expected to pierce the top 15 nations on manufacturing competitiveness over the next five years. These nations could represent a “New China” in terms of low cost labor, agile manufacturing capabilities, favorable demographic profiles, market and economic growth, with their competitiveness ranking rising in the next five years as China continues to shift its focus towards a higher value, advanced technology manufacturing paradigm.

The 2016 study looked more closely  at six “focus” nations: United States, China, Japan, Germany, South Korea, and India. Collectively, these countries account for 60 percent  global GDP.

Excerpts from India Section

Manufacturing CEOs appear to acknowledge the change in political direction brought on by a new Indian government and foresee an improvement in India’s competitiveness ranking as new initiatives, such as “Make in India” and “Skill India,” take hold over the next five years. Though challenged with poor infrastructure and historical governance issues, India has worked to further enhance its manufacturing competitiveness by setting an ambitious target of increasing the contribution of manufacturing output to 25 percent of its GDP by 2025.

India has a  highly skilled workforce and a rich pool of English speaking scientists, researchers, and engineers.   However, the country remains challenged by poor infrastructure and a governance model that is slow to react which may affect the speed with which it can support higher growth. As 43 percent of its $174 billion in manufacturing exports require high-skill and technological intensity, India may have a strong incentive to solve its regulatory and bureaucratic challenges if it is to strengthen its candidacy as an alternative to China.   The report further notes that in India, growth in middle class populations has led to significant increase in domestic consumer demand which has created attractive new markets and new consumers to penetrate.

India’s manufacturing highlights:

  • India’s manufacturing as percentage of GDP stood at 12.9 percent in in 2013.
  • India contributed 2.1 percent to the global manufacturing output in 2013.
  • India’s manufacturing exports grew by 14.4 percent CAGR over 2010-2013 period and were at $172 billion in 2013.

Advantages to manufacturers:

  • Skilled, low-cost labor force:
  •  India has a rich talent pool of scientists and researchers offering cost-efficient R&D.
  •  India has an abundant availability of engineers and English-speaking workforce aid in the growth of services as well as manufacturing industry.
  • Manufacturing labor costs in India (estimated at $1.72/hour in 2015) are among the lowest in the world.

Higher economic growth:

Real GDP grew 7.3 percent in 2014 and 2015 and is likely to continue to grow at 7.5 percent rate in 2016 and 2017, making India one of the fastest growing economies in the world. On the other hand, Chinese economy slowed down from 7.3 percent growth in 2014 to 6.9 percent in 2015 and will likely moderate further to 6.3 percent and 6 percent in 2016 and 2017, respectively.

To tap this opportunity, global manufacturers are setting up plants in India, bringing the latest technology, and competing with the local manufacturers. Competition between the foreign multinationals and local companies pushes companies to improve productivity and also encourages them to invest more in innovation.

Government support to boost manufacturing:

The new government under Prime Minister Narendra Modi that came to power in May 2014  started “Make in India” campaign to attract manufacturing investments.  The government plans to ease doing business in India by doing away with unnecessary approvals, developing industrial corridors and smart cities, and by allowing higher FDI.

Challenges

Poor infrastructure and governance issues:

  • Large  investments are needed to improve the transport network and power supply in the country. Logistics and transportation cost in India is high at 14.4 percent of GDP compared to less than 8 percent spent by the other emerging countries.
  • Indian government is facing headwinds in passing Land Acquisition Act of 2015, which makes land acquisition easier. Delays in land acquisition and environmental clearances have stalled more than 270 projects across the country.
  • Labor reforms is another contentious issue which the Indian government needs to tackle to attract investments. India has one of the most rigid labor markets in the world, according to World Bank.

High non-performing assets (NPA) stalling credit growth:

Gross NPA’s in the Indian banking system could jump up to 5.9 percent in FY 2016 from 4.4 percent in FY 2015, as restructured loans turn bad. Banks have become more cautious in granting new loans with nonfood credit growth slowing down to just 10.4 percent for the fortnight ended March 06, 2015 from a high of more than 30 percent witnessed in 2006. In addition, many infrastructure projects that were commissioned in the heydays of boom were struggling to repay the loans, depriving the sector of more bank funds. All these are leading to a vicious cycle of poor credit offtake, low manufacturing growth, and muted investments in infrastructure.

Things to watch out

Passage of GST bill:

Goods and Services Tax (GST) unifies the country by having a single taxation system for all goods and services. GST will eliminate multiple indirect taxes, such as octroi, central sales tax, state sales tax, etc., thus simplifying the taxation process. Having a GST instead of multiple taxes is likely to result in lower costs for manufacturing products, making them internationally competitive.

Demographic dividend:

India’s share of global working age population is expected to increase from 17.8 percent in 2015 to 18.8 percent by 2050. However, employability has become a concern as only 5 percent of workers have formal skills training. The Indian government has started the ‘Skill India Initiative’ to address the skills shortage and equip 400 million workers by 2022.

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Posted on by Gunjan Bagla
Gunjan Bagla
California-based management consultant Gunjan Bagla runs Amritt, a consulting firm helping American companies to succeed in India. Amritt is the trusted advisor for India market research, India business development, India market entry, Global Engineering, Global Technology Scouting, India R&D and Open Innovation. Gunjan is author of "Business in 21st Century India: How to Profit Today from Tomorrow’s Most Exciting Market" (Hachette Book Group, 2008), Amazon's top rated title on the subject. He has appeared as the India Expert on BBC Television, Bloomberg TV, Fox Cable Business and has been quoted in the New York Times, the Los Angeles Times, the Hollywood Reporter and Business Week for his expertise on India.

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