enhancing prosperity

WHITEPAPER ON COMPETITIVENESS OF INDIA

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INTRODUCTION The Asia Competitiveness Forum was held on April 26 & 27, 2012 in Delhi (National Capital Region), India at Hilton, Janakpuri. The forum was organized in conjunction with The Competitiveness Institute (TCI), OECD LEED, NSDC, GIZ and MSME. The Forum covered topics related to competitiveness such as ▪▪ Economic Development: Economic Development: Reconfiguration, World, Asia, Regional Competitiveness, Urban Competitiveness, Locations, India ▪ ▪ Prosperity: Wealth, Equitable Distribution, Disparity, Wealth Creation, and Clusters ▪ ▪ Shared Value Creation: Business, Society, BOP, Cooperatives, and Business Models This whitepaper has emerged from the deliberations of the Competitiveness day of the forum. Broadly 5 topics were discussed during the competitiveness day of the forum and are as follows ▪▪ Asia as a driver for world economy: Dividend, Aging, Prosperity, Growth Engine, Value, Arbitrage, and Changing Role of Capitalism ▪▪ Manufacturing Competitiveness: Multiplier effect, next paradigm of growth for India, employment generation. ▪ ▪ The Role of Business in Society: Shared Value, Economic Objectives, Social Objectives, and Philanthropy et al ▪ ▪ Clusters as a tool for wealth creation: Emergence of clusters in India, Productivity, Diffusion, Innovation, Seeding Clusters, Trade, Cluster Portfolio, Specialization Patterns, Technology Clusters, Cluster Composition, Internationalization ▪ ▪ Regional Competitiveness & Process of Economic Development: Provinces, Vision, Value Proposition, Competition within States, Business Environment, Strategy, Sustainability, Stages of Competitive Development

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Asia as a Driver of World Economy Over the past several decades, the Asian economies have been contributing actively to the world’s total GDP, with India and China as the majoris contributers. History has amply evidenced that sovereignty, stability and peace are the most important drivers of any economy and a nation becomes prosperous when there is stability and peace. If we look back, we observe that the historical period which has been described as a Golden age, has always encouraged free sharing of ideas. For instance, the Indian experience indicates that in The Guptas, Harshwardna, Chola and Krishandev Rai periods, academicians and scientists were an integral part of the king’s court and people from China and other places used to visit these empires. So a free exchange of ideas was always encouraged in the past in these empires. Also it is observed that the empires or kingdoms were very successful and prosperous whenever there was a concomitant industrial growth. Thereby, the Kings and the Government enabled the industry to flourish without putting too much control on them. This eventually led to prosperity and economic development. The industry in the past used to be dependent on very skilled labour force which actually produced things for an individual. So if someone wanted to buy a shoe or a cloth, they would go to a local skilled man or woman and give their specifications and the product would be made according to their requirements – customisation prevailed The ideas of mass customization, of personalization, of being close to the customers, of providing value added services etc have happened a few hundred years ago. And then the first industrial revolution happened. The west reacted to this prosperity of India and China by bringing mechanization. The weavers of India were replaced by the textile mills of London and the prosperity started shifting towards the west. This led to the second industrial revolution which actually took away mass customization and brought assembly line manufacturing. Over due course, the

factories of the west started contributing maximum towards the world’s GDP. The east responded to this by looking at the most expensive part of the value chain which is labour, and started bringing low cost labour to regain its supremacy. Over the last 30 decades one would say that Asia lost its supremacy because of the first industrial revolution. A very startling fact: US and China have the same amount of manufacturing output in terms of dollars, but US has only 10 percent of labour force as compared to China. Also US and Germany are moving towards the third revolution called Digital Manufacturing. Digital manufacturing is about making things which are not closer to the customer in a totally personalized and customized fashion and where labour component of the manufacturing becomes a lot smaller. So, if we take an iPad for example, it takes only 8 dollars of labour but the total cost of an iPad is 450 dollars. The five factors which would make Asia to compete in the third industrial revolution are as follows: ▪▪ Innovation and the talent which drives innovation ▪▪ Energy ▪▪ Input costs, whether they are labour cost or material cost ▪▪ Infrastructure ▪▪ Government taxes and fiscal policy So among these five, the talent and innovation driven manufacturing seems to be the one which resonates well with other factors. India has achieved a tremendous success in building software industry in the last 30 years, making it a 100 dollar billion industry. India’s competitiveness for the future will depend on our ability to embrace digital manufacturing and not to compete with the countries based on labour cost. India should actually leverage its strength by bringing innovation into its manufacturing policies. Four most important factors for India to build competitiveness are as follows: ▪▪ India really has to have strong intellectual prop-

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erty laws. We should aim to make our intellectual property laws much better than what is there in the US. In the US, the respect for the intellectual property is very high and hence, India should also not only tread on the same path as the US, rather try to excel therein. ▪▪ We really have to create a culture of innovation, celebrating innovation, linking education to innovation, trying out new ideas, which are going to be completely different from the colonial mindset. An education system should not be designed just to bring out mere transactional cashiers and clerks for the colonial empire but an educational ecosystem should actually produce and drive innovation which is going to be the key for competitiveness. ▪▪ The concept of clusters becomes lot more critical in an innovation driven manufacturing economy. There are a number of Clusters in India such as textile clusters in Tirupur, small metal manufacturing clusters in Ludhiana, IT clusters In Bengaluru etc. What we lack is an ecosystem around

these clusters which can actually bring innovation in them – and these clusters need to be professionally managed and branded. India needs to embrace the innovation driven manufacturing sector and we should use this as a basis for making the manufacturing policy for the next 5-10 years. ▪▪ Having a very stable and predictable tax regime is imperative for boosting inflowing capital in the country. Retroactive legislations and arbitrary powers given to people are not good signals since without capital the manufacturing sector would not succeed. And flight of capital brings a horrendous vista. ▪▪ Hence, India should learn from the history and focus more and more on innovation driven strategies, bringing stable tax laws and polices into the system, focus more on customization, cluster building, infrastructure etc. Therefore, in the following sections, the factors which are responsible for the low competitiveness status of India and proposed solutions for improving the same have been discussed.

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Manufacturing Competitiveness What is competitiveness? Competitiveness is defined by the productivity with which a nation utilizes its human, capital and natural resources. -Michael Porter

INTRODUCTION Consumerism is growing at a very fast pace; in fact we are consuming electronic goods worth $40 billion, whereby it is predicted that by 2020 it will grow to $400 billion. We will be importing more electronics in India than oil. Government has also realized that importing electronics worth $400 billion would result into a financial crisis. Hence, India really needs to focus on growth in internal

manufacturing. Manufacturing will be driven by a lot of factors. Market growth cannot be avoided and if the market continues to grow at the same pace that we are experiencing currently, then natural forces would definitely lead to foreign companies to start manufacturing in India. Our aim is to increase the manufacturing Competitiveness of India.

Figure 1: Indian manufacturing over the last 20 years

% Contribution of Manufacturing in GDP 17.0 16.5

16.2

16.0 15.5 15.0 14.5 14.0

16.4

16.0 16.1 15.915.8 15.8

15.8 14.9

15.1 14.5 14.4 14.1

15.3 15.2 15.3 15.2 15.015.1 14.8 14.8

13.5 13.0 12.5

From the above graph it can be seen that since 1991, contribution of manufacturing sector in our GDP has remained almost stagnant. It achieved a maximum of 16.4 percent in the year 1997 and in the last year i.e. 2011 it remained only 15.8 percent. Patently, Indian manufacturing industry has remained stagnant over

the last 20 years. During 1990s, when liberalization of policies and mindset occurred, the financial ecosystem and the competitive needs of the industry groups suddenly grew. A large number of industries were working on enhancing their competitiveness. The most com-

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petitive manufacturing examples from the Indian industry are Tata Steel and Reliance. The cost of their product was very low in spite of the fact that they were situated in a country where it was very difficult to start and sustain a business. This was possible because of the scale on which they operated. They were able to insulate themselves from the environment which led to huge reduction in cost. For example, if the power costs were high, then they would set up their own power plant; and in a similar vein, if the infrastructure of a port was a problem, then they would build their own port, etc. The prosperity and manufacturing competitiveness for small scale manufacturing industry has the same importance as that for bigger scale manufacturing industries. Large scale manufacturing industries are the hub or they provide a nucleus for the small scale manufacturing industries to develop. But if small scale industries are not competitive enough, then the competitiveness of the large scale manufacturing industries also have a setback. Small industries cannot insulate themselves from the environment because they do not have adequate re-

sources. If the cost of power is high, then it is not possible for them to set up their own power plant. And if they are not able to satisfy their business needs from their power provider, DG (Distributed generation) power costs them twice the normal amount. Such kinds of issues become major barrier for small scale manufacturing industries in building or enhancing their competitiveness. So what do small industries do to survive? Keeping the inputs same, price cutting can only be achieved up to a very small extent. Generally, small industries start cutting on their inputs to reduce the cost, which leads to the deterioration of the quality of their products which eventually brings down the reputation and reliability of the manufacturer. We need to cut corners in manufacturing partly by demand and partly driven by famous jugaad (= the ad hoc resourcefulness-cum-ingenuity that allows short-term solution-mongering). Jugaad is the excellent strength in Indian industry where we can use low cost techniques, common place techniques, and build the ability to survive in the industry. But sometimes jugaad leads to short sightedness.

India’s competitiveness ranking which is brought out by the World Bank and International Finance Corporation is 132 in the list of 142 countries. We are even below Pakistan, Nepal, Bangladesh, Sri Lanka etc. Manufacturing is a serious concern in India, the reasons behind this serious concern can be understood by looking at the facts mentioned below: ▪▪ Share of manufacturing in Indian GDP is only 15.6 percent, which is lowest among the other Rapidly Developing Economies (RDEs). Other RDEs’ manufacturing sector contributes significantly to their GDP. For example, Thailand (40 percent), China (34 percent), Poland (30 percent) etc. ▪▪ Since 1991, the contribution of service sector

to GDP has grown up from 48.8 percent to 65.2 percent whereas the share of manufacturing has remained almost constant. (see the charts below) ▪▪ In other RDEs, manufacturing provides a major share of employment whereas in India, manufacturing sector employs only 58 million workforces, a mere 12 percent of the total workforce. Naturally, stagnant share of manufacturing in GDP should be a main cause of worry.

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Figure 2: GDP Composition 1991, 2010 % Contribution in GDP- iNDIA (1991) 19.8

31.4

20.2

Agriculture Services

14.9

Manufacturing 48.8

% Contribution in GDP- iNDIA (2010) 14.6

Services

15.9

Manufacturing 65.2

Industry

Agriculture

Industry

Figure 3: Gross Value Added in Manufacturing (State Wise) Gross Value Added in Manufacturing State Wise (Rs. crore) Manipur Nagaland Tripura Meghalaya Bihar Jammu & Kashmir Delhi Assam Goa Assam Himachal Pradesh Punjab Jharkhand Madhya Pradesh West Bengal Chattisgarh Odisha Rajasthan Haryana Uttar Pradesh Uttarakhand Andhra Pradesh Karnataka Tamil Nadu Gujarat Maharashtra 0

20000

40000

From the above graph, we can estimate the amount of Gross Value Added by different states of India. Maximum Gross value is added by Maharashtra followed by Gujarat, Tamil Nadu, and Karnataka. Minimum value addition is done by North East states which are

60000

80000

100000

Manipur, Nagaland, Tripura and Meghalaya. Herein, India needs to improve the Gross Value Addition of the states who rank low by leveraging the strength of the states which are adding maximum value to the manufacturing.

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Figure 4: Gross Value Added in Manufacturing (Sector-wise) Gross Value Added Sector Wise (Rs. Lac) OTHER MINING AND QUARRYING WASTE COLLECTION, TREATMENT AND... WOOD AND OF PRODUCTS OF WOOD AND... CROP AND ANIMAL PRODUCTION,... MANUFACTURE OF FURNITURE PUBLISHING ACTIVITIES REPAIR AND INSTALLATION OF MACHINERY... LEATHER AND RELATED PRODUCTS PRINTING AND REPRODUCTION OF... OTHER MANUFACTURING PAPER AND PAPER PRODUCTS TOBACCO PRODUCTS BEVERAGES WEARING APPAREL OTHER TRANSPORT EQUIPMENT COMPUTER, ELECTRONIC AND OPTICAL... FABRICATED METAL PRODUCTS, EXCEPT... OTHER INDUSTRIES MANUFACTURE OF RUBBER AND PLASTICS... ELECTRICAL EQUIPMENT TEXTILES MOTOR VEHICLES, TRAILERS AND SEMI... BASIC PHARMACEUTICAL PRODUCTS AND... FOOD PRODUCTS OTHER NON - METALLIC MINERAL PRODUCTS MACHINERY AND EQUIPMENT N.E.C CHEMICALS AND CHEMICAL PRODUCTS COKE AND REFINED PETROLEUM PRODUCTS BASIC METALS 0

4000

8000 Thousands enhancing prosperity

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From the above graph, sector wise value addition in manufacturing can be seen. Basic metals, coke and refined petroleum products, chemicals and chemical products, machinery and equipment and other nonmetallic mineral products are the top 5 value adders in the manufacturing. The sectors which do least value addition are waste collection, treatment and disposal activities, materials recovery, wood, products of wood Increase contribution to GDP

Boost employment

Add depth

and cork etc, crop and animal production, hunting and related service activities, manufacture of furniture etc; and sectors need serious attention. The Planning Commission has been working on how manufacturing can add thrust to the 12th five year plan. They believe that a special manufacturing strategy should be designed to add value to the 12th five year plan. It has set up the certain objectives for the same:

▪▪ Increase in manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy ▪▪ Enable manufacturing to contribute to at least 25% of the National GDP by 2025. ▪▪ Boost employment through manufacturing ▪▪ Create 100 million additional jobs by 2025 in manufacturing sector. ▪▪ Add depth to the manufacturing so as to increase and encourage value addition in domestic manufacturing, to address the national strategic requirements

Enhance Global Competitiveness

▪▪ Enhance Global Competitiveness of Indian Manufacturing through appropriate policy support

Multiplier effect

▪▪ Create a multiplier effect in manufacturing.

Source: National Manufacturing Plan, Planning Commission of India

Multiplier effect Talking about Agro business in India, almost 70 percent of the employment is generated by agriculture. The major challenge faced by India is to migrate that 70 percent of employment in agriculture to manufacturing in agriculture itself, which is supposedly a large component of manufacturing, and hence would generate far more employment opportunities. Therefore, to bring a multiplier effect in manufacturing is a big challenge.

This would not only affect the GDP growth but also the growth of the country as a whole.

Issues in Manufacturing ▪▪ Acquisition of land is a major problem ▪▪ We are also facing energy crisis, labour issues, environmental sustainability, HR issues, water availability for the industry, competitiveness of the exports etc India needs to acquire more physical infrastructure and technology to reduce the production time.

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RECOMMENDATIONS Increase spending on Research and Development

Trust Building between Government, Industry and Society

In India, spending on Research and Development is mere 0.9 percent whereas in countries like China, it is almost 2 percent. Hence, India needs to increase the spending on Research and development. India also needs to take care of the issues such as bringing Foreign Direct Investment and technology in manufacturing.

An element of trust building is required between the government, industry and the society. What is pulling us back today are the different definitions of the above three sections. For example, what is considered good for the society may not be good for the industry and may not fit into the goals of the government?

Bringing Innovation in Manufacturing National innovation council is already looking at issues in bringing innovation in the manufacturing sector in the countries and for this State Sectoral Innovation Councils have been set up. There is also a move for setting up National Technology Fund for Innovation. Technology upgradation can happen through the sectoral funds in the ministries like we have the technology upgradation funds for the textiles. A significant technology upgradation is required in the MSME sector, where outdated technology is a big disadvantage. The 12th five year plan also caters to the above issues. Recently, the Government has adopted the National Manufacturing Policy which focuses on clusters as well. Clusters are very important for the development of various sectors.

Developing Clusters NMIZ (National Manufacturing Investment Zone) is a huge cluster around which a manufacturing ecosystem can be developed. Many of the State Governments have acquired land for developing national investment zones and have already approached the departments of industrial policy and promotion. Delhi -Mumbai industrial corridor is a very huge stretch of integrated industrial township development covering the states of UP, Haryana, Maharashtra, Rajasthan and Gujarat. This is a very huge cluster on industry zone which Government of India has kick-started.

Focus on “Green” manufacturing techniques If India and China also start consuming the same level and same kind of energy as the developed nations are consuming, then it would create a global ecological crisis. So we have to make sure that as we develop manufacturing in India, we also need to come up with clean ways of energy generation and make sure that our ecological balance is not disturbed.

Utilizing Indian talent in a disciplined way Executives in different sectors as Agrarian sector, technology sector etc keep looking for talent so that talent can innovate on manufacturing. Indian talent is best in terms of brain power, thinking capacity, ability to improvise etc. and is recognized across the world in many industry sectors such as BPO sector, IT sector, medicine, infrastructure, entertainment etc. But Indian talent is not disciplined to the right level which is a very big weakness. Undisciplined talent leads to the wastage of energy as it is not focused on exactly what has to be done and eventually ends up taking more time in doing things which could have been wrapped up in lesser time. Philippines is not a very hot economy and it is also not very good from an investment perspective. But there are various lessons which can be learned

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from Philippines and managing talent is one of the best thing which can be learned from there.

Big Manufacturing Opportunity in India India is one of the biggest consuming economies in the world. Internal consumption is so high in India that it can enjoy a huge scale building opportunity which very few countries in the world can have. Hence, a huge level of economies of scale can be achieved, costs can be brought down and innovation can be applied on that. Indian intellectual power is strong enough and very well recognized all over the world.

Climb the premium charging ladder An Indian software engineer gets paid one-fourth of his Dutch counterpart. We should explore the reasons behind and should climb the premium charging ladder.

Focus on customization rather than mass production In mass production, India is a laggard and it seems like India is not going to cover up on that. Hence, India should focus more on customization so that we can charge more as the world is also moving towards individualization. Every individual has a unique identity and hence unique needs. The modern idea says that one cannot classify the people into segments today and it is advised that India works out individual customisation at mass level solutions.

Bring stability in policies Indian manufacturing cannot be competitive until and unless we bring stability in our tax regimes, policies, education system etc. In India, everything is changed every year with the new budget, be it the tax system, the education system etc. This instability is

a big problem which has been causing a deep-rooted impact on society, which has not only social implication but economic implication as well.

Focus on long term planning Indian small scale industries have always been too busy in coping up with their day to day problems and hence, they have lost their vision for quality and long term planning. Industries have stopped thinking about the long term strategies because they get used to managing the situations as it is. They rather start doing only short term planning for the situations which keep arising. Hence, long term strategic competitiveness is never achieved. India needs to work on making a consensual 20 year long vision and plan which runs across all the political ideologies, political parties and irrespective of who is ruling the country.

Concerns of Indian Food Processing Industry Food processing industry of India is getting lot of attention because of the following issues: ▪▪ Huge amount of food wastage in India ▪▪ High food inflation ▪▪ Less Consumption of processed food in IndiaThe consumption of processed food in India is mere 5-10 percent which is very small as compared to other developed or even developing economies where it is 40-80 percent. Indian Industry and government are working to unveil the reasons behind this small consumption and methods to curb to the food wastage and food inflation. Food industry of India is an extremely competitive sector because it doesn’t attract huge investments. Food Safety Authority is being formed in India and we also have Right to Food bill which would be rolling out soon. We don’t yet have a relaxed Agricultural Produce

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Marketing Act (APMC) where person from the industry can go and procure directly from farmers without the intervention of the middlemen. A huge pie of the perishable food gets wasted. In India, the production of many food items as sugar, cotton, corn are produced in surplus and pulses and edible oils are also well supplied, but still we continue to suffer from one of the highest inflation rates in the world. This is mainly due to our inability to deal with the perishable food

items as fruits, vegetables, milk, meat and other dairy products. The perishable items are spoiled because of poor processing, poor packaging and inefficient supply chain. For example, India produces one of the best apples in the world, but by the time they reach Delhi from Shimla or Kashmir, they get worse than the apples coming from China. India also needs to bring improvement in packaging. Poor packaging spoils food items, especially perishable items.

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Clusters as a tool for wealth creation What are clusters? Geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (e.g. universities, standards agencies, trade associations) in a particular field that compete but also cooperate. -Michael Porter Cluster is basically a tool in India, which was first used in 1996 for the promotion of Micro, Small and Medium Enterprises. It was started by the United Nations Industrial Development Organization’s (UNIDO) program and Government of India picked it up rapidly from 2003 onwards. The 11th Five Year Plan had a number of schemes and programs on clusters and the various ministries such as Ministry of Textile, Development Commission of Handicrafts, Handlooms, MSME, DIPP, various banks such as SIDBI and many other international organizations have been working on clusters. Basically, the movement started in 1997, it gained momentum in 2003 and is still going very strong. There are 30 million MSMEs in India, out of which 22 million are in services and 8 million in manufacturing. 98% of the MSMEs in the manufacturing sector are in the micro industry. There are almost 6500 clusters in India.

When was the word “cluster” first used in India in the policy papers? One reference to the clusters could be found in 2nd Five Year Plan which was more in the form of industrial states but officially it was used for the first time in a book written by one of the earliest Development Commissioner of small scale industries. The book was called “Industrial States in India” and was written in 1963. Clusters, however, evolved significantly in India in 1990s. In India many attempts have been made to use the cluster methodology in 1950s and 1960s so as to make it a major policy tool for Regional Development and to curb the inequalities of income and space. As a result of those efforts, number of industrial spaces came up. But as we define clusters, we don’t qualify industrial

state as a part of a cluster mainly because of the changing definitions. But still there are many economic concepts which are applicable to industrial states and to the cluster development methodologies as well.

Clusters and Government In 1970s, there was a lot of investment in the industrial states and Government provided spaces in different locations especially to focus on balanced regional development. For the first time, as a part of the Government policy, Government invested in industrial states like Chennai which is one of the oldest automotive industrial state, Agra where lot of foundry work was started and in Kanpur where textile industry was growing. There were four major clusters which were developing in India in 1960s. After that, survival of natural clusters began to undergo significant changes. Then slowly, Ludhiana, Tirupur and several other modern clusters came up and they survived because of their strengths. This year, i.e. 2012, the Government is going to focus on 2500 clusters with a total budget of around INR 20,000 crore. Almost 95 percent of this budget would be utilized on building the infrastructure required for clusters to flourish.

Clusters and SHGs Cluster is a very well used term in India especially in rural development context. In the recent past, Government started many schemes based on Self Help Groups and also started to give special kind of names to Self Help Groups. The Government of Madhya Pradesh has evolved a concept for increasing the

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clusters and for urban poverty alleviation with the help of SHGs. The premise is if SHGs are producing different products and a hundred such SHGs are present in the vicinity, and if they are asked to produce the same type of product, this would eventually result into a very big cluster.

Clusters and Urbanization Urbanization in India is happening at a very fast pace but it’s also dislocating the clusters. A study done on Delhi and NCR suggests that in near future, it would become difficult even for Maruti to retain its subcontractors in nearby areas because of space constraint which is due to the increasing prices of real estate. These factors will distort the current definition of clusters and will redefine them. Because of the changing definition of the clusters, IT is going to play a major role in the formation of the clusters. Clusters would be greatly dependent on IT tools which would eventually cause geographically distant firms to be a part of the same cluster.

Traditional clusters and Innovation clusters An innovation cluster is very much different from traditional cluster model. Traditional models tend to focus on outputs and the creation of mechanism of working together to achieve quality and increased outputs and then ultimately creating more revenue. But innovation clusters focus on throughputs, ideas, creativity and then fusing innovation within the cluster.

Indian clusters and European clusters India and Europe have to bridge the gap in their technologies in their respective sectors. Previously one had to go from Euro chambers to National Chambers, regional to local, which was a long path to reach to the technology providers and the decision makers. Then the focus got shifted to the clusters and Europeans started looking on how clusters work and how

were they set up? They discovered that there is a lot of difference between Indian clusters and European clusters. Not in terms of virtual clusters or physical clusters but in the terms of definition. In Europe, the clusters are innovation driven which is about increasing competitiveness. But in India, it’s mainly about sharing the facilities such as production facilities, logistic facilities etc.

In terms of cluster management, there is a huge potential in India. Prioritize the elements of cluster development The theories of the cluster development state that there should be cooperation between various clusters. Apart from cooperation, other things also need to be created such as infrastructure, common facilities, laboratories etc. Every cluster has a different requirement and taking a decision on requirements for a cluster is tough for the policy makers.

Proper Monitoring and Evaluation of the cluster programs Most of the cluster programs are run and funded by the Government but Government does not have proper monitoring and evaluation programs. There is hardly any budget for hiring the manpower required for the evaluation of the cluster programs. Without proper monitoring and evaluation, programs go out of the way and cannot even be corrected after a certain time.

Cluster Development Programs and Competitiveness Global and historical research indicates that Cluster Development Program (CDP) makes the clusters competitive. But the cause and effect relationship is yet to be explored. Hence, in India, research needs to be conducted on how the Cluster Development Programs can make the clusters competitive? Indian institutes need to take a call on this research. enhancing prosperity

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FMSI Framework and Indian Clusters

Factors

▪▪ Factor endowment is getting diluted because government is focusing on employment generation at local levels not at a central level. Many government policies, migration of labor from one state to other state has stopped now.

Market

▪▪ Earlier, clusters used to be located near the markets but now a days due to the shortage of industrial space, clusters are moving away from the market. So, in this way, they are losing a competitive edge and a favorable factor for their growth.

Strategy

▪▪ In Indian industry, strategy as a tool to become competitive is almost nonexistent. We mainly work on low cost factors of production so strategy is not much used as a tool.

Institution

▪▪ There are lot of clusters in India which have come up due to the strong investment made by government in support institutions. For example, clusters of Pune Belt and Bangalore or to some extent in Delhi and nearby areas, have been playing a very good role in bringing up IT and service clusters.

As far as the Government is concerned in using strategy for local economic development, SHG movement is one of the biggest examples of the governmental strategy for cluster development methodology. They use social capital for micro financing, do trust building and improve their value system. In India, strategy is mainly used in informal sector, decentralized sector and rural development areas.

Clusters and Prosperity When we talk about evolution of cluster methodology and clusters itself, prosperity pathway is the methodology used. Basically, prosperity pathway focuses on the fact that productivity creates competitiveness. Over the time, competitiveness leads to the ultimate

goal of prosperity. The countries that are focusing on competitiveness are shooting too low and they get bogged down by looking good in the reports and by trying to do the things which are barely necessary; in the end, all this amounts to C grade. Competitiveness is about just being competitive and not a goal. Prosperity and a prosperous environment should be the goal. Prosperity is more than just dollars. It lies in personal freedom, quality of life etc. Can we think of any country which is prosperous but not competitive? The answer is no, we cannot find a single country which is prosperous but not competitive. But can we think of the countries which are competitive on paper but are not prosperous? The answer is yes, we can.

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Role of Government in developing clusters (example of Jordanian clusters) It was realized at a very early stage in Jordan, that their traditional clusters cannot help them to focus on the areas where they needed to focus. The country could emerge as a knowledge economy as the education levels were high but the country had no definite strategy to move in that direction. Development of Innovation Clusters was facilitated in Jordan. Clusters do not work in the same way across the world, so they have to be customized depending on their presence in their respective country, so as to achieve the desired objectives as they were done in the case of Jordan. In the last 3 years, the results have not been too fantastic with billions of dollars of investment. There was just 450 million dollars increase in revenue and almost 50-55,000 new jobs were created. This was possible because Jordanians were able to come together in innovation clusters and promote creativity and ideas related with innovation clusters. It was not only companies involved in those clusters, but it was every stakeholder involved in the value chain, including the Government. Irrespective of the geographical location, clusters always have to have some type of advocacy from the

Government because Government needs to pass many regulations and provide an enabling environment for the clusters. In Jordan, the Government was involved from day one in the creation of clusters and it became a part of the planning process. They became part of the process not only to create strategy, but to create action plan to begin doing things. In spite of very good planning, sometimes the implementation becomes a problem, so putting focus on the action plan is very important. For example, Jordan has “n” number of strategies, they even have strategies about having strategies but actions were not happening there until innovation clusters came up because innovation clusters gave them a mechanism to take actions. Involvement of Government, NGOs, donor organizations etc. from the very beginning was the key for success of clusters in Jordan. Development process starts with productivity and ends up with prosperity. Prosperity is sustained through innovation. Innovation creates productivity, productivity creates competitiveness, competitiveness over the time creates prosperity as long as innovation remains a part of the process. We can see the countries which have achieved prosperity because clusters are working really well.

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The Role of Business in Society: Shared Value, Economic Objectives, Social Objectives, and Philanthropy What is shared Value? The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. -Michael Porter and Mark R. Cramer Case of Novartis, Arogya Parivar

addressing the need

creating the market

delivering quality healthcare to the deprived

Arogya Parivar, identifies health care needs of the people at district level, village level etc and they work together on the agenda that how different partners can come together and fit in the spectrum and what all needs to be taken care during next 3-5 years on a consortium based approach. As Novartis’s responsibility, Arogya Parivar has adopted innovation in the following basic ways: 1. They sell therapy in smaller pack sizes and blister packing which keeps the dosage same but reduces the cost. 2. They follow a community based social approach. Arogya Parivar’s health educators are delivering free healthcare services in villages, building awareness, advocacy etc. and this is making them small entrepreneurs. This enables Novartis to gain a tremendous advantage in its supply chain and enables community to take the health care to villagers. They are also running various loyalty based programs. For example, when a poor villager goes to a dispensary doctor, he spends at least 30-40 rupees for his entire therapy. They are distributing community level cards to such patients who are earning less than 4 USD a day so that their doctor gets more footfall and poor villagers get cheaper but quality treatment. Community level cards are for subsidizing the therapy. In the end, community totally benefits from this program. This ultimately leads to a behavioural change in healthcare. Novartis is also supplying medicines to Kenya, Vietnam etc. and now they are working on a completely different sets of product portfolios for these markets and for that they are in the touch of local governments and they are also trying to come up with certain non conventional therapies as well which would fit perfectly for these markets. These countries have quality and pricing issues. Because of heavy duties for these countries, they pay higher prices for the therapy as compared to the rest of the world.

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Case of FabIndia FabIndia involves NGOs, governments, community etc in their process to build value for the society. They partner with NGOs and most of them get involved into training and capacity building in the villages. There is a role to be played by different fixed identities through the entire chain which includes NGOs, retailers, logistics, supply chain, government etc. There are many government schemes on cluster development and the creation of Self Help Groups which really help them. They are doing Public Private Partnerships and currently they are engaged in them across the country. There are many individuals in the government organizations that show interest in doing partnerships with public sector. FabIndia has set up a company in Orissa which is completely a public private partnership and the State Government supports them and is very actively looking to promote the weavers. The whole collaboration is working very well for them and they basically look at who delivers best and what. FabIndia has a very open system in terms of who can work with them. Basically, anybody who has a product which is ready to go to the market and fits the look and feel of FabIndia, has equal chances of representing their product anywhere else. Qualifications of supplier do not matter for them. It does not matter whether somebody is a weaver or master weaver; hence the system is very open and transparent. Hence, community owned companies at grass root level have been able to tap this opportunity in a very well way. FabIndia teams travel from village to village, finds clusters, talk to the people, look at their product and source directly. In this way, their teams are able to bring lot more variety and even small producers to the table. They follow a bottom up costing approach where costing starts from the producer. Count of yarn, quantity of yarn, dye used, labour charge and in the end the mark up is also mentioned by the supplier or weaver very transparently. This open costing has always been followed by them. They are still carrying their 30-40 years old relationships and have almost equal number of young and old producers.

Case of Mother Diary Taking the case of Mother Dairy in brief, they have their own team of people who collect samples of milk on daily basis. They pick up almost 4000-5000 samples of milk from the market every month and analyze them. If there is any variation in the existing sample, the vendor is changed. They ensure that they build a self disciplined process through their inbuilt processes and do not wait for the regulatory authorities. Hence, they gain the trust of the consumers and live by their demands at large. Milk being a perishable item, and is not easy to handle.

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COMPETITION

RECOMMENDATIONS

The companies like FabIndia, Mother Dairy, Novartis etc work extensively on creating shared value for the society and hence are called community companies. There are various ways to view competition in the market which are described as follows: ▪▪ Organization is competitive with competitors on the other side. ▪▪ Community Company on one side and market on the other side, but community companies view market as an ecosystem to develop. When we look at Competition we have to identify it, identify the competitors strategy and practices which is enabling it to outdo the other organization. As an organization starts losing its competitive position in the market, it becomes difficult to regain the position back because the competitor becomes master in the field where the organization has lost. This mainly happens when the losing company has multiple objectives which is really like playing minesweeper. Our competitors may or may not have the same thought process or commitment as we have or as we perceive them. Pretty much, it depends on our definition of competition. For example, someone may have a very broad perspective of the competition. A consumer has 1000 bucks to spend on a Sunday and he may go to FabIndia store and buy a Kurta or may go to some other store and buy a pair of jeans and sneakers or he may possibly go and catch a movie. One may perceive all of them as the competitors who share the wallet of the consumer, which is indeed a very broad perspective to view the competition. The unmet needs of the society are so huge, that if we see from the pharmaceutical perspective and healthcare needs, all the companies in India cannot even address the need single handedly and hence cooperation and collaborations are required. Novartis and Arogya Parivar as a company, always invite other companies so as to make a broader spectrum to address the need.

Make processes transparent In today’s world, information asymmetry and opacity has come down drastically. Rates are transparent because they can be found at many places as mobile phones, internet etc but what still needs to be transparent is the testing mechanisms, transparency and awareness about how test can be done, what it detects and what it doesn’t.

Build awareness about financing Awareness also needs to be built about the whole concept of microfinance including interest costs and implications thereof. Lack of availability of banking facilities is a big problem for the farmers.

Balance the business and stakeholders needs To promote the inclusive growth (like involving farmers and artisans), there needs to be a balance in the business, which means that at the same time business needs and the needs of producers and other key stakeholders should be satisfied which would eventually lead to sustainability.

Work on collaborative models Sometimes, when ever some business or even an individual involves themselves in a social activity then there are many uncertainties in the beginning which may be due to several reasons as incomplete information, accessibility to society etc. These uncertainties lead to inertia. Collaboration with Government and other parties play a big role in taking away this inertia. Collaborative models ultimately transfer the benefits to the producers.

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Reduce dependence on subsidies It’s very important that in an ecosystem, each and every member is in for the business because there is always a give and take situation. If there is subsidy with any element of the ecosystem, then there is some trouble be it the subsidy from the company or Government because subsidy is not sustainable. In an ecosystem, each and every shareholder should get its due share. Every business works with limited resources so one has to figure out the points where intervention impact would be the maximum. In the process of creating shared value for society money is always there but there are no easy solutions to achieve the objective. But if one goes into scepticism, it doesn’t work. Creating shared value for the society is not driven by the social objectives, it’s purely business. It not only adds to the revenue but also contributes to the branding of the company, makes the organization reach to a larger section of the society and makes the community people brand ambassadors of the company. Hence, if one organization would not tap this opportunity, then

some other organization would definitely do it. For example, when a sales officer from Mother Dairy comes to know that a labourer working at construction site needs tea and hence they should be provided with milk, so the sales officer sets up a distribution network to serve them milk. He would have never done it for social cause but this was done for the business cause. The true fact is that Mother Dairy daily supplies 3 lac litres of milk at the construction sites. Sales officers would visit the construction site as there would be at least 200 people who need tea and the owner or care taker of the construction site would be paying for the milk on the spot because it’s his responsibility to provide tea to the labourer. Had it been driven by the social objective, sales officer would make sure that the construction labourer gets good and fresh milk every day on any cost. Hence, there is a dual intention. The direction, in which the role of business in society is going, is away from philanthropy and CSR, but it’s actually towards building the proactive, large scale and sustainable ways which are trying to contribute towards the objective of promoting the inclusive growth.

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Regional Competitiveness & Process of Economic Development India’s present competitiveness status In the Global Competitiveness Index, the overall rank of India slipped from 51st position to 56th position this year. All other Asian countries such as Malaysia, Indonesia Singapore, Japan etc are ahead of India. Countries like South Africa and Brazil are somewhere near to India and Russia is a little lower. High inefficiency in the areas such as infrastructure, transportation, education, healthcare, power and energy etc, high fiscal deficit, high debt to GDP ratio and problems of corruption are largely responsible for India’s low competitiveness.

graduation has to be changed and students should be encouraged to move into the research.

Build infrastructure Infrastructure is extremely important if viewed from the market and business environment. When you look at the industry structure, it should be very well designed. For example, looking at IT industry, there is only one association in India (NASSCOM) dealing with government regarding policy matters and other issues. Indian IT industry is united and is represented as one industry internationally.

Role of government in competitiveness

Bring certainty in the system

Role of government is limited to providing macroeconomic and political stability. Moreover, Government can act as a facilitator. We also need basic economic framework, consistent economic policies and a stable tax regime. We have to build a microeconomic capacity so that basic inputs for business are efficiently available.

Telecom sector contributes 3 % to India’s GDP. Government Policies and regulation, play a very important role in the decisions of the people who want to make investments in the telecom sector. Certainty and consistency in these policies is required for the people who want to make huge investments. India has huge potential to produce low cost smart phones which would require innovation.

Need to focus on City competitiveness City competitiveness is also a very important issue for the prosperity and competitiveness of the country. Indian cities are not competitive and they rank very low even on the scale of Asian cities while other Asian cities such as Hong Kong and Singapore rank very high among the global cities in terms of competitiveness. In the next 20-30 years a huge investment is required in the areas of infrastructure, education, transportation, green energy etc. to make Indian cities competitive

Promote Entrepreneurship

Focus on Research

Focus on human capital and education

Research is an integral part of development. India needs to produce more PhDs. The mentality of moving into jobs straight away after graduation and post

If we look back 20-25 years from now, what we have achieved in IT industry is significant as it is still booming. But other areas such as education sector

When we look at the economic growth and how countries and regions compete in a global market place, then the biggest thing which impacts the above is entrepreneurship. The overall entrepreneurial spirit of the country, the desires and aspirations of budding entrepreneurs contribute towards an increase in the competitiveness of the country.

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have not moved at all. In India, skilled people are required in every sector. Hence, as a country, India needs to bring huge reforms in education sector to produce skilled human capital. We need to bring more institutes in India imparting quality education and equally focusing on all the other areas not just IT and medicine. When we look at human capital, quality is more important than quantity.

Focus on sustainability The question we should be asking ourselves is whether the economic model delivered to us, is able to meet the needs and aspirations of 7 billion people on this planet, in a balanced and a sustainable way? Hence, all the processes and techniques adopted by us should be sustainable because resources on the planet are limited and they have to satisfy the needs of future generations as well.

Competitiveness in healthcare US spends almost 17 percent of its GDP on healthcare and Kerala spends almost 150th of what USA spends but still results are comparable. In India, cost of availing a good quality treatment is very low. Hence, India has sustainable models of healthcare. India should keep improving its healthcare System so as to retain its competitiveness in healthcare. There should be low dependency on the expensive health institutions like Fortis Healthcare, Max Healthcare etc. and maximum focus should be paid on improving the services of Primary Health Centres because India’s 80 percent population still depends on them. India also needs to increase its spending on healthcare. Currently, India is spending only 1.8 percent of its GDP on healthcare.

Identify primary activity for building competitiveness

ties for building the competitiveness of the city or country. For example, Finland’s primary economic activity is telecom; hence Finland is competitive in the Telecom sector. Similarly, Japan’s strength lies in the electronic field, Detroit in the manufacturing, California in wireless etc. Government plays a proactive role in this; because economic activities are always build around a system of incentives.

Focus on manufacturing India should focus on building manufacturing competitiveness. As mentioned in the previous sections, the manufacturing sector contributes only 15-16 percent to India’s GDP which is significantly low as compared to other economies. Moreover, India’s manufacturing sector only employs 58 million people which are 12 percent of the total labour force of India. Hence, India needs to increase its competitiveness in the manufacturing sector.

Focus on water and sanitation Government needs to focus on providing improved sources of drinking water and sanitation to the people who are deprived of them, especially rural population and the urban poor. Almost 70 percent of the India’s healthcare capacity is engaged for the treatment of water borne diseases.

Strict Measures to curb corruption Corruption is the biggest inhibitor to India’s regional competitiveness and economic development. Whatever the budget is allocated to various plans, is never spent in actual because of the existing corruption in the system. Moreover, corruption never lets the policies and plans to happen in the correct way. 

Whenever we look at a country, city or region, we should first identify its primary economic activi-

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CONCLUSION The paper discusses the various topics on Overall Competitiveness, Manufacturing Competitiveness, Clusters, Shared Value, Regional Competitiveness and Economic Development. Various factors that impact all of the above have been discussed and solutions for enhancing competitiveness and development are proposed. In a nutshell, to enhance the prosperity and competitiveness of a nation, India should learn from the history, the time period when Asian economies including India were the major contributors to the world’s GDP. To enhance the manufacturing competitiveness, India should focus on spending more on research and development, bringing innovation in manufacturing, developing more and more clusters, establish a trust between government, industry and society, focus on “green” manufacturing techniques, disciplining the Indian talent, tap the manufacturing potential of India, climbing the premium charging ladder, focus more and more on customization, bringing stability in policies and tax regimes, focus on long term planning, improving the supply chain etc. To develop more and more clusters in the country, innovation should be adopted, government and SHGs should be involved to increase the clusters across the country, elements of cluster development should be prioritized, proper monitoring and evaluation of cluster programs should be done, link between Cluster Development Programs and competitiveness should be explored in depth. To enhance the role of business in society and to work more on shared value, business processes should be made transparent, awareness about financing should be built, needs of business and stakeholders should be balanced, more and more collaborative models should be adopted, dependence on subsidies should be reduced etc. Discussions indicate that work on shared value is more driven by business objectives rather than social objectives. If one organization does not tap the opportunity of becoming a community company, then some other organization would. The Role of Business in Society is moving towards a direction leading to building proactive, large scale and sustainable ways which would contribute towards the objective of promoting inclusive growth. To boost the regional competitiveness of a country and to enhance the process of economic development, main focus should be on city competitiveness, focus on research and development and entrepreneurship, certainty in the system should be brought and human capital and quality education should be looked upon.

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LIST OF EXPERTS ▪▪ Ajay Gupta, VP-Marketing & Strategy, Ericsson India ▪▪ Amit Kapoor, Honorary Chairman, Institute for Competitiveness & Professor, MDI ▪▪ Amitabh Thakur, Fellow, Institute for Competitiveness & MD, India Edge Advisors ▪▪ Anirban Roy, Country Director, Arogya Parivar (Norvatis) ▪▪ Ganesh Guruswamy, Country Director, Freescale ▪▪ Ganesh Lakshminarayanan, CEO, Dell ▪▪ Harpal Singh, Chairman, Fortis Health Care ▪▪ Himanshu Jain, VP-South Asia, Sealed Air ▪▪ Lalitha Vaidyanathan, MD, FSG ▪▪ Luis Lueder, Head of Operations, European Business Technology Center ▪▪ Mark McCord, Member, Deloitte, USA ▪▪ Mohit Satyanand, Director, Inlingua ▪▪ Paul Schuttenbelt, South Asia Coordinator, CDIA ADB ▪▪ Rajveer Singh, MD, Cluster Kraft ▪▪ Ravi Saroop, Ministry of Finance, GOI ▪▪ Renu Parmar, Planning Commission, GOI ▪▪ Robert Polk, R.C. Polk & Associates – Mobility Collaborators ▪▪ Rohit Bansal, CEO, India Strategy Group ▪▪ Sandeep Singh, CEO, Remorphing ▪▪ Siraj Chaudhry, MD, Cargill ▪▪ Siva Nagarajan, MD, Mother Dairy ▪▪ Smita Mankad, Head, SRCs, FabIndia ▪▪ Sunand Sharma, CEO, Alstom ▪▪ Tamal Sarkar, MSME Foundation

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