Why India’s cost of production high but productivity is low – Explained

Published: June 27, 2020 6:45 AM

Inefficiencies of India’s infrastructure, logistics and supply chains, and corrupt practices, put a considerable burden on achieving cost efficiencies for businesses operating in India, leading to low productivity and increased cost of production

Soon after Independence, in 1948, India’s share in world trade was 2.2%; that declined to 0.5% by 1970, and rose to 1.7% in 2019.

By Rakesh Mohan Joshi

The recent conflict at the border between China and India has emerged as an unprecedented opportunity for India to introspect on why it hasn’t been able to keep pace with rival China that has rapidly emerged as arguably one of the world’s most formidable economic and strategic power. Interestingly, India was ahead of China in terms of its per capita GDP till 1990 both on PPP and nominal basis. In 1991, India had a considerably higher per capita GDP in terms of PPP, current international $1,230 compared to China’s $1,094, data from the World Bank shows. China’s GDP grew over 10% between 1961 to 2018, with a peak of 27.27% in 1970. India, on the other hand, has never touched a double-digit growth figure so far. Although India embarked upon its celebrated economic liberalisation in 1991, it is apparent that China moved at a much faster speed, and, by 2018, China’s per capita GDP in terms of PPP rose to international $15,376 compared to India’s $6,697.

Soon after Independence, in 1948, India’s share in world trade was 2.2%; that declined to 0.5% by 1970, and rose to 1.7% in 2019. On the other hand, China’s share in world exports grew remarkably, from a mere 0.9% in 1948 to 13.3% by 2019. Indian governments, irrespective of their political ideologies, claimed to have made their utmost efforts to promote exports as stated in India’s Trade Policies, year after year. Despite a host of policy measures, irrespective of political ideologies, India’s exports hovered around 0.5% between 1970 to 1991, and around 1.75 % in the world exports for the last decade. Interestingly, China’s exports rose rapidly from the $1.4 trillion to $2.5 trillion between 2011 to 2019, and its share in the world exports grew from 10.5% to 13.3 %.

The Indian market today is dominated by products of Chinese origin, in consumer goods as well as capital goods, primarily because of their far lower prices compared to alternatives available to the customers in the marketplace. India’s `2-lakh-crore mobile market is dominated by Chinese mobiles, with over 72% market share. Besides, products of Chinese origin dominate India’s smart TV market with 45% share, telecom equipment market with 25% share, auto component markets with 25% share, apart from considerable penetration in pharmaceuticals, capital goods, organic chemicals and even several other consumer goods.

Such a state of affairs in the marketplace and economy explicitly reveals the hollowness of the talk on efficacy of the policy measures to counter the competition, and calls for an unbiased empirical examination of the issues that have obstructed India’s economic growth, rather than bragging all the time.

Inefficiencies of India’s infrastructure, logistics and supply-chains, and corrupt practices, put a considerable burden on achieving cost efficiencies for businesses operating in India, leading to low productivity and increased cost of production. In 2019, India ranked 68th in the Global Competitiveness Index (GCI), a global, widely-accepted, empirical assessment of a country’s institutions, infrastructure, adoption of ICT, macroeconomic stability, product market, labour market, financial system, market size, health, skills, business dynamism and innovation capability, carried out by the World Economic Forum. China ranked 34th. India also needs to introspect as to why it lost its competitiveness by 10 ranks from the previous year, whereas economies such as Azerbaijan and Vietnam improved competitiveness by 11 and 10 ranks, respectively.

On ease of doing business, in 2019, India ranked 77th compared to China’s 46th, indicating the complexities of carrying out business operations in India not only prevail, but also pose a considerable obstacle to investments, both foreign and domestic. Bottlenecks in logistics, as evident by India’s 44th rank compared to China’s 26th in the Logistics Performance Index, remains a major challenge.

Prevalence of widespread corrupt practices had long been a formidable barrier for achieving efficiency in every sphere of human life and business operation on the Indian soil. Despite high-decibel propaganda by several political parties, headways made in curbing corruption remain limited, as evident by a marginal improvement in India’s ranking on the Corruption Perception Index. India’s rank improved from 85th in 2014 to 76th in 2015, but slipped in subsequent years, and landed at 80th by 2019.

India should accept the realities on the ground, and resolve to achieve efficiency and competitiveness at all levels, including production and sourcing of inputs at competitive prices, identifying and removing bottlenecks of business complexities, infrastructure, logistics. Its endeavour should be aimed at making India and Indian products internationally competitive. As a country comprising government (the Centre and the states put together), corporates and citizens, India needs to accept the systemic loopholes in the eco-system and resolve to overcome these and put itself on a sustainable growth path. Individuals, including politicians, in power and opposition both, bureaucrats and other officials, corporates and common citizens are required to shun their short term gains, similar to what Japan followed after World War II, and put India on a growth trajectory in the real sense so as to fight against external economic and strategic aggressions victoriously.

The author is Chairperson (research), Indian Institute of Foreign Trade, New Delhi

 

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