Coming
of age:
The case for exports
As
exports move to a higher gear, India’s manufacturing sector seems poised
for a quantum leap, as this extract from an Edelweiss Capital report
underlines
The
Indian manufacturing sector has shown clear signs of a turnaround, re-emerging
from a five-year phase of a slowdown. Its growth has been predominantly
led by exports which grew 19 per cent in FY03 compared with a 5.5 per
cent Compounded Annual Growth Rate (CAGR) between 1996-97 and 2001-02.
As exports move to higher gear, it will continue to drive growth in
select sectors.
In
FY02 manufactured products accounted for 76 per cent of total merchandised
exports. Twenty years ago this share was 46 per cent. In the last 10
years, manufactured exports have grown at a 10 per cent CAGR as against
a 6 per cent CAGR in primary products. From FY99-FY2002, the trend is
strikingly in favour of manufactured products with a 9 per cent CAGR
compared with a 1 per cent CAGR in primary products. In spite of the
increasing share of manufactured products as a percentage of the export
pie, the top ten products are primarily from labour-intensive categories.
Going forward, we see this composition changing significantly.
Skill-intensive
manufactured exports
India
enjoys a strong advantage in skill-intensive products. The last three
years’ (FY1999-2002) data of the Director General of Commerce and Intelligence
(DGCIS) of the Government of India clearly shows acceleration of exports
from these sectors. Engineering goods reported a 15 per cent CAGR in
exports and pharmaceutical and chemicals exports clocked 14 per cent
CAGR during this period. As per the preliminary numbers released for
FY03 by the DGCIS, the engineering sector reported a 24.7 per cent growth
and basic chemicals reported an 18.2 per cent growth in exports.
Leveraging
traditional advantages
India
offers a host of advantages that could directly and indirectly drive
export growth of manufacturing companies. These include availability
of inexpensive labour, availability of skilled manpower, low labour
costs, a rich natural resources base and availability of metal-based
raw materials at lower prices. These advantages could catalyse India’s
export growth vis-à-vis other emerging markets including China.
Availability
of labour and low labour costs
Low
labour cost works in favour of Indian manufacturers. The average hourly
wages for a graduate/skilled worker in India are $7 as against $30-50
in most developed countries and $15-40 in developing countries. Table
above gives a per-hour comparison of wages across countries. India is
closer to China and is well placed to exploit this advantage. Though
India ranks low on labour productivity, wages, as a percentage of sales,
are around 5-9 per cent vis-à-vis 25-35 per cent in Europe and US for
similar industries. Low labours costs will continue to remain a major
advantage for the Indian manufacturing industry.
Availability
of skilled manpower
According
to "The World Competitiveness Yearbook" published by the International
Institute for Management Development (IMD), in availability of skilled
manpower rating, Indian ranks second with 7.4 points, as shown in table
above. However on availability of qualified engineers (see table), India
ranks first with 8.5 points on a scale of 1-10. India has 0.8 million
engineering graduates who are in working age. Importantly, the working
age group will continue to be favourable to India vis-a-vis other countries.
The
advantage of availability of skilled labour at lower costs impacts a
firm’s cost structure. The result is that employee expenses as a percentage
of revenues would be lower compared to that in other countries. This
gives Indian corporates a strong edge when they are pitching in global
markets.
Low-cost
raw materials
India
is endowed with rich natural resources, a major plus for metal-based
industries. Leveraging this advantage, Tisco and Hindalco have emerged
as the lowest cost producers of steel and aluminium respectively.
To
identify India’s competitive advantages in various categories of manufactured
products, the Unite Nations Commission for Trade and Development (UNCTAD)
classification of products has been used according to industrial upgrading
based on factor intensity relating to resources, skill and technology.
All products have been classified under five categories.
1)
Non-fuel primary products (vegetables and fruits, minerals and tobacco)
2)
Labour and resource-intensive products (textiles, leather, toys and
clothing)
3)
Low skill technology-intensive products (iron and steel, metal products)
4)
Medium skill and technology-intensive products (motor vehicles, electrical
and non-electrical machinery and plastic products)
5)
High-skill and technology-intensive products (computers, communication
equipment, chemicals pharmaceutical and scientific instruments)
Considering
India-specific advantages, India is believed to have an edge in medium
and high skill-intensive products. Experts also corroborate the view
that India has a competitive advantage in manufactured products. Industries
with the global competitive advantage are: agro-chemicals, auto components,
engineering, pharmaceuticals and specialty chemicals. These will report
faster export growth rates in the coming years.
Recent
performance
As
seen from Chart below, in India, labour- and resource-intensive industries
accounted for 60 per cent of total manufactured exports of $34.5 billion
in FY02. High skill- and technology-intensive products have grown at
a 13 per cent CAGR during the last six years, primarily led by pharmaceuticals
and medical equipment industries; labour-intensive products have grown
at a 5 per cent CAGR during the same period.
Besides
the various India-specific advantages and factors that engendered a
conducive business climate, there have been other business enablers
that will catalyse export-led growth for manufacturing companies. These
are categorised as industry and economy level enablers and company level
enablers.
Economy/Industry
level enablers
These
business enablers have a tremendous positive impact on Indian companies.....
....CONTD
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