enhancing

prosperity

WHITEPAPER ON COMPETITIVENESS
OF INDIA
 Documentation Partner

Knowledge Partner

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MICRO, SMALL & MEDIUM ENTERPRISES
 1

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 Insti-
tute (TCI), OECD LEED, NSDC, GIZ and MSME.

The Forum covered topics related to competitiveness such as

▪▪ Economic Development: Economic Development: Reconfiguration, World, Asia, Regional Com-

petitiveness, 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, employ-
ment generation.
▪ ▪ The Role of Business in Society: Shared Value, Economic Objectives, Social Objectives, and Phi-
lanthropy et al
▪ ▪ Clusters as a tool for wealth creation: Emergence of clusters in India, Productivity, Diffusion, In-
novation, Seeding Clusters, Trade, Cluster Portfolio, Specialization Patterns, Technology Clusters,
Cluster Composition, Internationalization
▪ ▪ Regional Competitiveness & Process of Economic Development: Provinces, Vision, Value Propo-
sition, Competition within States, Business Environment, Strategy, Sustainability, Stages of Com-
petitive Development

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Asia as a Driver of World Economy
Over the past several decades, the Asian econo-
mies have been contributing actively to the world’s
total GDP, with India and China as the majoris
contributers.
History has amply evidenced that sovereignty, stabil-
ity 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 ob-
serve that the historical period which has been de-
scribed 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 sci-
entists 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 flour-
ish without putting too much control on them. This
eventually led to prosperity and economic develop-
ment. 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 prod-
uct 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 de-
cades one would say that Asia lost its supremacy be-
cause 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 com-
pared to China. Also US and Germany are moving
towards the third revolution called Digital Manu-
facturing. Digital manufacturing is about making
things which are not closer to the customer in a to-
tally 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 innova-
tion
▪▪ Energy
▪▪ Input costs, whether they are labour cost or ma-
terial 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 tremen-
dous success in building software industry in the last
30 years, making it a 100 dollar billion industry. In-
dia’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 bring-
ing innovation into its manufacturing policies.
Four most important factors for India to build com-
petitiveness 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 in-
novation, trying out new ideas, which are go-
ing to be completely different from the colonial
mindset. An education system should not be
designed just to bring out mere transactional ca-
shiers 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 manufac-
turing clusters in Ludhiana, IT clusters In Ben-
galuru etc. What we lack is an ecosystem around
3
these clusters which can actually bring innovation
in them – and these clusters need to be profession-
ally managed and branded. India needs to em-
brace 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 horren-
dous vista.
▪▪ Hence, India should learn from the history and
focus more and more on innovation driven strat-
egies, bringing stable tax laws and polices into
the system, focus more on customization, cluster
building, infrastructure etc. Therefore, in the fol-
lowing 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 bil-
lion, 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 mar-
ket continues to grow at the same pace that we are
experiencing currently, then natural forces would
definitely lead to foreign companies to start manu-
facturing in India. Our aim is to increase the manu-
facturing Competitiveness of India.

Figure 1: Indian manufacturing over the last 20 years

% Contribution of Manufacturing in GDP

17.0
16.5 16.4
16.2
16.0 16.1 15.915.8
16.0 15.8 15.8
15.5 15.2 15.3 15.2 15.3
14.9 15.1 15.015.1
15.0 14.8 14.8
14.5 14.4 14.5
14.1
14.0
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 in-
dustry 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 be-
cause 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 in-
frastructure 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 in-
dustries also have a setback.
Small industries cannot insulate themselves from the
environment because they do not have adequate re-
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 rea-
sons 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 Rap-
idly 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
5
sources. If the cost of power is high, then it is not pos-
sible 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 prod-
ucts 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 ex-
cellent strength in Indian industry where we can use
low cost techniques, common place techniques, and
build the ability to survive in the industry. But some-
times jugaad leads to short sightedness.
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 be-
low)
▪▪ In other RDEs, manufacturing provides a major
share of employment whereas in India, manu-
facturing sector employs only 58 million work-
forces, 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) % Contribution in GDP- iNDIA (2010)

19.8 Agriculture 20.2 14.6 Agriculture

31.4
Services Services
14.9 15.9
Manufacturing Manufacturing
Industry 65.2 Industry
48.8

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 60000 80000 100000

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

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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 non-
metallic 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
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

Increase contribution medium term to make it the engine of growth for the economy
to GDP ▪▪ Enable manufacturing to contribute to at least 25% of the
National GDP by 2025.

▪▪ Boost employment through manufacturing

Boost employment ▪▪ Create 100 million additional jobs by 2025 in
manufacturing sector.

▪▪ Add depth to the manufacturing so as to increase and

Add depth encourage value addition in domestic manufacturing,
to address the national strategic requirements

▪▪ Enhance Global Competitiveness of Indian

Enhance Global Com-
Manufacturing through appropriate policy
petitiveness
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 per-
cent of the employment is generated by agriculture.
The major challenge faced by India is to migrate that
70 percent of employment in agriculture to manu-
facturing in agriculture itself, which is supposedly a
large component of manufacturing, and hence would
generate far more employment opportunities. There-
fore, 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 Develop-
ment
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.
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 In-
novation 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 re-
quired in the MSME sector, where outdated technol-
ogy 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 ecosys-
tem 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.
9
Trust Building between Government, Industry
and Society
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?
Focus on “Green” manufacturing techniques
If India and China also start consuming the same
level and same kind of energy as the developed na-
tions 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 sec-
tors such as BPO sector, IT sector, medicine, in-
frastructure, 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 be-
hind 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 seg-
ments today and it is advised that India works out
individual customisation at mass level solutions.
Bring stability in policies
Indian manufacturing cannot be competitive un-
til 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 implica-
tion 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 po-
litical 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 at-
tention because of the following issues:
▪▪ Huge amount of food wastage in India
▪▪ High food inflation
▪▪ Less Consumption of processed food in India-
The consumption of processed food in India is
mere 5-10 percent which is very small as com-
pared 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 in-
dustry 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 high-
est inflation rates in the world. This is mainly due
to our inability to deal with the perishable food
11
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 pro-
duces 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 packag-
ing. 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 provid-
ers, firms in related industries, and associated institutions (e.g. universities, standards agencies,
trade associations) in a particular field that compete but also cooperate.
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 Indus-
trial 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 min-
istries such as Ministry of Textile, Development Com-
mission of Handicrafts, Handlooms, MSME, DIPP, var-
ious 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 manufac-
turing. 98% of the MSMEs in the manufacturing sec-
tor 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 writ-
ten 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, how-
ever, evolved significantly in India in 1990s.
In India many attempts have been made to use the clus-
ter 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
-Michael Porter
state as a part of a cluster mainly because of the chang-
ing definitions. But still there are many economic con-
cepts 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 in-
dustrial 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. Af-
ter 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, Gov-
ernment 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 produc-
ing different products and a hundred such SHGs are
present in the vicinity, and if they are asked to pro-
duce 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 subcon-
tractors 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 out-
puts and then ultimately creating more revenue. But
innovation clusters focus on throughputs, ideas, cre-
ativity 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 deci-
sion makers.
Then the focus got shifted to the clusters and Euro-
peans started looking on how clusters work and how
13
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 facili-
ties, 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 clus-
ters. Apart from cooperation, other things also need
to be created such as infrastructure, common facili-
ties, laboratories etc. Every cluster has a different re-
quirement and taking a decision on requirements for
a cluster is tough for the policy makers.
Proper Monitoring and Evaluation of the clus-
ter 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 cer-
tain time.
Cluster Development Programs and Competi-
tiveness
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.
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FMSI Framework and Indian Clusters

▪▪ Factor endowment is getting diluted because government is focus-

ing on employment generation at local levels not at a central level.
Factors
Many government policies, migration of labor from one state to
other state has stopped now.

▪▪ Earlier, clusters used to be located near the markets but now a

days due to the shortage of industrial space, clusters are moving
Market
away from the market. So, in this way, they are losing a competi-
tive edge and a favorable factor for their growth.

▪▪ In Indian industry, strategy as a tool to become competitive is

Strategy almost nonexistent. We mainly work on low cost factors of pro-
duction so strategy is not much used as a tool.

▪▪ There are lot of clusters in India which have come up due to the
strong investment made by government in support institutions.
Institution 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 strat-
egy 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 build-
ing and improve their value system. In India, strategy
is mainly used in informal sector, decentralized sec-
tor and rural development areas.
Clusters and Prosperity
When we talk about evolution of cluster methodolo-
gy and clusters itself, prosperity pathway is the meth-
odology 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 en-
vironment should be the goal. Prosperity is more
than just dollars. It lies in personal freedom, qual-
ity of life etc.
Can we think of any country which is prosperous
but not competitive? The answer is no, we can-
not 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 pros-
perous? The answer is yes, we can.

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Role of Government in developing clusters (ex-
ample 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 educa-
tion 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 in-
vestment. There was just 450 million dollars increase
in revenue and almost 50-55,000 new jobs were cre-
ated. 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 al-
ways have to have some type of advocacy from the
15
Government because Government needs to pass
many regulations and provide an enabling environ-
ment 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 ac-
tion 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” num-
ber of strategies, they even have strategies about
having strategies but actions were not happening
there until innovation clusters came up because in-
novation 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, competitive-
ness over the time creates prosperity as long as inno-
vation 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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16

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 condi-
tions 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

delivering qual-
addressing creating the ity healthcare to
the need market 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 entre-
preneurs. This enables Novartis to gain a tremendous advantage in its supply chain and enables com-
munity 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, commu-
nity 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 govern-
ments 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 partner-
ships with public sector. FabIndia has set up a company in Orissa which is completely a public private part-
nership 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
The companies like FabIndia, Mother Dairy, Novar-
tis etc work extensively on creating shared value for
the society and hence are called community compa-
nies. 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 posi-
tion back because the competitor becomes master in
the field where the organization has lost. This mainly
happens when the losing company has multiple ob-
jectives 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 defi-
nition 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. No-
vartis and Arogya Parivar as a company, always in-
vite other companies so as to make a broader spec-
trum to address the need.
RECOMMENDATIONS
Make processes transparent
In today’s world, information asymmetry and opac-
ity 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 trans-
parent 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 oth-
er key stakeholders should be satisfied which would
eventually lead to sustainability.
Work on collaborative models
Sometimes, when ever some business or even an in-
dividual involves themselves in a social activity then
there are many uncertainties in the beginning which
may be due to several reasons as incomplete infor-
mation, accessibility to society etc. These uncertain-
ties 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 sub-
sidy 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 im-
pact 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 scepti-
cism, 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 brand-
ing 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
19
some other organization would definitely do it.
For example, when a sales officer from Mother Dairy
comes to know that a labourer working at construc-
tion 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 ob-
jective of promoting the inclusive growth.
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20
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 po-
sition 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 en-
ergy etc, high fiscal deficit, high debt to GDP ratio
and problems of corruption are largely responsible
for India’s low competitiveness.
Role of government in competitiveness
Role of government is limited to providing macroeco-
nomic 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.
Need to focus on City competitiveness
City competitiveness is also a very important issue for
the prosperity and competitiveness of the country. In-
dian cities are not competitive and they rank very low
even on the scale of Asian cities while other Asian cit-
ies 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
Focus on Research
Research is an integral part of development. India
needs to produce more PhDs. The mentality of mov-
ing into jobs straight away after graduation and post
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 represent-
ed as one industry internationally.
Bring certainty in the system
Telecom sector contributes 3 % to India’s GDP. Gov-
ernment Policies and regulation, play a very impor-
tant 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.
Promote Entrepreneurship
When we look at the economic growth and how coun-
tries 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.
Focus on human capital and education
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
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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, qual-
ity 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 process-
es 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 health-
care 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 improv-
ing the services of Primary Health Centres because
India’s 80 percent population still depends on them.
India also needs to increase its spending on health-
care. Currently, India is spending only 1.8 percent of
its GDP on healthcare.
Identify primary activity for building competi-
tiveness
Whenever we look at a country, city or region, we
should first identify its primary economic activi-
21
ties for building the competitiveness of the city
or country. For example, Finland’s primary eco-
nomic activity is telecom; hence Finland is com-
petitive in the Telecom sector. Similarly, Japan’s
strength lies in the electronic field, Detroit in the
manufacturing, California in wireless etc. Gov-
ernment 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 signifi-
cantly low as compared to other economies. More-
over, India’s manufacturing sector only employs 58
million people which are 12 percent of the total la-
bour 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 peo-
ple who are deprived of them, especially rural popu-
lation and the urban poor. Almost 70 percent of the
India’s healthcare capacity is engaged for the treat-
ment of water borne diseases.
Strict Measures to curb corruption
Corruption is the biggest inhibitor to India’s
regional competitiveness and economic develop-
ment. Whatever the budget is allocated to various
plans, is never spent in actual because of the exist-
ing corruption in the system. Moreover, corruption
never lets the policies and plans to happen in the
correct way. 
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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 devel-
opment, 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 De-
velopment 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 re-
duced 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 promot-
ing 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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