Indias Global Competitive Index - Case Study Example

India’s Global Competitive Index Name Course Professor Date 2036 words Contents Introduction 3 Main Body 5 Conclusion 8 References 11 Introduction Economic growth is a measure of an increase in the real Gross Domestic Output or real output. GDP is used as the measure of national output as well as national expenditure. GDP measures an economy’s total volume of goods and services produced in a specified period. On the other hand, economic development transcends increase in the real output, looking into a wider range of statistics. Economic development is concerned with how various economic factors affect people’s quality of life. Economic development tries to explore deeper to give an analysis of people’s actual living standards as well as the freedom these people have in enjoying a good living standard. Measuring economic development is not as precise as it is with economic growth which depends on GDP statistics. Several measures of economic development are used such as the Human Development Index (HDI). Most of these measures look at life expectancy, the levels of environmental standards, levels of heath care, real income per head, levels of education standards and literacy and quality and availability of housing. It is, therefore, possible to have economic growth without economic development. This is true because there may be an increase in GDP but no improvement in the living standards of most individuals in an economy. Some of the factors that may lead to this phenomenon are when economic growth benefits only a small percentage of the population, where a country is faced with issues of corruption or a country that produces toxic chemicals that may fetch high returns but on the other side lead to environmental and health problems. According to Whitman Rostow, economic development happens in five phases (Aoki, 2011 pg 2). The first phase of economic development is known as the traditional society where the economy is supported by subsistence activity. The second phase of economic development is known as the preconditions for take-off. In this stage, there is increased specialization generating surplus thus shifting trade to another level. The third and most important phase is known as the take-off stage. This stage marks an industrial revolution where industrialization increases, worker switching to the manufacturing sector from the agricultural sector. Drive to maturity marks the fourth phase of economic development. At this stage, the economy is diversifying into new areas with an increase in technological innovation which offers a diverse platform for a range of investment opportunities. The fifth and last stage of economic development is the phase of High Mass Consumption. At this stage consumer, durable industries flourish with the service sector becoming increasingly dominant (Aoki, 2011 pg 3). Competitiveness is the set of policies, institutions and factors that determine a nation’s level of productivity. It is this level of productivity of an economy that sets the possible national level of prosperity. Measures of the level of productivity of any nation are used to determine expected rate of return on investment investors obtain. This marks the foundational drivers of an economy’s growth rates. An economy is said to be more competitive if it is likely to grow faster over time (Delgado, 2012 pg 8). Economic growth on the other side entails an increase in a country’s real output. There is a causal link between the increase in the nation’s real output which determines economic growth and increases in productivity that place an economy higher in the competitive index. Main Body There are many factors that drive productivity and competitiveness, and an understanding of the determinants of the process has for many years occupied the minds of economists. This concept has engendered theories that range from Adam Smith’s division of labor and specialization theory to neoclassical economist’s theories of investment in physical capital and infrastructure. According to economic literature, most of the factors determining national competitiveness are not mutually exclusive hence two or more of them appear significant at the same time (Delgado, 2012 pg 9). This has been captured within the Global Competitive Index through the inclusion of a weighted average of different components, each one of them measuring a different aspect of competitiveness. The GCI is featured as an appropriate estimate of the level of competitiveness and productivity of an economy and narrows down to 12 pillars of national competitiveness (WEF, 2013 pg 20). These pillars include institutions, infrastructure, macroeconomic environment, heath and primary education, higher education, efficiency of the goods market, labor market, financial market development, readiness in technology, market size, business sophistication and innovation. Focusing on the eleventh and twelve pillars of national competitiveness for the Indian case, we first explore what these pillars entails. The eleventh pillar of national competitiveness is business sophistication. It is plausible to note that, sophisticated business practices are conducive to increasing the efficiency levels of production of goods and services. Two fundamental elements are featured in business sophistication that includes the quality of individual firm’s operations and strategies and a country’s overall networks quality. These factors are important mostly to countries that are at advanced economic development stages that have almost exhausted basic sources of productivity improvements (WEF, 2014 pg 24). According to the Global Competitiveness Index of 2014-2015, India ranks high in the business sophistication at number 57 (WEF, 2014 pg 45). India performs so well in business sophistication since this pillar depends on the network of suppliers that Indian business community has managed to create over the past few decades. Interconnection of suppliers and companies from various economic sectors in proximate geographic groups has enhanced efficiency, greater innovation opportunities in the creation of products and processes as well as the production of unique and sophisticated products. Innovation, on the other hand, is the 12th pillar of national competitiveness that India scores high in. In most instances, innovation emerges from both new technological and non-technological knowledge. India performing best in innovation is because the innovation pillar is dependent on technological innovation for competitiveness and growth in a longer time frame. India has demonstrated continued technological improvements over the past decades. What India needs to understand is that innovation alone cannot be sufficient for increasing the level of productivity. The country’s firms need to design and develop cutting edge products that will enable it to maintain a competitive edge. Due to the recent rising fiscal pressures experienced by advanced economies, India should take caution and ensure that its public and public sectors resist the pressures of cutting back on research and development funding. Research and development will eventually prove critical for sustainable economic growth and development in the future (Delgado, 2012 pg 12). India should ideally focus on the basic requirements sub index for it to improve its competitiveness. Across this sub-index, India performs worst with respect to its relative rank. Its rank in this sub-index s 92 out of 144 and can be placed at 5 in a rank of 1-7 (WEF, 2014 pg 46). In this sub-index, we find that its poor macroeconomic environment is ranked at 101, health and primary education is also poor ranking at 98 and its infrastructure is decrepit ranking at 87. Focusing on efficiency enhancers, India has experienced a fall from 42 in the 2103-2014 ranks to 61 in the 2014-2015 ranking. Except the market size pillar, the rest of the pillars in this sub-index have experienced drastic fall with the biggest shocker experienced in the financial market development dropping from position 19 to 51. Technological readiness is lowest at position 121. This is experienced due to the difficult fiscal situation India has experienced in previous years. Goods efficiency pillar ranks at 95 due to increased protectionism, monopolies as well as various distortionary measures. Innovation and sophistication factors sub-index performs best with a relative decline from 41 to 52 as previously explained (WEF, 2014 pg 46). Giving an insight to doing business in India, several problematic factors are worth noting (Albert, 2015 pg 4). The GCI report ranks inadequate infrastructure, faulty tax regulations, policy stability, inefficient government bureaucracy and corruption as the key problematic factors that deter business investment in India. There are series of alleged scams that make doing business in India hard. In addition to the alleged scams, a retrospective amendment to tax laws and policy instability over land acquisition are additional reasons that make it hard doing business in India. Regarding institutional quality, there are issues of public trust in politicians, the burden of government regulation, and irregular payments and bribes that contribute to deterioration in the business environment (Albert, 2015 pg 6). Focusing on health, education and social indicators, there is a need to worry since India ranks poorest in the basic requirements in GCI. The country is faced with high inflation rates, high general government debt and persistent budget deficits giving it a poor ranking and bad image for investors. The GCI report also notes that it involves a very long bureaucratic process to register a business in India as well as setting up a business citing relatively high tax rates as a proportion of gross profit. The factors that contribute further to the lowering of goods market efficiency in India include and not limited to the high proportion of imports to GDP and higher trade tariffs. Conclusion According to Rostow’s five phases of economic development, India can be plausibly placed at the second phase of preconditions for takeoff. This stage covers a very long period, a century or more and in preparation for establishing the preconditions for takeoff. It is at this second phase that we encounter fundamental changes in the social, economic and political fields as the case in India. Currently in India, the society is changing its attitudes towards risk taking, profit earning and science. The construction of social and economic overheads can also be easily identified such as more schools and railroads (Albert, 2015 pg 8). A centralized tax system is in the process to include almost all the sectors of the economy and the labor force has started adapting. Reviewing on the pillars of national competitiveness, the pillars that require most attention are the health and primary education pillar and the technological readiness pillar (WEF, 2014 pg 46). India experiences some of the highest infant mortality children malnutrition rates in the world. According to the GCI report, only 36 percent of India’s population has access to improved sanitation. Life expectancy in India is second shortest in the world after Myanmar. Although India is on track to achieving universal primary education, there is a persistent crisis at the primary levels according to a report by ASER. An improvement in educational standards will yield great brains that will lead to the development of the macro-economic policies that will see the nation forge forward and improve its global competitiveness ranking. According to WEF (2014 pg 46) report on GCI, when it comes to technological readiness, India ranks very low at 121. India is one of the countries that are least digitally connected in the world. It worrying to note that, only 15 percent of Indians have access to the internet on a regular basis. Broadband internet is also a privilege of a very few Indians. Since India ranks very high in technological innovation, it should use this advantage to bridge this digital divide. Technology is a necessity in the current globalized world since it enables firms to compete and proper effectively. With poor projections of technological readiness, most multinational firms will be hesitant to venture into the Indian business environment. India should advance its ICT sector given its critical spillovers to other economic sectors. Effective economic growth should be all inclusive to realize economic development in a country (Salvatore, 2010 pg 3). For the Indian case, there are worrying levels of corruption that lead to ineffective income distribution. Although the countries experience increased levels of Gross Domestic Product, most of the income realized goes into banks accounts of few corrupt officials in the government. Similarly, most of the industries are subsistence or deal with raw materials fetching very low wages for the workers hence their quality of life remains low. The country needs to take measure to transform the economy into a manufacturing hub and improve it competitiveness which will yield huge benefits (WEF, 2014 pg 47). This will eventually help India rebalance the economy moving the country up the value chain and attract investors. References Albert, A. M. 2015. Harnessing potential: Institutional voids and doing business in India. Saarbrücken: LAP Lambert Academic Pub. Aoki, M. 2011. The Five-Phases of Economic Development and Institutional Evolution in China and Japan. SSRN Electronic Journal. doi:10.2139/ssrn.1893285 Cairncross, A. 2010. Introduction to economics. London: Butterworth. Colander, D. C. 2013. Economics. New York: McGraw-Hill Irwin. Delgado, M., & National Bureau of Economic Research. 2012. The determinants of national competitiveness. Cambridge, MA: National Bureau of Economic Research. Devonshire-Ellis, C., & Dezan Shira & Associates. 2012. Doing business in India. Berlin: Springer. International, B. P. 2015. Doing business and investing in india: Strategic, practical information, regulations, contacts. New York: Intl Business Publications. La, G. O. 2011. Economic growth and development. Bingley, U.K: Emerald. Nalaka Gunawardene. 2014. Bridging South Asia’s digital divide with budget telecom SciDev.Net South Asia. Retrieved March 18, 2016, from http://www.scidev.net/southasia/digital-divide/analysis-blog/bridging-south-asia-s-digital-divide-with-budget-telecom.html Nelson, D. 2008. Doing business in India. London: DK Pub. Miller, R. L. 2008. Economics today: The macro view. Toronto: Pearson Addison Wesley. Rostow, W. W. 1960. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge University Press. Retrieved March 18, 2016, from http://www.ou.edu/uschina/gries/articles/IntPol/Rostow.1960.Ch2.pdf Salvatore, D. 2010. Introduction to international economics. Hoboken, NJ: Wiley. World Economic Forum (WEF). 2014, August. Global Competitiveness Report 2014-2015 | World Economic Forum. Retrieved fromhttp://www.weforum.org/reports/global-competitiveness-report-2014-2015 World Economic Forum (WEF). 2013, August. The Global Competitiveness Report 2013-2014 | World Economic Forum. Retrieved from http://www.weforum.org/reports/global-competitiveness-report-2013-2014 Read More