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Business News/ Opinion / How competitive is Indian manufacturing?
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How competitive is Indian manufacturing?

Currency depreciation has ensured that India remains competitive

Graphics: Prajakta Patil/Mint Premium
Graphics: Prajakta Patil/Mint

Indian manufacturing’s problems are well known, but its export competitiveness has remained intact over the past decade, says a new study by the Boston Consulting Group. A key reason for that is India’s depreciating currency.

According to BCG, India’s manufacturing costs as a proportion of US costs have changed very marginally in the 10 years to 2014. As Chart 1 shows, India’s costs come close to 87% of US manufacturing costs in 2014, not very different from a decade ago.

This is in stark contrast to China where relative costs have increased significantly over the past decade. Brazil is another country which has seen its competitiveness eroding, making it one of the few countries where manufacturing costs are higher than in the US. While India has seen an increase in the costs of inputs such as electricity and natural gas, its relative labour costs adjusted for productivity has come down, as Chart 2 shows.

To be sure, wages have risen in Indian manufacturing over the past decade, but that has been offset by a fall in the rupee. Over the past decade, the annual average rupee to dollar rate has fallen 35% against the US dollar compared to say, a 35% appreciation for the Chinese yuan. Even the increase relative in electricity and natural gas costs are lower than the rise in other Asian countries owing to the weaker currency.

The question that remains is why hasn’t India, riding on low costs, already become a hub of global manufacturing? That’s because direct costs aren’t the only factor when it comes to choosing a manufacturing location. Factors such as corruption, weak infrastructure, regulatory hurdles and labour laws add risk, and are the hidden costs of Indian manufacturing.

“Fundamental reforms in labour, energy, and investment regulations are required before India can fully capitalize on its low-cost advantage," concludes the BCG study.

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Published: 28 Aug 2014, 10:39 AM IST
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