Tag Archives | manufacturing

Taking Advantage of Lower Commodity Prices

By focusing on those industries that rely on oil as a producion import, India can take maximum advantage of falling global commodity and oil prices. 

The biggest headlines in the economic world over the past year has been news of slowdown in the Chinese economy and the resultant fall in commodity prices. The slowdown in China, which has been the engine of growth in the past decade, has had significant impact on most other economies. China has been the biggest consumer of commodities and oil and thus, a slowing Chinese economy will import lesser amounts and this reduced demand leads to a fall in prices. Commodity prices have fallen by over 40% since their peak in the early part of this decade. Apart from oil, copper, iron ore, zinc, and many metal prices have been declining consistently. Price of energy related commodities, such as coal, has also significantly dropped. The reduced prices have hit many commodity and oil exporting countries. Brazil, Russia, South Africa and many other emerging markets have had severe declines in their exports and consequently in their GDP growth.

Commodity prices have fallen by 40% since their peak.

Commodity prices have fallen by 40% since their peak.

How is India poised? Is it going to be hurt by the Chinese slowdown or can it be a tailwind to increase growth?

First, the negatives: Indian apparel and yarn exports have declined considerably. China has been a big importer of Indian textile products and its decreased pace of income generation has meant lesser demand for Indian exports. Further, with China devaluing its currency considerably as a means to improve their trade, Indian competitiveness has been further eroded. India’s exports have fallen in every single month from April to November 2015 in comparison with the same month a year ago.

However, with India being a net importer of oil and commodities, it should really focus on taking advantage of the lower global commodity prices and falling oil prices. Here’s a few things that India can focus on:

1. With oil prices set to decline further in the first half of 2016, this is the time for India to seriously consider building a large enough strategic oil reserve.

2. India should get its current account balance in line. The rupee has also been declining significantly and if India can increase its exports, and with a reduced import bill, the current account deficit can be corrected to an extent.

3. Lower oil prices will imply smaller oil, petroleum and fuel based subsidies. This should be a golden opportunity for the government to get its fiscal accounts in check.

4. A lower import bill will also have positive effects on inflation and inflation expectations. This should give more room for a more accommodative monetary policy.

5. Most importantly, the government should focus on those industries that uses imported material, commodities and oil, as raw materials for production. The Indian auto industry should get a considerable fillip due to lower input prices. If policy can be more accommodative, the auto industry can soar. Other industries that rely on oil, such as, plastic industries including pipes, chemicals and resins selectively, paints, footwear manufacturers etc can really benefit from oil prices and the government should focus on creating a friendly climate for these industries. Apart from oil, reduced price of iron-ore, copper and even coal should help a large number of Indian industries by lowering input costs.

6. Finally, since India’s nearest peers – Brazil, China, South Africa, and many other EMs – not faring well in terms of economic opportunities, it is poised to receive a lot more of global funds, both FII and FDIs. The next round of liberalising reforms cannot come soon enough to attract global capital into India.

After the stagflationary episode in 2010-12, India is finally getting back to the higher growth track and global conditions seem to be favouring India. It should do all that it can to take advantage of these conditions and accentuate the positives.

Anupam Manur is an economics Policy Analyst at the Takshashila Institution. Connect with him on Twitter @anupammanur

 

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Problems with Movement of Goods Within India

The quality of the road network infrastructure in India is in need of drastic improvement and better coordination among regulatory authorities can reduce the delays in travel times.

The biggest markets in the world, i.e., the largest concentration of people in a geographic entity, are China, India, US and the EU. With such large markets, internal trade should account for a significant portion of overall economic output. However, internal trade in India accounts to less than 15% of GDP, which is one of the lowest in the world. The Eurozone does slightly better with internal trade accounting for 20% of GDP, in China it hovers around 35% of GDP and in the US, internal trade forms 40% of GDP.

The low share of internal trade in India can be explained by many factors. Complex, varied and multiple tax structures in different states. Laws and regulations also differ from state to state which increases transaction and compliance costs, which are then passed on to the consumers. Agricultural commodities and manufactured commodities have their own set of problems. However, a very practical and big constraint in the movement of goods within India is the state of road infrastructure, which this post shall try to highlight.

India has the second highest road network in the world, spanning over 4.7 million kilometers, which easily makes it the most important mode of transportation in the country. It carries over 60% of the country’s total freight traffic and about 85% of the passenger traffic. While this is impressive in its own right, the state of roads in India actually falls behind the requirements. One way to measure this is to calculate the volume of road freight growth in India and the corresponding growth in expansion of the road network. While road freight volume and the number of road vehicles have been growing at a compounded annual growth rate of 9.1% and 10.8% respectively, the growth rate of length of roads lags behind at 4%.

Further, most of the road network in India is rural roads that do not allow the smooth transit of heavy vehicles meant to transport goods across states. The share of motorways/expressways and national highways in the total road network is abysmal when compared to many developing and developed countries. India has only 1.7% of its total road network in the form of expressways and highways, whereas the corresponding figure for the US is 5.7%, UK – 12.6%, South Korea – 16.9% and China 2.6%.

This results in lower truck speeds and delays in transportation of goods across the states. India has one of the lowest average speeds for trucks. This table below, taken from a report by Ernst Young and Retailers Association of India (2013), shows different parameters to gauge the efficiency of the transportation system in India.

Different indicators of efficiency in road transportation

Different indicators of efficiency in road transportation

Apart from the lack of good physical infrastructure, the regulatory structure in India causes many more delays in road transportation. India’s trucks spend only about 40% of their time moving on the road. The rest of the time is taken up at checkpoints and tollgates. A McKinsey report and a EY summit with FICCI confirms that India spends nearly 13% of its GDP on logistics.

A sample of the different checkpoints and detentions for trucks on national highways.

A sample of the different checkpoints and detentions for trucks on national highways.

A World Economic Forum Report observes that “a truck carrying goods from Gurgaon to Mumbai has to pass through 36 checkpoints and takes up to 10 days to reach its destination.”

“Vehicles are frequently detained for checking essential documents, like sales tax, payment of market fee, octroi, entry permits, law and order concerns, protection of environment and the endangered species etc. Besides, there are numerous other reasons under different legal provisions that can detain a vehicle, like check on the movement of essential commodities, food adulteration and hazardous chemicals etc. These checks are generally conducted by respective agencies at separate points, resulting in more than one detention. There exist flying squads or surprise checking teams other than normal checkpoints, who are empowered to stop and check the vehicle at any point within their jurisdictional limits and detain it for any violation” notes a Ministry of Agriculture Report on Removal of restrictions on internal trade in agricultural commodities.

Better coordination between the various agencies involved in checking for regulatory compliance can reduce the number of stoppages and improvement in travel times.

In order to develop inter-state trade within India and make India a manufacturing hub, it is imperative to fix the structural infrastructure issues, both in terms of the quality of roads and the number of stoppages due to regulatory checking.

 Anupam Manur is a Policy Analyst at Takshashila Institution and tweets @anupammanur

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What does it mean to be employable?

Why autonomous universities are essential to harness India’s demographic dividend

By Shobitha Cherian

 

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India is currently in an extremely advantageous position, demographically speaking. Half of its burgeoning population of 1.27 billion people is comprised of individuals under the age of 25 and a quarter of the increase in the global working population between 2010 and 2040 is projected to come from the country. This so called ‘demographic dividend’ could be extremely beneficial to the Indian economy. According to the IMF, it could potentially result in an increase in the GDP growth rate by two percentage points each year for the next twenty years. However, in order to harness this demographic, it is necessary that this growing population also be productive and employable.

But what determines the employability of an individual? A lot of employers would say it is the extent to which a worker can utilise his attributes, skills or knowledge in order to contribute productively. So, in addition to a bare modicum of knowledge and skills, it is essential that workers are also capable of actually translating that expertise into productive labour. Unfortunately, such workers are far from being prevalent in India, and a vast amount of work is required before the majority of India’s young workforce becomes employable.

Higher Education in India: Vision 2030, a report produced by Ernst and Young for the Federation of Indian Chambers of Commerce and Industry (FICCI) states that 75 percent of graduates from Indian universities are said to be unemployable in the IT sector. This number decreases to 55 percent in manufacturing and 50 percent in the banking and insurance sectors. While graduates from the country’s top universities are much more capable, they comprise a small proportion of the national average. Overall, there is an apparent disconnect between the skills and knowledge of a majority of the Indian workforce and the needs of their respective industries. This must be rectified as soon as possible, otherwise India’s youth will age past the point of productivity without ever realising their potential.

One major problem with the current education system is that it churns out students that are theoretically proficient in their subjects but lack the ability to adapt and apply this knowledge to perform specific tasks required on the job. Theoretical know-how is relayed in isolation through prescribed text books and written examinations; this is not enough to understand practical or real world applications in their industries. The problem is particularly pronounced with science and engineering graduates; the ability to apply scientific theories to come up with practicable solutions is an absolute necessity in a job environment.

In order to ensure that students possess this ability, it is necessary that they are given expertise in the tools and practices actually used in their respective industries. In the United States, the Secretary’s Commission on Achieving Necessary Skills (SCANS) was appointed in 1990 to determine the skills needed for young people to succeed in the workplace. In its report, which is still widely used as a guideline for educational institutions in the States, it illustrates five competencies that all graduates must possess-

  • Knowledge of how to effectively allocate time, money, materials and human capital.
  • The ability to work on a team, teach, lead, negotiate, serve customers and work with people from diverse backgrounds.
  • Knowledge of how to acquire, evaluate, interpret and communicate data.
  • Knowledge of how to design and improve social, organizational, and technological systems.
  • Having the ability to effectively use technology.

It is vital that Indian universities adopt such guidelines when setting their curricula. In this regard, universities should be granted more autonomy in deciding their curriculums and with other such vital functions. The current framework empowers regulatory authorities to micromanage universities through various laws, rules and guidelines, often to poor results. This level of regulation makes it nigh impossible for progressive minded faculty to adopt more modern and practical curricula. This autonomy could be granted without detrimentally affecting educational standards by defining some basic pre-requisites for each university.

Creating a regulatory structure where universities are empowered to produce graduates that cater to industry requirements is the need of the day. Without it, the potential of the majority of India’s workforce will not be realised into actual contributions to the economy. Currently, the demographic dividend is closer to a non-performing asset about to turn into a liability.

Shobitha Cherian is an intern at the Takshashila Institution.

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