Analysis of the Competitive Advantages of the Indian Economy

This case study examines the competitive advantages of the Indian economy, prompted by a government report based on the Global Competitiveness Report 2017-2018. The analysis, conducted by a student, addresses the Governor of the Reserve Bank of India's concerns regarding India's competitive position, specifically within the Innovation and Business Sophistication sub-index and the barriers to development in financial market development compared to China. The paper establishes India's position on the economic development path, assesses its overall competitive position, and computes competitive advantages in the pillars of Business Sophistication and Innovation. It also measures the barriers to economic development in India relative to China in the financial market development pillar. Finally, it critically evaluates the Indian bureaucrats' report, contrasting their findings with the analysis, and provides a comprehensive understanding of the challenges and opportunities for the Indian economy.

Running Head: THE COMPETITIVE ADVANTAGES OF THE INDIAN ECONOMY
The Competitive Advantages of the Indian Economy
Name:
Number:
Date: 7th October, 2018

THE COMPETITIVE ADVANTAGES OF THE INDIAN ECONOMY 2
Executive Summary
The World Economic Forum prepares the Global Competitiveness Index of the 137
countries which are based on the level of their productivity. The Indian bureaucrats prepared
a report based on the GIC. The report prepared by them was not convincing and the governor
of the RBI is curious about the competitive position of India with respect to Innovation and
Business Sophistication and also in assessing the barrier of development of India with China
in the financial market development pillar.
The purpose of the paper is to present a true picture of the India’s competitive
position by evaluating the GIC computed by the World Economic Forum. The
competitiveness and barriers are calculated and compared with that of China and the result is
then compared with the one presented by the Indian bureaucrats.
Key words: development, growth, global competitiveness, national competitiveness, barriers,
financial development, etc.

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Introduction
Competitive advantage is a condition that allows a firm, an organisation or a country
to produce a good or service at an opportunity cost lower than its competitors. The paper here
provides the national competitive advantages of India and China within the subindex 3, i.e.
pillars of innovation and business sophistication. It also discusses the position of India and
China on the economic development path. Let us understand the meaning of each of these
terms in the context of the paper:
Economic development is different from economic growth. Economic development
considers all the factors that define growth and development of a country. It takes both the
monetary factors and non-monetary factors into account. It focusses more on the standard of
living and wellbeing of its citizens. It encapsulates both welfare and growth.
Economic Development path as defined by Michael Porter encapsulates three types of
economies or three stages of economies. Stage 1 of the economy is a factor driven economy,
stage 2 is an efficiency driven economy and stage 3 is an economy driven by innovation.
Some economies are in the phase of transition - for example an economy can be transiting
from stage 1 to stage 2 or from stage 2 to stage 3. The different development phases are
segregated by the time intervals. The threshold or the interval of each time period is
segregated by the GDP per capita of the country. If an economy’s GDP per capita is less than
$2000, then it is a factor driven economy (stage 1) and if an economy’s GDP per capita is
greater than $17000 the it is innovation driven (stage 3).
The Global competitive position of the economy is defined by the overall productivity of
the economy. To measure the overall productivity, not only the ranks are considered but
focus is also put on the score of the economy. The aggregation is done for the pillars, indexes

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and sub-indexes. The competitive index helps in the assessment of the economic
development barriers of one country with respect to the other countries.
Analytical development
1. Establish the position of India and China on the economic development path
The economic development path can be segmented into three stages. The GDP per capita
of China is $8113.3 and that of India is $1723.3.
Stage 1 is the stage of a factor driven economy where the country competes with its
competitors on the basis of the factor endowments like natural resources and labour. The
stage 1 has four pillars namely- pillar of Institutions, pillar of Infrastructure, pillars of
macroeconomic environment and the pillar of health and primary education.
Stage 2 is the stage of efficiency driven economy where the productivity rises and the
wages are in synchronisation with the development of the economy. An efficiency driven
economy has better quality products and efficient production techniques. The wages rise but
the prices don’t. The competitiveness in this stage is primarily determined by the pillars of
higher education and training (5th pillar), pillar of goods market efficiency (6th pillar), pillar of
labour market efficiency (7th pillar), pillar of financial market development (8th pillar), pillar
of technological readiness (9th pillar) and the Market size pillar (10th pillar).
The third stage is innovation driven and the wages are so high that it is sustainable only if
there is innovation (11th pillar) combined with sophisticated production techniques (12th
pillar).
These three stages determines the development path of an economy. Since India’s per
capita GDP is less than $2000, so we can say that India is a factor driven economy and is in
the Stage 1 of economic development path. China’s per capita GDP is in between $3000 -

THE COMPETITIVE ADVANTAGES OF THE INDIAN ECONOMY 5
$9000, so China is an efficiency driven economy and is in stage 2 of the economic
development path.
2. Establish the overall competitive position of India and China
The Overall competitive position of an economy is defined with respect to the
institutions, policies and factors which determines the level of productivity of the economy.
The overall competitive position of China is 27 with a score of 5.00 and that of India is 40
with a score of 4.59 when compared with 137 other countries. Productivity is taken into
account because it is a major determinant of the long-term economic growth.
China’s overall competitive position, i.e. 27th rank is attributed to the steady and
incremental improvement in its competitive score. When compared with previous year China
progressed in all pillars of development except infrastructure (pillar 2) and macroeconomic
environment (pillar 3). A decline in macroeconomic environment can be due to the rising
government budget deficit and that of infrastructure can be due to the fall in the port
infrastructure quality. The gains are due to the increases in FDI that is generating new
technologies in China. The goods market efficiency pillar has also shown a considerable
improvement as the long process for starting a new venture or a business has been reduced.
India’s overall competitive position, i.e. Rank 40 is more stable this year as compared to
the previous year. This is due to the improvement is most of the pillars of development. The
pillar of infrastructure has ranked up from 68th to 66. The pillar of higher education and
training was previously ranked 81 and is now 75. The technological readiness pillar is up by
3 ranks from 110 to 107. These are all due to the increase in public expenditure. The
performance of the ICT indicators have improved too as there are increases in broadband
subscriptions, per user internet bandwidth, internet in schools and usage of mobile phones.
The institutions quality has risen but the problem of corruption still remains a major concern.

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3. State the rule applicable for the evaluation of the national competitive
advantages of India and China
Competitive advantage mostly relies on the factors which are firm-specific like “created”
factors, internal economies via innovation and “created” demand for the product.
The World Economic Forum defines competitiveness as a set of policies, institutions and
factors which further determines the productivity level of the country. The level of
productivity then sets the prosperity level along with the rate of return achieved by the
investors. These are the growth drivers of the economy and the faster the economic growth,
the more competitive will be the economy.
The Global Competitiveness Index measures all the indicators of development (the 12
pillars) on a 1-7 scale and. These scores are then aggregated to compute the overall
Competitiveness of the economy with respect to other countries.
There are two criterias to allocate the countries into their stages of development. The first
one is the per capita GDP at market exchange rates. The per capita GDP has thresholds
according to which a country is allocated its development path.
The second criteria an adjustment procedure for countries which on the basis of their
income can move beyond the factor driven stage (stage 1), but the economy’s prosperity in
this stage is determined by the extraction of resources. The second criteria is computed by
finding the export share of mineral goods of the country in the total exports and further it is
assumed that the countries whose more than 70% exports consists of mineral resources
(computing using 5 year average) are majorly factor driven.
The calculation is based on the successive aggregation of the score from the
disaggregated level (the indicator level) and all the way to the GCI score. The parent category
(the 3 sub-index) has weights attached to it and the further sub categories (pillars) have also
weights attached according to the weight of the parent category. The weights that are

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attributed to each sub index is not fixed but it depends on the stage of development of the
economy
4. Compute the competitive advantages in Pillars # 11 and # 12 for India
Pillar 11 is the pillar of Business Sophistication and Pillar 12 is the pillar of Innovation.
Both these pillars comes under the Innovation and Sophistication factors subindex.
Under Pillar 11, India ranks 38 with a score of 4.5 and under pillar 12 India ranks 29 with a
score of 4.1. (WEF, 2017).
5. Measure of the height of the barriers to economic development in India with
respect to China in Pillar # 8
The rank of an indicator for is taken as a proxy for the height of the barrier to economic
development. Eighth pillar represents pillar of financial market development. It has 8
indicators. To compute the height of the economic development barrier in India we consider
China as the benchmark country. China is efficiency driven and India is factor driven so
China is ahead of India in the path of economic development. Taking China as the benchmark
will help in assessment of the gaps and areas that require development in India.
Let ICH be the indicator for China for the 8th pillar = 48 in the Global Competitiveness
Index and IIN be the same indicator for India = 42
The height of barrier to economic development in India with respect to China in the pillar
of financial market development indicator (I) is:
HIN/CH = Rank of IIN – Rank of ICH
Height of barrier = 42-48 = -6 (Pol, 2017).
Here we see that when it comes to financial development then India is ahead of China.
The height of the barrier here is negative.

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Conclusion
6. Critically evaluate of the report presented by the Indian bureaucrats
Evaluating the points presented by the Indian bureaucrats with respect to the assessment of
this paper:
a. Indian bureaucrats: “India is an efficiency-driven economy”
Paper: India’s GDP per capita is less than $2000 which indicates that India is not
efficiency driven but rather factor driven economy. India is still in the stage 1 of Economic
development path.
b. Indian bureaucrats: “India has competitive advantages in relation to all the indicators
involved in Subindex 3: Innovation and Sophistication Factors of the Global
Competitiveness Index (GCI)”
Paper: In the sub-index 3, India ranks 30. There two pillars in the third sub-index. In the
11th pillar India ranks 39 and in the 12th pillar India ranks 29. China on the other hand ranks
29 in the sub-index 3. India has definitely improved in the pillar of innovation and
sophisticated business as it is growing to become a centre for innovation but it still needs to
work a lot so that the firms can adopt the fast growing technologies of the advanced
economies which would spread innovation and economic benefits.
c. Indian bureaucrats: “the heights of the barriers to economic development for Pillar #
8: Financial market development are substantial in relation to China”
Paper: As calculated in task 5, we can see that when it comes to pillar 8, the barriers to
economic development of India with respect to China is not substantial but is in fact negative.

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d. Indian bureaucrats: “the availability of financial services and the soundness of banks
in China is by far better than in India”
Paper: In the availability of financial service indicator China ranks 54 with a score of 4.4
whereas India ranks 43 with a score of 4.5.
In the soundness of banks indicator China ranks 82 with a score of 4.5 whereas India
ranks 78 with a score of 4.6.
Both these indicators are a part of the financial market development pillar. We can see
easily by the ranks itself that India has better financial services and the banks are sounder
when compared with China.
India is an emerging market economy and also one of the strongest growing economy.
When compared with past years, the development of India has improved but India needs to
move from the stage of factor driven economy to the stage of efficiency driven. For this
purpose India needs to work on the indicators of the sub-index 2 and improve its efficiency in
the production, distribution and utilization of resources.

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