International Competitiveness, Investment and Finance: A Case Study of India

By A. Ganesh-Kumar; Kunal Sen et al. | Go to book overview

3

The balance of payments and national competitiveness

National competitiveness can be defined as the 'ability to produce goods and services that meet the test of international competitiveness, while (the country's) citizens enjoy a standard of living that is both rising and sustainable' (Tyson 1992, p. 1). Thus, a competitive country is one that is able to produce tradable goods that are in sufficient demand both in home and overseas markets such that trade will be in balance without the country having to continuously depreciate its currency or to operate at a level of activity below its potential (Howes and Singh 2000). Clearly, large and persistent deficits in the country's current account are one important indicator of structural problems with respect to the country's relative competitiveness, though such deficits may also be caused by macroeconomic disequilibrium or inappropriate exchange rate policies. Large current account deficits often trigger balance of payments (BOP) crises for developing countries and may necessitate the use of adjustment measures such as a contraction in aggregate demand in the country in question or large exchange rate adjustments. For a developing country that is attempting to pursue high rates of economic growth, such a growth strategy could lead to widening current account deficits and effectively constrain the long-run growth rate of the economy. A higher long-run growth rate that is consistent with a sustainable BOP situation is only possible with a rapidly growing export sector. As we have argued in Chapter 1, given that agricultural commodities often face declining prices in world markets, the manufacturing sector must necessarily be the leading sector in the country's export drive. Therefore, the key policy issue at the national level is how to increase the international competitiveness of the country's manufacturing sector.

The purpose of this chapter is threefold. In Section 3.1, we provide a brief overview of the evolution of India's external sector for the period 1970-98, focussing on the current account, the trade balance and the real exchange rate (RER). In this section, we also look at some summary measures of the Indian manufacturing sector's international competitiveness.

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International Competitiveness, Investment and Finance: A Case Study of India
Table of contents

Table of contents

  • Title Page v
  • Contents ix
  • Figures xi
  • Tables xii
  • Preface xv
  • 1 - Competitiveness, Investment and Finance 1
  • 2 - The Policy Environment in India 12
  • 3 - The Balance of Payments and National Competitiveness 27
  • 4 - The Determinants of Sectoral Competitiveness 51
  • 5 - Outward Orientation 63
  • 6 - Finance Constraints, Persistent Exporting and Investment 93
  • 7 - Conclusions and Policy Implications 115
  • Appendix 123
  • Notes 146
  • References 151
  • Index 157
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