What drives the development of a nation has always been one of the key questions in the world of policy. Sometimes, this growth is primarily driven by certain sectors with increased economic activity. This can lead to a skewed spatial economic landscape. The rationale for a more even spatial spread of economic growth within a country is simple – the greater the number of high-performing sectors, the greater the overall economic growth. However, bringing such uniformity is a difficult task that requires a different approach. In the Indian scenario, the country has come a long way in bringing uniformity in economic development across states, but there is still a lot of work to be done in this direction.
The Competitiveness Roadmap for India@100, developed by Amit Kapoor, Chair, Institute for Competitiveness, Professor Michael E. Porter and Christian Keitel of Harvard Business School, mentions that urban districts account for nearly all of the wages paid in India account for more than 55% of the population and close to 45% of all jobs, they make up only about 30% of all districts. Similarly, almost half of the total exports are done by two states, Maharashtra and Gujarat. Besides this, states differ on several other parameters such as innovation and capital formation etc. The need to bring about even more spatial development in the country has been much talked about. However, India needs a different approach to understand what drives growth in particular sectors. The Competitiveness Roadmap puts forth this approach by looking at ‘clusters’ as a means of enhancing competitiveness.
Differences in regional economic performance across India are linked to changes in cluster portfolios and the strength of different locations. To achieve equity in the spatial distribution of economic development, an understanding of what clusters are is a prerequisite.
Clusters are essentially groups of related and ancillary industries located close to each other. As defined by Michael Porter, “clusters are geographic groupings of companies, suppliers, service providers and associated institutions in a particular region, linked by externalities and a variety of complementarities.” Linked Firms and Institutions Two main types of clusters can be found in regional economies: business clusters and local clusters.
The above classification is based on the pattern of geographical presence and operative competitive dynamics within each type of cluster. Traded clusters are considered engines of growth in a sector, some examples of which are the IT sector in Bengaluru, video production and distribution in Mumbai, and financial services in New York City. Local groups, on the other hand, are present across the country and their presence follows the distribution of economic activities that meet the needs of the local market.
While local clusters provide employment locally, business clusters are centers of innovation and high wages. The competitiveness of a region increases when both types of clusters function efficiently.
For decades, the groups have helped gain insight into the country’s economic geography. India has an opportunity to identify ways to bring uniformity in the presence of groups across the country. The Competitiveness Roadmap reveals that a large number of Indian districts are yet to form strong clusters, while some districts have a large number of strong clusters.
The document also noted that districts with higher median wages received a larger share of their payroll from stronger groups. Furthermore, Indian districts with higher average wages are associated with higher skill intensity. Indian business clusters are characterized by high wage levels, high capital and skill intensity compared to the rest of the economy. Direct efforts towards building strong groups are of utmost importance. To be able to do this, we must first identify patterns in existing clusters and assess opportunities for new formations. The cluster identification methodology of the Cluster Mapping Project, an initiative of the Strategy and Competitiveness Institute at Harvard Business School, is an effort in this direction. The project provides a cluster-mapping database of industry clusters and regional business environments in the US.
India must put together a body of knowledge on location-specific strengths that can be used to create actionable policies for different locations. This will go a long way in developing a development agenda for specific places, regions and groups.
Regional economies act as the building blocks of a country. Activating each block based on the strength of the various locations is equivalent to powering each of the economic engines available. Increasing the presence of clusters and strengthening the existing ones will take the Indian economy closer to its ambitions.
Amit Kapoor and Bibek Debroy are respectively Chair of the Institute for Competitiveness, India and Lecturer at Stanford University; and Chairman, Economic Advisory Council to the Prime Minister
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