Capital goods refer to products

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INTRODUCTION

According to Morgan James: Capital goods refer to products that are used in the production of other products but are not incorporated into the new product (these are termed consumer goods).

Or

A factor of production category consisting of manufactured products used in the Process of production.

"The capital goods sector occupies a special role in the technical change process. The reason is that this sector lies at the heart of the processes of technology generation and diffusion. All technical change, whether of the product or process variety, requires the development of modified or new machinery and equipment. Conversely, the diffusion of improved vintages of machinery facilitates the process of technical change in using firms."

THE INDIAN CAPITAL GOODS INDUSTRY

Origin

The development of a strong and vibrant engineering and capital goods sector has been at the core of the industrial strategy in India since the planning process was initiated in 1951. The emphasis that this sector received was primarily influenced by the erstwhile Soviet Union model, which had made impressive progress by rapid state-led industrialization through the development of the core engineering and capital goods sector.

GROWTH IN CAPITAL GOODS

The overall growth rate of index of industrial production (IIP) during FY07 was 11.3%. The growth rate achieved by the mining, manufacturing and electricity sectors during FY07 was 4.6%, 9.2% and 6.3% is decreased as compared to during corresponding period of the previous year. The capital goods industry to grow significantly. Reflecting the buoyant capacity addition in the manufacturing industry, the capital goods industry grew by a healthy 17.7% in 2006-07.

According to the estimates made by the Government, the investment requirement for infrastructure is around USD450 billion during the 11th five year plan.

Capital goods companies expect to do well in the quarter ended June, on the back of a robust show from heavyweights Larsen & Toubro (L&T) and BHEL. Mid-size companies, however, expect a modest rise in sales and decline in profit on slower growth in orders and increase in interest cost.

An analyst at Edelweiss Research says there is an improvement in liquidity, which has led to resumption of projects stalled due to lack of liquidity. Further, most companies in the sector are confident of a recovery in the second quarter of 2010.

The demand side in process verticals still looks weak and, hence, big-ticket project announcements have not been forthcoming. Order accretion in the power transmission sector has, however, been strong in the quarter. Profitability is expected to be robust, due to improvement in capacity utilizations and positives from lower commodity prices

Year on year growth rate in percentage as:

Capital goods Industry Strength

  1. Growth demand for the capital goods is likely to continue in India and abroad.
  2. Availability of well-qualified technical personnel to develop latest generation machines and provide effective after-sales service.
  3. India is the only country barring Japan to have the technological and technical ability to produce the entire range of capital goods in Asia.
  4. Huge installed capacity to cater when demand picks up.
  5. Indian Industries have the capacity to produce capital goods which may be exported to various countries.
  6. Replacement market for modernization, technology up gradation and marginal expansion.
  7. Lot of projects are on the rise, especially in developing countries

Current Status

The capital goods industry's annual production stood at Rs.500 billion in 2003-04. Its contribution to the exchequer in terms of customs, excise and sales tax are estimated to be in excess of Rs.150 billion. From CMIE data it is noticed that though there was a 15% increase in the market size in 2003-04, the production growth of 2003-04 over 2002-03 was only negligible at 2.7%. Consequently there was a 55% jump in imports .

The growth in capital goods exports has gained momentum from 2001 to 2004 but has shown a sharp decline in 2004-05 reflecting a growth in demand in the domestic market, which led to a fall in exports.

Capital Investment in the Capital Goods Sector

The investment pattern in the capital goods sector under implementation from April 1995 to April 2005 has shown an overall rising trend.

The capital goods sector is at the core of the development of sectors like infrastructure, mining & metals, electricity and manufacturing. Any investment impact on the capital goods sector will have a multiplier effect in terms of employment generation

INTRODUCTION OF BHARAT HEAVY ELECTRICALS LIMITED (BHEL)

BHEL is the largest manufacturer of rotating electrical machines in the country, and has established itself as an industry leader. There are approximately about 30,000 BHEL make HT machines all across the country in various industries and power plants. Since nineties, BHEL has been adding about 1000 HT machines per year to this population of machines.

BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The Company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services - efficiently and at competitive prices.

BHEL has Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users.

Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Power projects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries.

Competitive Strategy

Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. It follows that a central aspect of strategy formulation is perceptive competitor analysis.

However the capital goods industry are well behind international trends of not only being aware, but also implementing these strategies. The study highlighted the low awareness of the industry on these key management issues and their benefits/outcome.

RECOMMENDATIONS FOR THE GOVERNMENT

Government Actions (Short Term)

  1. Provide a level playing field to the domestic manufacturers by removing import of capital goods under 0% category for project imports and others.
  2. The Indian Capital Goods manufacturers have been at a disadvantage as compared to the Foreign suppliers due to various reasons which when translated in percentages are as high as 15.28 to 24.58 % for equipment been imported at 0% duty.

This will help:

  • In maintaining Uniform tax system and reduce the cascading effect of the taxes.
  • Domestic industry can compete with the foreign companies in India and create reference from Indian projects, which can be used for qualifying and securing business in overseas market.
  • Domestic industry's presence will increase competition and ultimately reduce the cost of the project.
  • In long term maintenance of the project at economical cost.
  • Generate Multiplier effect on employment generation & GDP growth.

REVIEW OF LITERATURE

Romer (1987) explore that the growth arises from an increase in the number of available varieties of intermediate and capital goods. Trade plays an important role in this framework because a country can grow faster if it is able to import specialized inputs produced abroad Treating the import of a particular good from a particular country as a variety .

Samuel kortum(1990)explore that the Product proliferation as a result of meeting ever increasing customer demand preferences is well documented. In addition, customization has been promoted as a source of competitive advantage. Despite these factors, most of the published research in operations and supply chain management has neglected the needs of the 'engineer-to-order' (ETO) sector and there is no major systematic literature review for the ETO supply chain..

Hewitt(1992)explain that China will maintain a strong momentum of growth on the capital goods market in the second half, with production and demand basically balanced, and market price keeping at a high level. According to a survey over 300 major capital goods in the second half of this year conducted by the Ministry of Commerce in cooperation with administration departments of commerce in various localities, major production and distribution .

Morgan(1998)conduct that the capital goods industry can expect more supportive measures from the government in the coming months, Heavy Industries Minister Vilasrao Deshmukh said here Monday." Our Endeavour is to support the capital goods industry so that it can help Indian manufacturing industry to meet the challenge of global competition and sustain the growth momentum in exports,"

Chuang (1998) formulated a trade-induced learning model to show that the poorer countries derive benefits by importing the higher productivity richer country products. More specifically, Chuang?s analysis imply that ceteris paribus the greater the share of higher productivity products in the import basket of the country, the higher is the likelihood of trade induced learning and growth.

Morgan(1999)explore that the many changes taking place in corporate thinking over the past few years has been purchasing's growing involvement in capital goods, services, and equipment purchases. Only 10 years ago purchasing's role in capital goods and services procurement involved mostly just paper pushing and transaction processing. Today more and more purchasing executives are making strategic supply decisions about what capital goods and equipment are needed, whether and how they should be bought, and from whom.

Olivier (2001)explore that the innovative activity is highly concentrated in a handful of advanced countries. These same countries are also the major exporters of capital goods to the rest of the world. We develop a model of trade in capital goods to assess its role spreading the benefits of technological advances. Applying the model to data on production and bilateral trade in capital equipment, we estimate the barriers to trade in equipment.

Goh and Olivier (2002) establish the positive effect of trade induced learning on the long-term growth rate of the less developed countries. Their model show that access to the capital goods from the developed countries enables a developing country to accumulate capital, which in turn stimulates learning by doing and higher growth. Recently, a number of empirical analyses have shown that traded goods differ significantly with respect to their implied productivity.

Keller (2004).explore that the Countries use imported intermediate products and capital equipments derive benefits because these products embody foreign knowledge. Spillovers arise in this process of knowledge diffusion to the extent the imported products cost less than its opportunity costs - including the R&D costs to develop the products. Further, import might facilitate learning about the products (for example, reverse engineering), spurring imitation or innovation of competing products.

Framton(2004)conduct that the Exhibitions of capital goods are the most frequent exhibitions held. According to PT Pamerindo Buana Abadi, which frequently organizes exhibitions of capital goods, 80% of the total number of exhibitors in its exhibitions of capital goods are foreign exhibitors and 20% Indonesian exhibitors. According to PT Napindo, 60% of the total number of exhibitors in its exhibitions of capital goods are foreign exhibitors. The strong participation of foreign suppliers/manufacturers in exhibitions of capital.

Broda (2006) noted a dramatic increase in the number of imported varieties in the United States between 1972 and 2001. They also noted a similar increase in the number of countries supplying each individual good.

endowment advantage to produce vertically superior product varieties, i.e., varieties that are relatively capital or skill intensive and possess added features or higher quality.

Giuseppe Vitaletti (2006) determining the optimal life of capital constitutes an important problem in economic analysis, one that has been extensively addressed in the Sraffian literature. In Sraffa's system the lifetime of fixed capital is posited as a given parameter. In the most recent literature on the topic, the lifetime of capital goods becomes endogenous, the outcome of entrepreneurial decisions concerning alternative techniques.

Hausman (2007) argue that the goods where the richer countries have comparative advantages have higher implied productivity levels compared to the goods where the poorer countries have comparative advantages and he propose a quantitative index to rank goods in terms of their implied productivity. Their index (denoted as PRODY) is a weighted average of the per-capita GDPs of the countries exporting a product, where the weights are the revealed comparative advantages of each country in that product.

Jacques(2008)aims at reconciling theoretical models of endogenous growth with the empirical evidence on trade and growth. In particular, we show that the conventional wisdom according to which trade is growth-impairing for a country with comparative advantage in goods with limited opportunities for learning fails to hold when the imported good is a capital good. The intuition is that the country gains access to cheaper capital goods, which raises investment, output per worker and learning by doing.

Goolsbee,Austan(2009)examines a neglected aspect of the short-run incidence of investment subsidies, namely their impact on wages of capital suppliers. A long standing literature has found that capital investment responds less to investment subsidies than basic models predict. Some previous work has argued that an explanation for the small responses might be that the benefits of the subsidy do not ultimately so the investing firms but rather are passed on to the capital suppliers through higher prices .

OBJECTIVES OF THE STUDY

  1. To identify the means of sustaining growth for capital goods.
  2. To identify the constraints faced by the capital goods sector in India.
  3. The objective of the study were to focus on the competitiveness of capital goods sectors in terms of benchmarking of productivity, marketing strategies, from looking at technology gaps.

RESEARCH METHODOLOGY

  • Research methodology is the technique of conducting research includes determination of population, collection of data, tabulation analysis& interpretation of information.
  • The purpose of research methodology is to describe the research procedure used in research .
  • Research methodology helps in carrying out the project report by analyzing the various research findings collected through the data collection.

SAMPLING TECHNIQUE

The sample of 60 respondents will be taken on random basis. The suitable statistical technique will be used to analyze the data.

TOOLS OF ANALYSIS

Interpretation of collected &analyzed data has been done through presentation in the form of appropriate figures i.e.

  1. Bar charts
  2. Correlation analysis
  3. Regression analysis
  4. Pie charts
  5. Cross tabulation
  6. Chi-square test

DATA COLLECTION

Keeping in mind the objectives of the study a structured questionnaire is developed. The data is collected with the help of questionnaires which are filled up by the employees of company. A sample of 60 employees is selected. A questionnaire is also comprised of questions designed by using different techniques.

In this analysis, 58..3% of respondents said that there must be a 5-10 percent shows change in the growth rate of capital goods over the years. And 28.3% of respondents said 0-5 percent change in the growth rate over the years.

CHI-SQUARE TEST

Hypothesis testing

Ho(null hypothesis): There is no significant impact of change in growth rate of capital goods on investment in capital goods.

Ha(alternative hypothesis): There is significant impact of change in growth rate of capital goods on investment in capital goods

Regression

Ho: There is no association between the increase in production over years & change in growth rate of capital goods.

Ha: There is association between the increase in production over years & change in growth rate of capital goods.

It is analyzed that there is total 31 respondents which think that the company may manufacture the goods on its own & involve in the import and export of the capital goods. 29 respondents think no manufacturing of some goods by the co. on its own and not involvement of some capital goods in import and export.

ONE-WAY ANOVA

Ho: There is no impact of increase in production over years on change in investment on capital goods.

Ha: There is an impact of increase in production over years on change in investment on capital goods

FINDINGS AND CONCLUSION

  1. The respondents said that company engaged in all the capital goods like industrial electrical machinery , heat exchanger vehicles, motors and generators, hydropower and gas based plants. machine tools.
  2. From the above data collection ,it is analyzed that company may involve in the import And export business.
  3. It is analyzed that 51% of respondents said that the company may manufacture the goods on its own and other said that company may import the capital goods.
  4. From the above data collection it is analyzed 48% of respondents said that the industrial electrical machinery is more imported and exported and other 20% respond that machine tools are also imported and exported.
  5. The result shows that the correlation is 0.002. It indicates that there is a low degree of positive correlation between change in growth rate of capital goods & Investment in capital goods.
  6. In this analysis, 58..3% of respondents said that there must be a 5-10 percent shows change in the growth rate of capital goods over the years. And 28.3% of respondents said 0-5 percent change in the growth rate over the years.
  7. The result shows that the chi-square = 0.00 or p-value which is less than the level of significance i.e .0.05 .it means null hypothesis is rejected. So, there is a significant impact of change in growth rate of capital goods on investment in capital goods
  8. The result shows that the p-value(.035) which is less than the level of significance i.e 0.05 .it means null hypothesis is rejected. So, there is association between the increase in production over years & change in growth rate of capital goods.
  9. It is analyzed that there is total 31 respondents which think that the company may manufacture the goods on its own & involve in the import and export of the capital goods. 29 respondents think no manufacturing of some goods by the co.on its own and not involvement of some capital goods in import and export.
  10. The result shows that the p-value(.0.829) which is more than the level of significance i.e. 0.05 .it means null hypothesis is accepted. So, there is no impact of increase in production over years on change in investment on capital goods.
  11. In the above analysis it shows that 45% of respondents said there is a technology constraint highly faced by the capital goods industry & 26.7% of respondents said that there is a low tariff constraints & rest of the respondents finds any other constraints faced by company.

REFERENCES

  • Broda.B.,(2006) "Technological capability in the Third World: an overview on Capital goods.",Pp-56-90.
  • Chuang.,(1998) "The economic implications of learning by doing". Review of Economic Studies 29(3): 155-173
  • Frampton.F.,(2004) "Machines diffusion, lags and productivity growth ... connecting the dots", Conference on R&D, Education and Productivity Held in Memory of Zvi Griliches): Paris, France
  • Goh.H.,(2002) "Technological accumulation and industrial growth: CAPITAL GOODS", Industrial and Corporate Change
  • Goolsbee.,(2009) Impulse and diffusion in technical change. Futures 13(5): 347-359 Nelson R R, Pack H. 2009. The Asian Miracle and modern growth theory. The Economic Journal 109: 416-436
  • Hausmen.H.,(2007) Technology, Learning, and Innovation: Experiences of newly industrializing economies: 170-192. Cambridge University Press: Cambridge
  • Hewitt.H.,(1992) 'The Rise of "the Rest": Challenges to the West from Late- Industrializing Economies', Oxford University Press
  • Jaques.,(2008)"Diffusion of innovation ancient and modern: A review of the main themes." The Handbook of Industrial Innovation: 106-141. Edward Elgar:
  • Kortum.S.,(1990)" New economic policies and the diffusion of machine tools in Latin America".,World Development 28(9)
  • Keller.k.,(2004) "Organisational capabilities and the economic history of the industrial enterprise". Journal of Economic Perspectives 6(3)
  • Morgan(1998). The Economics of Industrial Modernization. Academic Press: London Ariffin N. (1998). The Internationalisation of Innovative Capabilities: The Malaysian Electronics Industry, SPRU. University of Sussex: Brighton
  • Morgan.,(1999)" Learning (technological/organizational/economic)'', The Global Distribution of Innovation Activities; Handouts of Competing in the Global Economy Course:
  • Oliver.B., (2001)" National Capacities for Technological Accumulation: Evidence and Implications for Developing Countries", pp-34-78.
  • Romer.A.,(1987) "The diffusion of advanced automation in developing countries: Focus on capital goods &factors". Technovation 19: 163-175
  • Vitaletti.G.,(2006). "Technological learning and entries of user firms for capital goods in Korea." Pp-45-56.

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