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exporters by only 2.6 percentage points on average. j/ This confirms the analysis and findings of the Bank' Export Strategy Report (6663-IN, Mar-h 1987) which established that Indian industry generally exports a marginal share of output when the export international price permits a reasonable profitability at marginal cost. The category of marginal exporters earns a small marginal cost profitability of 1.3% on FOB prices, and does not expect to receive additional CCS income. These levels of export profitability as anticipated in 1988-1989 compare favorably with those prevailing in 1978-1980 as recorded by ICICI for a sample of industries. !/ 9. The seconG category of Table 1, dinominated potential exporters, constitutes some sort of anomaly. They are characterized by having not only the most favorable price competitiveness (averagj NPC of 1), but also a full cost profitability over international prices which is simil&r to their profitability in the Jomestic market (12% versus 14.7%). Nevertheless, thi appraisal reports for these projects do not indicate plans or even intentions to export. These projects are generally in engineering industries, with some in chemical industries based on local primary resources. A major characteristic of these projects is their relatively high Value Added content (their VD%/Output ratio in international prices average 54%, as compared to 32% for the other project categories), which givss them more room for cutting down on the cost components of Value Added. As a matter of tact, all projects of this category have negative Effective Rates of Protection (EPRS), averaging -29% **as** opposed to an average +50% for the other project categories (Annex I), which suggest high operating efficiency (according to appraisal report projections). The reasons for not exporting nor considering exports are not mentioned **iri** the appraisal reports for the..e projects, and might be case-specific. They may relate to quality standards and issues, particularly for final engineering goods. This apparent anomaly would deserve during a subsequent mission some investigation with the DFIP which might lead to worthwhile findings.

# impact of Input Costs on ComDetitiveness and ProfitabilitX

10. A major source of uncompetitiveness in Indian industries has been the higher prices paid for operating inputs relatively to international prices. The main reasons for these higher prices are: (i) the tariff duties paid on imported inputs; (ii) the uncompetitive prices of domestic supplies; and (iii) the nondeductible excise taxes. On average, inputs used by the projects have prices

- 2/ These low levels of CCS, as explicitly recorded in the DFIs' appraisal reports, are much lower than the official CCS rates. It is quite possible that the exporting projects will actually receive CCS incomes higher than those taken into account by the DFIs. Nevertheless, the high NPCs and negative profitability of some projects in the category of substantial exporters cast doubt on their real intentions and future achievements regarding exports. In particular, it is difficult to see how six projects with highly negative profitabilities of exports on full cost could export 50% to 75% of their output. The reasons why these projects intend to export such major shares might be case-specific and would deserve further investigation.

- iJ Export Performance of ICICI - Financed Companies (1978/79 to 1980/81), Bombay, 1985.