National Manufacturing Policy is being subsumed in the broader “Make in India” scheme. The object is to accelerate manufacturing sector growth to 12-14 per cent per annum so that the share of manufacturing increases from 16 percent of GDP to 25 per cent by 2022 that in turn can create 100 million jobs.
New policy initiatives in the form of easing business processes, liberal FDI policy especially in defence and railways, allowing PPP in railways and enforcing intellectual property rights.
While the centre has provided the broader policy initiatives, states will have to shoulder the responsibility of providing faster project clearances, allotment of land, rationalizing the tax regime and relaxing labour laws that are under their purview.
Broadly, the “Make in India” plan is biased towards capital-intensive sectors and hence eventually may not be able to generate jobs in large numbers. Will the new industry elbow out the existing units especially those in medium and small scale? The massive infrastructure development also requires large swathes of land, which may be hard to come by near big cities. If large parcels of land are to be acquired, will the government be able to keep the cost of infrastructure services down? What happens if a project fails to get all the necessary clearances and incurs cost and time overruns? Are sectoral regulators in place to look into disputes in case of PPP projects? These questions require some serious brainstorming before one goes on an over-drive.
- Focus on Hi-tech:
The focus of “Make in India” policy is on the hi-tech industries ranging from microchips to electronic goods to aviation and defence wares. This is not just a policy prescription but a policy imperative given India’s current imports of hi-tech goods amount to $90-100 billion growing at a CAGR of 27 per cent. This is in contrast to hi-tech exports of most developing nations averaging at over 25 per cent. Unless such goods can be produced in India, we can’t cap the current account deficit within 1-2 per cent of GDP. Unless India starts manufacturing and exporting hi-tech goods, it can’t fund the imports of resource-based items–oil, coal and ores.
Since hi-tech goods are FDI-oriented, India needs to have a policy to attract foreign technology, which is the missing link for R&D, manufacturing and exports. While the investment allowances and duty cuts are encouraging for capital goods sector, there has to be specific concession for hi-tech industries. What’s important, a lot of Japanese and Korean companies are trying to hedge their Chinese bets and are looking at a second option. They can come to India if the government provides a congenial environment. Since, the WTO rules can’t restrain their production to the home country India should seize the opportunity of attracting such industries.
Since the growth of telecom and IT Sectors is outpacing all expectations, there is a need for a National Electronics Mission which will help in taking forward the national electronic hardware policy and promote India as an Electronics Hardware Manufacturing Hub.
The 10,000 crore fund-of-funds should be utilized for encouraging, innovation, entrepreneurship, IP creation in the Electronic System Design & Manufacturing (ESDM) and IT sectors.
- Strengthen SMEs
If India has to develop as a strong manufacturing base, it needs to strengthen SMEs. A comprehensive policy to help SMEs acquire cutting-edge technology at affordable cost, increased bank credit at lower rates, exemption from compliance of certain business laws including labour laws, skill development and marketing are the need of the day.
Venture capital funds and even banks should come up with innovative schemes to help SMEs upgrade and acquire latest in technology. Unless SMEs are strengthened, India’s supply chain will rely heavily on costly imports.
One of the main problems that come in the way of SMEs is bank credit. While the government and RBI have given some incentives for banks to fund SMEs, the lending rates still remain high. This makes them unviable and chokes their future expansion.
While it may appear trivial, the reason why Germany and other developed nations have globally competitive SMEs is because the way they define SMEs and nurture them. The European Union defines SMEs as those employing up to 250 employees and having 50 million euros (400 crore) in annual turnover. In contrast, an Indian SME is defined in terms of capital investment – the last revision that came in 2006 stipulates investment in plant and machinery can be up to 25 lakh for micro enterprises,5 crore for small and `10 crore for medium sized companies. Obviously, SMEs in India remains hamstrung and it’s high time the definition is revamped by raising the capital investment limit to say `50 crore from the present 10 crore or adopt the EU definition. This is one big disincentive for a small company to grow bigger and become globally competitive.
The definition of SME needs to be changed specifically for hi-tech sectors such as defence and aero equipment, capital goods and electronics as these industries typically need higher capital base for supporting R&D but may not be labour-intensive.
- Labour Laws
Another problem that the government will confront in scaling up manufacturing capacities is the archaic labour laws that not just prevent easy entry and exit of businesses but ties them with multitude of compliance issues. Although the NDA government has made a beginning by proposing amendments in the Factories Act, Apprentices Act and Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act—the need of the hour may be to look at amending the Industrial Disputes Act, Contract Labour Act and Minimum Wages Act.
Even industry bodies are demanding amendment to the Industrial Disputes Act to raise the threshold limit from 100 workers to 300 or even 1,000 for a company to mandatorily seek government approval for retrenchment, lay-offs or closure of an unit to make hire and fire easier, the government needs to pay heed to the welfare of workers when proposing any changes. Unless the workers are ensured alternate work or a social security, the labour reforms may back fire. In the meantime, the government may consider amending the Industrial Disputes Act for only National Investment Manufacturing Zones (NIMZs).
- ‘First Develop India’
While launching the “Make in India” campaign, Modi raised a pertinent point – FDI for him means “First Develop India”. The foreign investment flows easily in a country where returns are high, business regulations are congenial, IP rules are enforced, infrastructure is available, raw material and labour costs are low. While India provides a reasonably high return on investment, abundance of raw material and labour, it ranks poorly on business regulation and infrastructure front. Over and above all of these, there has been quite a bit of inter-ministerial wrangle over hiking the FDI limits in sectors like retail, defence equipment and other sectors. For India to become a hub for manufacturing, FDI rules should be ridden of any complex riders. Defence is a classic example. It took India decades to recognise the fact that foreign firms will not be eager to share their technology with a local firm if FDI and hence the ownership is capped at 26 or 49 per cent. Unless 100 per cent FDI is allowed, the country can’t expect to attract state-of-the-art technology in defence equipment, some of which can be put to commercial use such as in avionics and surveillance systems.
While there is no bar for electronics and capital goods production, the hindrances lie elsewhere. Without a favourable taxation policy, India cannot lure global companies to set up large manufacturing units. While SEZs were thought to be the drivers of exports, the minimum alternate tax takes away the competitiveness of such zones in India as compared with other countries. Moreover, the restrictions on domestic tariff area (DTA) sales should be relaxed so as to make manufacturing units in such zones viable especially during economic slowdown.
All regressive tax rules including the GAAR and transfer pricing rules must be reviewed.
With “Make in India” campaign, Modi has stuck the right note at the right time. But there is a need to carry out what the Japanese say “kaizen” — continuous small changes to make a big impact. All central and state government departments have to work on a war footing to bring about these nuts-and-bolts reforms to make the country a manufacturing hub. While the government can only act on fiscal and administrative changes, the RBI has to become more responsive to growth and lower rates fast especially for the sake of SMEs, to make India competitive. There is no dearth of cheap labour and a little bit of handholding by India Inc can make them skillful.
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Courtesy:
Prof. (Dr). Mukesh Kumar Mahawar
Professor
Faculty of Commerce and Management
Madhav University, Pindwara, Sirohi (Rajasthan)