India’s manufacturing industry has traditionally never been an important contributor to the nation’s GDP although it always held huge potential. Now with the current regime’s ‘Make In India’ campaign aiming at boosting local manufacturing, Sandeep Menezes looks at the many challenges making entrepreneurs wary of setting up new manufacturing facilities.
Although there always has been huge potential across India, the manufacturing sector recorded a negative growth of -0.8 per cent in 2013-14 compared to 1.3 per cent in 2012-13. This clearly shows that there exists hurdles to local manufacturing or sops are inadequate and policies unfavorable.
India has established a strong and diversified manufacturing base for the production of a wide variety of basic and capital goods to meet the requirements of various sectors including heavy electrical, power generation and transmission industries, process equipment, automobiles, ships, aircrafts, mining, chemicals, petroleum, etc. However, the share of manufacturing sector in India’s economy is still quite low. There is considerable potential for growth which, in a globalised world economy, has to be based on improving productivity and competitiveness.
In the Indian context, opening of the economy and consequently the entry of international players has substantially enhanced the need for production of goods and services matching international standards.
Ease of Doing Business:
India is one of the fastest growing economies in the world. The high potential of Indian market driven by an emerging middle class, cost competitiveness and a huge pool of talent, making it one of the most attractive investment destinations. Yet, according to the World Bank’s ‘Doing Business 2014’ report, India is ranked 134 out of 189 countries in the overall ease of doing business. This places India lower than the other BRICS (Brazil, Russia, India, China and South Africa) members and highlights its relatively dismal performance.
It is a known fact that many entrepreneurs find it extremely difficult to set up their manufacturing enterprise due to the stifling regulatory environment and procedural hurdles.
Few factors affecting manufacturing sector in India:
- A) Uncertain taxation environment
The nation’s taxation policy too can play a key role in boosting its manufacturing sector. Globally, there are several developing nations that made innovative and pragmatic use of their tax policies to spur their domestic manufacturing sectors and boost growth.
But in India, the fear of an uncertain tax regime is the most frightful scenario wherein the manufacturer feels dissuaded from investing into setting up new manufacturing facilities or units. In the future, India must not only ensure stable tax regime but aggressively view tax policy not merely as a tool to generate revenues, but a key component of its overall economic policy which could boost manufacturing activity.
- B) Tough land acquisition
The Land Acquisition Bill, which was passed during the previous UPA regime sought to set a fair compensation for farmland being taken over for industrial projects. However, there has been enormous anxiety expressed by various quarters that the law only made land acquisition difficult and the process hugely complex while slowing the setting up of new industrial projects.
Without adequate land, new manufacturing units simply cannot come up. Also, if land is acquired at outrageously exorbitant market rates – then the projects’ costs rises steeply thereby affecting its economic viability.
- C) Unfavourable governmental policies
Favourable governmental polices and incentives are a norm world over to boost local industry to increase manufacturing output. But in India, since the last many decades the industry has had to face unfavorable policies that do little to boost local manufacturing.
It is because of being continuously ignored by successive governments that the share of manufacturing sector in India’s GDP has remained static at about 16 per cent for over 30 years now.
- D) High manufacturing costs
While wooing investors and pushing for local manufacturing through the government’s ‘Make in India’ campaign, Prime Minister Narendra Modi stated that “India offers you the potential of low cost manufacturing. India has low cost and high quality manpower.”
But the various clearances and regulations needed to set-up manufacturing facilities lead to huge rise in project costs. The rampant delays in getting clearances further add up to the already high costs.
- E) Dumping of imported products
There is an urgent need to get rid of the prevailing inverted duty structure that inadvertently encourages imports. To promote manufacturing in India and to accomplish the vision of ‘Make in India’ into reality, major impediments such as the current irrational tax structure need to be removed by withdrawing all concessional duty notifications on basic duty and special additional duty on various imported products.
Most foreign nations like China provide their manufacturing industry with excessive sops and incentives which give their products an unfair advantage over domestic Indian products. It is this excessive dumping of imported products that needs to be urgently regulated since their quality and after-sales support is both questionable while making the nation unnecessarily dependant on them.
- F) Inadequate infrastructure such as power, logistics & transportation
India suffers from inadequate infrastructure facilities such as poor power supply at higher rates vis-à-vis China, awful logistics facilities and pathetic transportation infrastructure. Without adequate supporting infrastructure, it becomes difficult for Indian manufacturers to compete with their global counterparts on price while maintaining high quality benchmarks.
Inadequate infrastructure facilities make local manufacturing expensive, unreliable and highly unviable on the global arena. It is therefore important that adequate supporting infrastructure be created to ensure success of local manufacturing.
Encouraging Local Manufacturing:
Recently the government has announced an ambitious plan to locally manufacture as many as 181 products India currently imports with a bill of at least $18.1 billion. The move could also help infrastructure sectors such as power, oil & gas, and automobile manufacturing that require large capital expenditure and revive the Rs.1.85 trillion ($29.07 billion) Indian capital goods business.
To give its ambitious ‘Make in India’ programme the much-needed atmosphere to succeed, the government is expected to come up with a separate set of labour laws governing the Micro, Small and Medium Enterprise (MSME) sector which forms the backbone of the manufacturing sector. The proposed new labour laws for the MSME sector will be applicable to industrial units that employ 40 or less in their workforce and will specifically address the needs of those who are employed in the small factories or manufacturing units.
India’s manufacturing sector grew at its fastest pace in two years in December 2014. The HSBC India Purchasing Managers’ Index (PMI) — a composite gauge designed to give a single-figure snapshot of manufacturing business conditions — stood at 54.5 in December, up from 53.3 in the prior month. This clearly indicates that the recent governmental initiatives have begun to show positive results.
India has a highly talented workforce which is much more economical than their global counterparts. However the national lacks with respect to supporting infrastructure and governmental policies or clearances. With the new government’s ‘Make in India’ campaign, it is felt that the days ahead will be much better for the manufacturing sector nationwide.
“Any assistance that the government can give with regards to fund availability will be widely appreciated. Across the chemicals industry, there is a high degree of imports of raw materials therefore any assistance on customs duties will be good.”
-Giles Everitt, Managing Director – Chryso India
“PM Modi’s ‘Make in India’ campaign has given a confidence boost to the manufacturing industry. The positive developments in areas of infrastructure, policies and steps that are being taken to simplify doing business in India will boost Indian manufacturing industry to great extent.”
-Pawel Duzniak, President Europe & India – Walter AG
“We think the government is taking adequate steps to boost the industrial sector and we hope to see some positive and encouraging initiatives which shall also boost the Indian economy.”
-Herbert Coenen, Executive Director – Uniparts India Limited
“We are trying for technology transfers so that more machines can be made in India. We have started a facility for manufacturing smaller machines and three years down the line may also start manufacturing the bigger machines in India.”
-Pradeep Agarwal, CEO & CFO – Mtandt Rentals Ltd
“A key accelerator for the realization of the Make in India vision is high-value manufacturing – manufacturing that adds economic, social and strategic value. The strong GDP multiplier effect created by advanced manufacturing has been demonstrated globally. In India, high-value electronics manufacturing can provide a similar multiplier effect by leveraging a confluence of existing strengths and industry trends.”
–Aninda Moitra, President & Managing Director, Applied Materials India