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Modi’s ‘Make in India’ plan: The 7 hurdles it has to overcome to boost manufacturing
By K Yatish Rajawat
View attachment a457e5e5c3759ab5cd02873baa70aeab.jpg
Prime Minister Narendra Modi is expected to unveil a new manufacturing policy on Thursday, one which will give details regarding his Independence day appeal to the business world to ‘make in India’. Modi had articulated his vision at the time and now what is needed is articulation of how will this vision be implemented.
To revive manufacturing in India isn't easy as over the years we have lost ground in this area. Any policy will need a holistic approach. Manufacturing in India is slowly dying, and while the impact of it is not visible, the signs are clear. Several manufacturing companies have become just traders of branded goods made in China as it’s a simpler business.
The industry presently focuses on taxes, subsidies and grants in any policy but these sops are not enough to build a manufacturing ecosystem. Especially, if the current ecosystem is hollow thanks to Chinese imports. The animal spirits of the entrepreneurs search for the highest valuations and maximum profits. This is where sops play a role as they help in increasing profits.
But manufacturing comes with other difficulties: there is a burden of labour, and capital is sunk in land and equipment. The opportunity cost of this capital is that if employed in trading or marketing it will give a quicker, surer and higher returns. This is the mindset and the outlook that has to be tackled if manufacturing has to become popular again.
If a government sets on itself a target of reviving manufacturing it may have to do several things. States, and not just the central government, have to be pulled into accepting this policy, as a state government has a much bigger role to play in it.
Here's what the new policy needs to address:
1. Smart Controls: Trading or imports of goods for mass consumption especially in the food, consumer goods, electrical products and light engineering goods needs to be controlled. Control cannot be physical barriers but smart barriers. A smart barrier for food, particularly processed imported food flooding our markets, is to have strong regulations on quality clearances. Chinese chocolates and candies flood Indian markets since importers presently do not have to take FDA permission.
2. Smart cities and Manufacturing clusters: Smart cities need to be combined with manufacturing clusters in a manner that creates liveable places for a workforce. Manufacturing does not exist in vacuum. It needs an ecosystem of labour markets, liveable spaces, and access to markets. The trouble with the government policy on Special Economic Zones was that it allowed builders and developers to create these islands which did not have all the components of an ecosystem.
3. Smart Taxation :Manufacturing constitutes just 16 per cent of the GDP but pays more excise duty than services which constitutes 60 per cent of GDP, and pays service taxes. Excise duty exemptions are region-specific or state benefits granted by the Centre. The trouble with an excise tax holiday is that it distorts the manufacturing landscape. Entrepreneurs use the tax benefit region for packaging and shipping and wait for the next region to be granted the benefit for planning their investment. This does not help anybody and has to change.
Excise benefits need to be linked to the number of jobs created as a percentage of turnover and should not be region-specific. This would level the playing field and at the same time allow labour intensive SMEs to avail of these benefits. Moreover a tax holiday linked to region and a period also inhibits expansion in that location as the entrepreneur is closely watching for the next location of a tax holiday.
4. Sales tax, octroi and entry tax are other taxes that a manufacturing unit has to bear. While these will go away when GST is implemented it will take at least 3-5 years for that to happen. What will happen to these taxes in the interim period? Is there a way for a business to plan its investment or will it have to wait for the GST to be implemented?
5. Higher the value addition, the greater the usage of electricity in manufacturing. There is 60 per cent additional charge put on industry so that farmers can get free power for agriculture. Lack of power or captive power supply adds to the cost of production, reducing competitiveness. A much better model of charging for power has to be deployed so that manufacturing should not pay for giving subsidies to farmers.
When a manufacturer has to set up a captive power unit, he wastes time and resources on it. As a friend, Fritz D’Silva from Goa, points out, a mid-sized manufacturer uses diesel gen-sets at least 15 days in a month. This is not a value addition activity but instead takes time and adds to the cost. The government is aware of the power problem but new capacity cannot be created quickly. Therefore can units that set up captive power units be given loans at a soft rate?
6. Another subsidy that is borne by manufacturing sector is high freight rates. As I have argued earlier, freight rates cannot be raised endlessly by railways to subsidise passenger fares. Manufacturing sector and the locations of manufacturing units is highly dependent on the cost of logistics.
7. Another issue that affects both current and new manufacturing units is land. The UPA government created the biggest bottleneck with its land acquisition bill, which makes land so expensive that it cannot be acquired for manufacturing. The only place land is available is in places that are uninhabited or barren, and this does not make manufacturing attractive for labour. Cities dependent on manufacturing are no longer attracting the best employees as they are located in places where it is impossible for an ambitious youth to live.
Even if an existing unit wants to expand, the state industrial development corporation cannot allocate him additional space. This is the problem across states with most state industrial development corporation having stopped providing services to their existing industrial parks. In states like Haryana, the HSIDC, under the Congress, became an instrument for acquiring land and giving it out to builders.
In a bid to take the debate to a wider public and stakeholders, PMO office is set to release the policy with a public debate. It is going to use social media and webinars with industry bodies. Jay Bakshi, a communication entrepreneur, says that industry bodies like CII and others are for the first time gearing up for a policy announcement that has never been seen before.
The PMO clearly seems to be looking at setting a long term debate and discussion on manufacturing. It is important for the states, Chief Ministers and politicians at the state level to be engaged and involved in this debate. A number of challenges for the manufacturing can only be implemented if state governments allow it.
Yatish Rajawat is a senior journalist based in Delhi.
Modi's 'Make in India' plan: The 7 hurdles it has to overcome to boost manufacturing - Firstbiz
By K Yatish Rajawat
View attachment a457e5e5c3759ab5cd02873baa70aeab.jpg
Prime Minister Narendra Modi is expected to unveil a new manufacturing policy on Thursday, one which will give details regarding his Independence day appeal to the business world to ‘make in India’. Modi had articulated his vision at the time and now what is needed is articulation of how will this vision be implemented.
To revive manufacturing in India isn't easy as over the years we have lost ground in this area. Any policy will need a holistic approach. Manufacturing in India is slowly dying, and while the impact of it is not visible, the signs are clear. Several manufacturing companies have become just traders of branded goods made in China as it’s a simpler business.
The industry presently focuses on taxes, subsidies and grants in any policy but these sops are not enough to build a manufacturing ecosystem. Especially, if the current ecosystem is hollow thanks to Chinese imports. The animal spirits of the entrepreneurs search for the highest valuations and maximum profits. This is where sops play a role as they help in increasing profits.
But manufacturing comes with other difficulties: there is a burden of labour, and capital is sunk in land and equipment. The opportunity cost of this capital is that if employed in trading or marketing it will give a quicker, surer and higher returns. This is the mindset and the outlook that has to be tackled if manufacturing has to become popular again.
If a government sets on itself a target of reviving manufacturing it may have to do several things. States, and not just the central government, have to be pulled into accepting this policy, as a state government has a much bigger role to play in it.
Here's what the new policy needs to address:
1. Smart Controls: Trading or imports of goods for mass consumption especially in the food, consumer goods, electrical products and light engineering goods needs to be controlled. Control cannot be physical barriers but smart barriers. A smart barrier for food, particularly processed imported food flooding our markets, is to have strong regulations on quality clearances. Chinese chocolates and candies flood Indian markets since importers presently do not have to take FDA permission.
2. Smart cities and Manufacturing clusters: Smart cities need to be combined with manufacturing clusters in a manner that creates liveable places for a workforce. Manufacturing does not exist in vacuum. It needs an ecosystem of labour markets, liveable spaces, and access to markets. The trouble with the government policy on Special Economic Zones was that it allowed builders and developers to create these islands which did not have all the components of an ecosystem.
3. Smart Taxation :Manufacturing constitutes just 16 per cent of the GDP but pays more excise duty than services which constitutes 60 per cent of GDP, and pays service taxes. Excise duty exemptions are region-specific or state benefits granted by the Centre. The trouble with an excise tax holiday is that it distorts the manufacturing landscape. Entrepreneurs use the tax benefit region for packaging and shipping and wait for the next region to be granted the benefit for planning their investment. This does not help anybody and has to change.
Excise benefits need to be linked to the number of jobs created as a percentage of turnover and should not be region-specific. This would level the playing field and at the same time allow labour intensive SMEs to avail of these benefits. Moreover a tax holiday linked to region and a period also inhibits expansion in that location as the entrepreneur is closely watching for the next location of a tax holiday.
4. Sales tax, octroi and entry tax are other taxes that a manufacturing unit has to bear. While these will go away when GST is implemented it will take at least 3-5 years for that to happen. What will happen to these taxes in the interim period? Is there a way for a business to plan its investment or will it have to wait for the GST to be implemented?
5. Higher the value addition, the greater the usage of electricity in manufacturing. There is 60 per cent additional charge put on industry so that farmers can get free power for agriculture. Lack of power or captive power supply adds to the cost of production, reducing competitiveness. A much better model of charging for power has to be deployed so that manufacturing should not pay for giving subsidies to farmers.
When a manufacturer has to set up a captive power unit, he wastes time and resources on it. As a friend, Fritz D’Silva from Goa, points out, a mid-sized manufacturer uses diesel gen-sets at least 15 days in a month. This is not a value addition activity but instead takes time and adds to the cost. The government is aware of the power problem but new capacity cannot be created quickly. Therefore can units that set up captive power units be given loans at a soft rate?
6. Another subsidy that is borne by manufacturing sector is high freight rates. As I have argued earlier, freight rates cannot be raised endlessly by railways to subsidise passenger fares. Manufacturing sector and the locations of manufacturing units is highly dependent on the cost of logistics.
7. Another issue that affects both current and new manufacturing units is land. The UPA government created the biggest bottleneck with its land acquisition bill, which makes land so expensive that it cannot be acquired for manufacturing. The only place land is available is in places that are uninhabited or barren, and this does not make manufacturing attractive for labour. Cities dependent on manufacturing are no longer attracting the best employees as they are located in places where it is impossible for an ambitious youth to live.
Even if an existing unit wants to expand, the state industrial development corporation cannot allocate him additional space. This is the problem across states with most state industrial development corporation having stopped providing services to their existing industrial parks. In states like Haryana, the HSIDC, under the Congress, became an instrument for acquiring land and giving it out to builders.
In a bid to take the debate to a wider public and stakeholders, PMO office is set to release the policy with a public debate. It is going to use social media and webinars with industry bodies. Jay Bakshi, a communication entrepreneur, says that industry bodies like CII and others are for the first time gearing up for a policy announcement that has never been seen before.
The PMO clearly seems to be looking at setting a long term debate and discussion on manufacturing. It is important for the states, Chief Ministers and politicians at the state level to be engaged and involved in this debate. A number of challenges for the manufacturing can only be implemented if state governments allow it.
Yatish Rajawat is a senior journalist based in Delhi.
Modi's 'Make in India' plan: The 7 hurdles it has to overcome to boost manufacturing - Firstbiz
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