CII Policy Watch [on] Manufacturing Sector

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Manufacturing sector, the key driver of the Indian economy, after a prolonged period of declining growth and slowdown in industrial output has seen signs of revival. Manufacturing for the month of May grew at 4.8% after two years of near stagnation providing a boost to the overall economic growth, which, for the first quarter of this financial year (April-June 2014) has witnessed a GDP growth of 5.7%. However challenges pertaining to structural issues such as poor infrastructure and lack of labour reforms, skills deficit, along with demand volatility, low investments, high interest rates, etc. still persist in the industry and CII therefore continues to advocate with government at highest levels to take steps for overcoming these challenges and creating an enabling environment for reviving and re-igniting manufacturing growth. The August issue of Policy Watch takes an in-depth look at the agenda for reviving Manufacturing Sector and has outlined some specific recommendations, which would help the sector to reclaim its rightful place in India’s growth story.
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  • 1. 1 policy watch this Issue Inside Message From the Director General............1 Chandrajit Banerjee, Director General, CII ASCON Survey......18 I ndustry Voices...........19 C EO Speak............................................................................................2 P olicy Barometer.................................................................................15 August 2014, Volume 3, Issue 3 Policy T he deceleration of the manufacturing sector in the last three years has been of high concern, given that the sector is expected to act as a pillar of growth, employment creation and export engagement. The National Manufacturing Policy (NMP) of 2011 had set a target of taking the contribution of manufacturing to GDP from 15 per cent to 25 per cent and creating 100 million additional jobs by 2022. I n recent months, there has been a marked positive change in business sentiments and industry is hoping for a quick revival of the manufacturing sector. Manufacturing IIP expanded at 4.8 per cent in May 2014 after two years of near-stagnation. Likewise, the CII ASCON survey for April- June 2014, covering 112 sectors, further reveals that 24 sectors are now on a high growth trajectory as compared to 15 sectors in the last quarter. W hile there are positive sentiments, much needs to be done to bring back and sustain the growth momentum. Issues such as high interest rates, complex business regulations, delayed environmental and land clearances, inflexible labour laws, sluggish implementation of industrial reforms, high compliance costs and inadequate infrastructure continue to pose challenges for the manufacturing sector. These, coupled with the pressures on mining, are especially hurting activities in core sectors such as steel, cement and aluminum. T he new Government has accorded high priority to reviving the manufacturing sector. Excise duty stimulus for certain sectors has been extended to 31 December 2014, and Budget 2014-15 took several steps in taxation, customs duties, industrial parks, etc to boost manufacturing investments. Extension of investment allowance to investments over Rs 25 crore and incentives for MSMEs would also assist in the effort. CII ’s Manufacturing Council, along with specialized sectoral committees, has submitted an action agenda for the manufacturing sector to the Government, outlining immediate steps and also measures for the medium term. Under taxation, CII has called for rationalization of taxation structure, early introduction of GST, and 25 per cent accelerated depreciation for investments in plant and machinery. CII submitted a list of delayed projects for consideration of the Project Monitoring Group (PMG) for according them speedy clearances and approvals. Also, we requested the PMG to reduce the threshold limit of these projects to INR 500 crores. In addition, CII’s Task Force on Ease of Doing Business has made presentations to the Government for simplifying administrative procedures and identifying good practices amongst states. W e strongly believe that the role of State Governments in the revival of the manufacturing sector is indispensable. CII is proactively working with the State Governments to provide inputs on State Industrial Policies. Andhra Pradesh, Chhattisgarh, Himachal Pradesh, Uttar Pradesh, Uttarakhand and West Bengal have already initiated work in this area, for which CII has provided inputs. W hile a strong policy framework is essential, we believe that simultaneously, industry too must strengthen its competiveness and proactively promote quality and efficiency practices at the firm level. The CII Centers of Excellence on Competitiveness, Logistics and Quality act as a fulcrum for value addition at the firm level, providing strong support for manufacturing companies in escalating productivity for global engagement. CII has successfully completed 237 cluster competitiveness learning programmes across the country in major manufacturing sectors such as automotives, heavy engineering, light engineering, etc, covering almost 2500 enterprises. The CII Visionary Leaders for Manufacturing Program (VLFM) is another significant step towards developing a pool of future leaders to steer the growth of this dynamic industry. It gives me immense pleasure to state that more than 500 CEOs and senior managers have already benefitted from this programme. A more recently launched CII Global Top Companies (GTC) 100 programme is another unique initiative with the aim of increasing the contribution of manufacturing to GDP. The initiative focuses on developing capabilities of MSMEs and supporting them in their transition to a higher level. C omplementing the ongoing initiatives, CII proposes to launch a Sector Skill Council in Manufacturing as well as work with industry members to establish ’Skill Gurukuls’ and skilling centres to ensure availability of a trained and qualified workforce. A strong manufacturing sector and its healthy growth is a prerequisite for ensuring high GDP growth, creating additional employment opportunities, reducing income inequalities, and ensuring global competitiveness. A coordinated effort from all stakeholders can restore the importance of manufacturing as an engine of growth for the country. n Chandrajit Banerjee Director General C onfederation of Indian Industry Focus: Manufacturing
  • 2. 2 policy watch CEOSpeak A fter a fairly long period of time, a light of hope in manufacturing can be seen. From subdued manufacturing growth during the previous 2-3 years (2011-2014), the industry has seen an expansion in manufacturing growth at 4.8 per cent (IIP) in May 2014. A very good reason for this could be the formation of a new Government at the Centre, with expectations to end the policy logjams and induce necessary actions for reviving manufacturing growth. T he tepid growth of the manufacturing industry in the last couple of years has impacted the growth of national GDP which is estimated to grow by a meagre 4-5 per cent in 2014-15, led to stagnation in employment creation, widening CAD, decline in exports, investments and demand creation. It is well known that for the economy to return to double digit growth it is critical to revive manufacturing in the country and it has to grow 2-4 per cent higher than the national GDP. I n the last two years, there has been considerable decline in new project announcements which fell from Rs. 5,944 billion crore in 2008-09 to Rs. 1,806 billion crore in 2012-13. This is a result of low business confidence, attributed to a plethora of regulatory issues and policy hurdles. According to the World Bank’s Doing Business indicators, India is at a low rank of 134 out of 189 in terms of overall procedural facilitation and further lower in areas such as starting a business and contract enforcement and taxation. India should aim at addressing each of these issues systematically to move up the ranking rapidly. Global economic uncertainties, archaic and inflexible labour laws, poor and obsolete infrastructure, delays in obtaining clearances and approvals for mining leases and land for projects, highly graded tax system, etc. have been the key reasons for falling domestic demand and investments. Some of the boiling issues such as the mining conundrum have caused the mining activity in the country to be stalled leading to uncertain raw material linkages. Also with delays in kick starting of infrastructure projects, the derived demand from industries such as steel, cement, aluminum, chemicals, consumer durables, etc. has also decreased. A lot of hopes have been pinned on the newly formed majority Government which has placed manufacturing at the top of its political manifesto. W hat we need to aspire to is to “Make India the Germany of East rather than the Factory to the West”. With a growing shift from China as a preferred manufacturing destination, it gives India an immense opportunity to emerge as the new manufacturing hub and leverage its competitive wages and cost structure. The National Manufacturing Policy announced by the Government in 2011 will be an important instrument to increase the contribution of manufacturing GDP to 25 per cent from the current 15 per cent and create 100 million additional jobs. H ence what the Government needs to do for reviving manufacturing growth is: C reate demand and investments by expediting the process of clearances and approvals for projects where funds are already invested. This will immediately churn the derived demand and open employment opportunities. The Centre and the State Governments need to work simultaneously. CII recommends: Setting up of state level Project 1. Monitoring Groups as they play an important role in fast tracking clearances of delayed projects. Such a mechanism will enable a continuous review and monitoring of delayed projects at the state level and provide expeditious solutions for several areas of concern at the state level itself. Reviving Manufacturing in India B Muthuraman P ast President, CII; Chairman, CII Manufacturing Council and Vice Chairman, Tata Steel Limited
  • 3. 3 policy watch CEOSpeak Expanding the scope of the Cabinet 2. Committee on Investment by reducing the threshold level of projects to Rs. 500 crore, and eventually reduce it further to Rs. 250 crore. Resolving the mining conundrum which 3. will act as a major investment booster for the industry. The mining conundrum has been an overstretched issue for the industry which has severely impacted the core industries, especially steel. The industry would appreciate setting up of a Task Force which has an objective and reasonable view towards the industry and provide for restarting mining activities in the country, and a re-look at the MMDR Bill to make it more practical and industry friendly. The industry, on its part, needs to focus on sustainable mining. Resolving issues such as labour, 4. environment, expeditiously within a time-bound manner. Demand creation alone would not create employment; for that we would need to review our labour regulations as well. There are 44 central labour laws, 150 state labour laws and innumerable standing orders often having divergent definitions of terms such as wages and workers. Rationalization and flexibility in labour norms will be critical to enhance competitiveness of the industry and also keep pace with the global markets. CII also proposes a unique concept of Mass Manufacturing Units as an enabler for employment creation. Such a concept has proved fruitful for economies such as China, which established huge industrial clusters and units for mass manufacturing. T he Government should also make a quick move towards announcing policies such as the New Steel Policy 2012, Chemicals Policy and the Textile Policy as they will boost industry confidence. An early consultative round with the industry on these policies will provide traction to the respective industries and open up the sectors thus resolving the current stagnation in manufacturing activity. Adding to these the Government should look towards introducing a Scrappage Policy for commercial vehicles. This will have direct bearing on job creation. It is a bellwether sector for the economy and has both direct and indirect linkages to the economy. T he Finance Minister's indication that Goods and Service Tax (GST) will be taken up for consideration during the course of this year to find a solution for approval is a breather for the industry. India has the highest levels of taxation for the corporates and GST will ensure rationalisation of the taxation structure in the country and bring it at par with the practices in other emerging, manufacturing nations. A nother avenue for growth is to focus on identifying big ticket projects and areas that will boost manufacturing such as promoting sectors of national and strategic importance – defence production, ship building, aircraft component manufacturing, textiles, ICTE Hardware, etc. We need to strategise and build capacities in these areas and at the same time restore investor confidence by allowing FDI in multi-brand retail, etc. Easing business regulations is a connecting thread for investments and demand. CII, through its Task Force on Ease of Doing Business, has already submitted recommendations to the Government on four parameters of land acquisition, taxation, starting a new business and contract enforcement, etc. I nfrastructure development has gained a prominent place in the Budget this year and there has been a focus on development of roads and highways to connect smart cities with ports and cluster parks, establish coal linkages, reforms in railways etc. However, infrastructure deficit is huge in India, and continues to affect competitiveness of the Indian manufacturing sector. Finally, Foreign Trade Agreements (FTAs) - there is a need to review and revisit the existing FTAs and CEPAs and efforts should be made to make Indian industry use this window better in their favour. Simultaneously new trade agreements should be drafted taking into account the interests of the domestic manufacturer. New markets such as Africa, Latin America, etc should be explored for promoting exports and the “Made in India” brand to further augment manufacturing growth in the country. O nce implemented, these measures will prove to be highly beneficial in reviving manufacturing growth in the country. Given that India enjoys favourable demographics, availability of natural resources and a huge domestic market, this is one of the best of times to move up and bring about a manufacturing revolution in the country. n
  • 4. 4 policy watch CEOSpeak How do you perceive the role of the capital goods sector in fuelling the growth of the Indian economy? T he role of capital goods industry in today’s scenario is changing. The way it contributes to the economy shifts as nations mature: in today’s advanced economies, it promotes innovation, productivity, and trade more than growth and employment. In a constantly shifting global business ecosystem, organizations that can look beyond the immediate horizon and are fast and adept at transitions are the ones that will ultimately be sustainable. Competitiveness is one aspect of ensuring this; the other is infusing technology and innovation into our systems. T he capital goods industry today contributes 12 per cent to the total manufacturing activity (which is about 15 per cent of the GDP) and is the backbone of the manufacturing sector making it an important enabler for sustaining economic growth as well as ensuring its inclusiveness. I t has a multiplier effect on overall economic growth as it facilitates faster growth for a broad base of user industries by providing critical inputs, i.e. machinery and equipment necessary for manufacturing. Therefore, the development of domestic capabilities in capital goods sector is essential to ensure self reliance, as the sector directly or indirectly influences core infrastructure development within India. Moreover, in today’s scenario of fragile geo political relations, India’s self sufficiency in defence, space and nuclear programme is also dependent to some extent on the self sufficiency of the capital goods sector. What are the key challenges confronting the capital goods sector in the current scenario and how do you see the prospects going forward? T he capital goods component in industrial production has lagged in recent years, following slow growth in the world economy. The IIP Index for capital goods for the year 2013-14 was recorded at -3.7 which has further degraded to -12.5 in March 2014 this year. Growth of this dominant sector has stagnated due to stalled projects, drop in investments, uncertainities experienced over a prolonged period, low investment sentiment and money blocked in projects leading to capital blockage of the entire supply chain. Some of the other common issues such as Lack of Level Playing Field and Inverted Duty Structure, Free Trade Agreements, Import of Second Hand Machinery, Import of Power Equipment, High Interest Rates, Lack of Technology Availability, Upgradation and Modernization, and Lack of Adequate Infrastructure has adversely impacted this sector. What are your recommendations to the new Government on behalf of the capital goods sector? T he sentiment is encouraging with the new Government in place. A sustained period of prosperity, growth driver and demand and policy framework tailored to foster growth for domestic manufacturing is most awaited. T here is a need for a concomitant policy structure to accentuate the ease of doing business and resuscitate manufacturing and create a level playing field for the Growth in Capital Goods and Engineering Sector : Indispensable for Manufacturing to Claim its Rightful Place in the Economy Vipin Sondhi C hairman, CII National Committee on Capital Goods & Engineering and Managing Director & CEO, JCB India Limited
  • 5. policy watch 5 CEOSpeak domestic industry. Following are my key recommendations: 1. Create demand by attracting investments and unlocking stalled projects both at the centre and the state level. Push for the execution of 153 mega projects with an investment of around Rs 5.2 lakh crore cleared by the Project Monitoring Group. 2. Expedite Implementation of GST 3. Regulate import of second hand machinery by allowing entry through 2 designated ports and imposing actual user condition. 4. FTAs: The Indian industry is greatly impacted by the agreements signed with South Asian countries. It is suggested to have a review mechanism for existing agreements with countries like Korea, China etc. 5. Rationalization of taxes and correction of anomalies. a. Impose 14 per cent customs duty on import of power equipment. b. Levy additional customs duty on Mega Power Projects as well for imported equipment, to ensure competitiveness of Indian equipment manufacturers. c. Remove provision for zero-duty import of capital goods under “project imports”. 6. Infrastructure support: Improvement of roads, quality of power and connectivity with ports to lower the transaction cost. 7. Promote exports through financial support and soft promotion policies like long term EXIM Funding specially for long gestation period projects. Banking Industry & Exim Bank to be advised to ease financing for the Capital Goods sector. 8. Mandatory technology licensing/JV partnership in nationally important segments. 9. Build Brand India image for capital goods industry to tap captive markets in countries other than India. T he Government of India in its Union Budget announced on 10 July 2014 has initiated various measures to create demand and promote investments in the capital goods sector by announcing a decrease in the threshold limit of investment allowance on plant and machinery from Rs 100 crore to Rs 25 crore. I nfrastructure investments announced such as development of 16 new port projects, with an allocation of Rs 11,635 crore for port connectivity, development of new airports in Tier 1 and Tier II cities, investment of Rs 37,580 crore in National Highways Authority of India, Ultra Mega Solar Power Projects and additional 15,000 km of gas pipelines via PPP would give a huge boost to capital goods industry. PSU capital investment of sum of Rs 2.47 lakh crore in 2014-15 also fosters demand for capital goods. T he Budget also addressed certain tax issues such as : a. Reduction of Basic Customs Duty from 10 per cent to 5 per cent on forged steel rings for manufacture of bearings of wind operated electricity generators, which will lead to reduction in input cost for bearing manufacturers, used in wind operated electricity generators. b. Continuation of reduction in excise duty on capital goods from 12 per cent to 10 per cent til December 2014. T he above measures will certainly assist the capital goods industry in regaining its growth. What do you think can be done to encourage the domestic industry? A s the
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