The Budget may announce incentives for the capital goods industry. The focus could be mainly on curbing imports of cheaper machinery.
“The matter is under consideration and hopefully there will be some positive announcement on February 28,” a senior Government official told Business Line . The issue here is related to machine tools, construction and mining machinery, textile machinery, plastic processing machinery and heavy electrical equipment/machinery.
Barring October, this sector witnessed negative growth during the first nine months of the current fiscal. At the same time, the growth of cheaper imports worsened the situation.
Issues on hand
The administrative ministry for the capital goods sector, the Ministry of Heavy Industries, has sought support from the Finance Ministry. In a letter to the Finance Minister, P. Chidambaram, the Heavy Industries Minister, Praful Patel, said, “There is an urgent need to address the fiscal issues relating to this sector in the forthcoming Budget to facilitate rapid growth of the sector which, in turn, would create additional demand as well as additional employment.”
Patel argued that the performance of the capital goods sector was not encouraging because of various reasons, such as technology gaps, lack of research & development and innovation capability, skill gap, high interest rate, zero duty on imports, free trade agreements, import of used machinery and non-structured supply.
Patel believes that foreign direct investment was not coming into this sector as foreign firms found it cheaper to export machines to India rather than set up a manufacturing base.
Under free trade agreements, finished machinery is imported at a lower rate of duty than the general import duty, due to which the domestic industry, consisting mainly of small and medium enterprises, was unable to compete, he said.
Second-hand machinery
The Ministry also argued that free import of second-hand capital goods without considering the age factor, applicable safety standards, energy conservation and environment issues, with low technology factor was hitting the sector really hard.
“On this issue, a Committee of Secretaries has already made recommendations for regulating import of second-hand machineries, which are yet to be implemented,” Patel wrote.