Make in India – are you serious?

The goal to raise share of manufacturing to at least a quarter of our GDP is sheer aspiration. Positioning India as a manufacturing hub will take much more.

India is assumed to be a lowcost economy. Companies engaged in manufacturing, however, find that it is expensive to manufacture in India. It is hence no surprise that value addition in manufacturing has been rendered shallow during the last two decades, with many manufacturers becoming traders.

If we are to make a serious attempt at raising our manufacturing share of GDP from the current 15 per cent to 25 per cent, a deep fundamental transformation of the enablers for manufacturing is essential.

The main reason for a dismal manufacturing share has been the impact of disabilities on manufacturing competitiveness. The relatively higher costs of finance, energy, logistics and transaction create a disability to the tune of 8 to 14 per cent, as reported by several studies.

The impact of the disabilities is directly proportional to the amount of value addition. A lot of manufacturing is hence restricted to (screw driver) assembly and testing, resulting in low value addition.

Employment and tax revenues, however, are generated only when higher value is added.

The second major reason for the manufacturing sector being rendered less competitive is an unfriendly regulatory environment. Government officials, especially at the State/district level, are not recognised or incentivised for the number of startups encouraged or the growth of successful enterprises in their area of jurisdiction.

They are mandated to regulate, control, govern and extract revenue. To the best of my knowledge, there is not a single executive who is “responsible” for manufacturing. Whose head will roll in case we do not get to the 25 per cent mark?

Following a candid conversation with a politician in Uttar Pradesh, it was clear that manufacturing businesses were seen by politicians as milch cows — for jobs, revenue and influence — at both the government and personal levels. Bureaucrats, especially at the State level, see them as entities that must be inspected. The average citizen too, often sees manufacturers as polluters, a bunch of greedy businessmen who flout rules and profiteer while exploiting labour.

I wonder if anyone believes these units are “the engines of our economy”.

With a new energetic government in place, a positive intention to support manufacturing and generate employment is evident at the highest levels. This has, however, not yet translated into supportive policy measures. This is probably because policymakers find that the options at hand are very limited.

The three modes of delivering a supportive policy in the past were import duty (customs), excise duty (consumer prices), and income tax (relief for sectors or activities such as exports, R&D, etc). In most cases, import duties are bound by multilateral or bilateral trade agreements. The rates of these duties are no more a subject of decision by national governments. In the case of electronics, the Indian government signed the ITA-1 agreement, WTO, in 1998, rendering 217 tariff lines in the sector to zero import duty since 2005. No tariff protection for local manufacturing is hence possible.

Aping the more developed economies, a few sectors including electronics, have tried imposing compulsory standards as non-tariff barriers. To everyone’s surprise, during the last few months, Chinese firms have managed to receive more such certifications than Indian companies.

It is not advisable to tinker with excise duty, soon to be combined with sales tax and/or value added tax as GST. A change in the rates at any stage of the manufacturing (supply) chain will result in a disruption of the value (supply) chain.

There are several instances of such confusion. In the recent Budget, inputs of LEDs were brought to a 6 per cent duty in line with the excise duty on LED lamps. The incidence of inverted duty resulting in Cenvat overflow has now shifted from LED manufacturers to those manufacturing inputs.

Manufacturing in most sectors use inputs such as raw materials, components and parts from other sectors. A change in the indirect tax rate in any one sector will have a disruptive impact on many other sectors.

Exemptions to rates of income tax have been on the decline and are intended, for the correct reasons, to be permitted only in very exceptional circumstances. This is no more seen as a tool for incentivising any manufacturing activity.

What policy measures does that leave us with?

Fundamental corrections in infrastructure, energy availability, lower cost of finance, an optimally priced rupee and a skilled workforce will deliver the required competitiveness to this ailing sector. But it is certainly not happening by 2020.

Direct compensation for disabilities, in proportion to the amount of value add, is the way forward. One such measure is to compensate a single disability, say, as an interest subvention. A more holistic approach is to give an incentive as a percentage of value addition.

Establishing manufacturing clusters can be an effective method of leveraging cluster principles in order to mitigate some of these disabilities. In practice, this may attract new investments, which will see a marginal competitive advantage.

The attendant issues of land allocation, pricing, multiplicity of agencies involved and the long list of clearances required will, however, need to be sorted out before an investment cycle can hope to kick in.

Meanwhile, the existing manufacturers continue to struggle. The weakening of the rupee seems to have been the log in the sea that is keeping them afloat. The rescue ship had better arrive soon!

For those feel that this is a pessimistic account, I would ask you to recall the last time you heard someone venturing into a manufacturing business. More importantly, would you sincerely advise it?

The writer is MD of a medium size electronics manufacturer and chairman of CII’s ICTE manufacturing committee