Capital goods units send SOS call

Demand rises for policy to encourage production of critical engineering equipment.

Apprehensive of losing orders to overseas rivals, especially from China, the Indian capital goods industry has started lobbying for a national manufacturing policy to encourage production of critical engineering equipment within the country.

The demand has been raised by the Confederation of Indian Industry (CII) and has the backing of the country's top makers of capital goods, including Larsen & Toubro (L&T) and state-owned Bharat Heavy Electricals Ltd.

"Unless we have such a policy, we are headed for a situation where the Indian capital goods industry may be dead in 25 years," CII Director General SS Mehta told Business Standard. The industry association has set up a task force under L&T Chairman and Managing Director AM Naik to suggest to the government the need for a strong domestic capital goods industry for strategic reasons.

The Indian capital goods industry is going through anxious moments as power and construction firms have started importing from China. Dongfang Electric Corporation, for instance, has already bagged orders for 3,000-Mw power equipment from India and hopes to double this by the end of this year.

Recent government numbers, however, paint a different picture. Data with the commerce ministry show that while machinery imports rose 21.32 per cent in April-August 2007 to Rs 45,235 crore, the project goods imports fell 39.92 per cent to Rs 2,060 crore. This in spite of the rise in the value of the rupee. Imports grew close to 20 per cent overall during the period.

The contours of the manufacturing policy are not clear but what the CII wants is that the Indian companies should be allowed to place orders with foreign firms only if they agree to manufacture the ordered goods within the country. Rising imports, it has said, will choke the flow of technology into the country. Compulsory local manufacturing could address this issue, it said.

The CII has also suggested that the policy should encourage small and medium enterprises to support large manufacturers. This could be done by handing out fiscal incentives to the sector, it said.

The CEO of a large capital goods company said there was an urgent need to cut the excise duty on capital goods to 12 per cent from 16 per cent and to raise the Customs duty to 7.5 per cent.

"There is a compelling need for a national policy if manufacturing is to have a strategic role in India," said Mehta.

According to him, Indian companies find it difficult to compete on price with companies from "countries with fixed foreign exchange rates and low interest rates".

However, some companies that imported capital equipment in recent past said they did so because the Indian producers' order books were full. "All shops are full," said Atul Punj, chairman of Punj Lloyd, which is executing construction projects worth Rs 20,000 crore in 19 countries.

His company is in the process of importing a barge from China as the equipment is not available in India. "No new shipyard has come up in the country in the last few years. All capacities are choked," Punj said.