India’s manufacturing sector must deliver more in terms of both relative contribution to the national cake as well as job creation, and engineering and chemicals are industries that need strengthening.
Two decades of economic liberalisation have seen India more than double the ‘Hindu rate of growth’ of the previous three decades. This, however, hides the fact that India’s manufacturing sector accounts for barely 15 per cent of its gross domestic product (GDP). India needs its manufacturing sector to deliver more not merely in terms of increased relative contribution to the national cake, but also in terms of employment generation. As per the Arjun Sengupta Report, the number of workers in unorganised manufacturing enterprises as of 2005-06 was 32.36 million. There is, therefore, considerable need and scope for enlarging the organised manufacturing sector, given its employment potential.
There are other dimensions as well. An industrially advanced nation must have two critical developed industries — engineering and chemicals. The only way these two segments of manufacturing can build on the base that has been created over the last six decades is to create enabling conditions, so that India’s engineering and chemicals sectors become important industries from a global perspective. Take the case of engineering. It accounts for 27 per cent of total factories in organised industry, 38 per cent of invested capital, 31 per cent of total persons employed and nearly 37 per cent of net value added. In terms of exports, engineering goods account for 25 per cent of India’s total exports but our share in world engineering exports is a mere 0.8 per cent. We must attempt to increase our share of world engineering exports to between 1.5 per cent and 2 per cent by the end of the Twelfth Five-Year Plan.
The Discussion Paper on the National Manufacturing Policy circulated by the Central government has made a number of recommendations to increase the share of India’s manufacturing to 25 per cent of GDP by 2022. This increase is expected to double current employment levels in the sector and enhance its global competitiveness. The primary focus in the discussion paper is the concept of National Manufacturing and Investment Zones (NMIZs), which is expected to reap the benefits of co-sitting, networking and greater efficiency through the use of common infrastructure and support services. The NMIZs would be an area that would be specifically delineated for the establishment of manufacturing facilities for domestic and export-led production, along with the associated services and infrastructure.
It will be a combination of production units, public utilities, logistics, environmental protection mechanisms, residential areas and administrative services. It would have a processing area where the manufacturing facilities, along with associated logistics and other services and required infrastructure will be located, and a non-processing area, to include residential, commercial and other social and institutional infrastructure. The processing area may include one or more Special Economic Zones, Industrial Parks and Warehousing Zones, Export Oriented Units, DTA units duly notified under the relevant Central or State legislation or policy. All the benefits available under the relevant legislation or policy will continue to remain available to the Zones.
The internal infrastructure of the NMIZ will be built and managed by a developer, or a group of co-developers. The external linkages will be provided by Central government and the concerned state government. The users of external as well as internal infrastructure will pay for its use, except to the extent that the government supports the service through budgetary resources. The NMIZs are likely to have high-class infrastructure, and provide a competitive environment conducive for setting up businesses. They would thus provide a boost to manufacturing, augment exports and generate employment.
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While conceptually NMIZs seem to be an excellent idea, given the problems faced by many SEZs with regard to land and also the possibility of implementation of the Direct Tax Code from the next fiscal year, it may be interesting to figure out how the implementation of some of the conceptual provisions of the NMIZs is being envisaged. I would, however, stress that notwithstanding the big ticket issues that NMIZs comprehensively deal with, it is also important to look at the relatively smaller things that inhibit India’s manufacturing sector. There is considerable scope for streamlining not only existing manufacturing policies, but also enhance the possibility of improving the implementation of what Prof Kaushik Basu calls the “anterior laws”— that is, laws that require agents of the state to enforce the laws that are legislated. Clearly, therefore, we need to lower transactional costs for the manufacturing sector.
The Investment Implementation Ratio (IIR), for the manufacturing sector, for instance, is lower than that for all industries. The IIR, which is the ratio of investment under implementation to total investment intentions during the year, is 48.8 per cent in 2010-11 for all industries, while for the manufacturing sector it is only 38.3 per cent. So, while investment under implementation must go up for all segments of industry, it must do so for manufacturing in particular, as that will itself increase the overall implementation ratio.
Again, on the taxation side, a full GST that takes into account all kinds of indirect taxes at all levels is the need of the hour, so that we have a common market in the country and the cascading impact is minimised. Equally, our trade agreements must ensure that we promote value added manufacturing domestically and this can be ensured if we are conscious of the debilitating impact of inverted duty structures on domestic manufacturing. The Economic Survey, 2010-11 notes that one has to be careful about the spaghetti bowl effects of Free Trade Agreements that are signed by India (for instance, the normal customs duty (MFN rate) on TV sets is 10 per cent, but in case of imports from Thailand and Singapore there is zero duty, subject to the rules of origin requirement).
While framing the new manufacturing policy, we must also consider the present as well, while looking at the future and try to devise innovative ways to consolidate the existing manufacturing base of the country. Value addition, rather than simply extraction or trading in raw materials, needs to be encouraged; cost of credit requires moderation; technology upgradation for existing manufacturing industries, particularly in the small and medium-scale sector, is an indispensable pre-requisite, since it is only through technology upgradation and diffusion that the small and the medium sector can increase its productivity, move up the value chain and reap economies of scale.
The author is Executive Director of EEPC India (formerly Engineering Export Promotion Council)