The Hindu Business Line : Tax reforms key to realising $300-b export potential: McKinsey

INDIA'S indirect taxes regime remains a spoilsport even though there exists a $300-billion manufacturing export potential by 2015, according to a report by McKinsey & Co.

The report, which was unveiled at CII's Manufacturing Summit on Friday, said: "Made in India could become the next big manufacturing exports story. The global trend to manufacture and source products in low-cost countries (LCCs) is likely to gather strength over the next 10 years, particularly in the skill-intensive industries where India has a significant competitive advantage."

It added: "If India were to take advantage of this trend, manufacturing exports from India could increase from $40 billion in 2002 to approximately $300 billion by 2015, leading to a share of approximately 3.5 per cent in world manufacturing trade.''

This can create 25-30 million new jobs in manufacturing and add one percentage point to the country's annual GDP growth rate.

Some $70-90 billion of the indicated manufacturing export potential by 2015 can be from just four sectors - auto components ($15-18 billion), apparel ($25-30 billion), specialty chemicals ($12-15 billion) and electrical/electronic products.

In 2002, $1,300-1,400 billion worth of manufactured goods was exported from LCCs a growth of 13 per cent as against six per cent for world trade.

That year, India - with $40 billion in manufacturing exports - had trailed China's $300 billion, Taiwan's $145 billion, Mexico's $140 billion, Malaysia's $78 billion and Thailand's $55 billion.

While labour-intensive industries and select skill-intensive industries constituted the first wave of such offshoring, going ahead it will encompass skill-intensive sectors like auto components, specialty chemicals and industrial electronics. This will enhance total offshoring to LCCs to $4,000-4,500 billion by 2015.

The trend will be driven by continued margin pressure on players in home markets, the emergence of a strong supplier base in LCCs, explosive demand growth in LCCs and the dismantling of regulatory barriers by the WTO.

While industry must contribute its share, McKinsey has said that the Government needs to remove four barriers to export led growth for India to realise the $300-billion possibility.

It must stimulate domestic demand stimulation by reducing indirect taxes and imports, de-bottleneck ports and accelerate power reforms, encourage development of several manufacturing clusters and accelerate labour reforms and facilitate skill development.

On the taxes front, the consultant recommends a single nationwide VAT, reduction of tax levels from 25-30 per cent currently to 15 per cent of retail price and a single rate of import duty, 10 per cent, by 2007.

McKinsey officials did not cite the tax issue as the biggest stumbling block, but Mr Ranjit Pandit, Managing Director, McKinsey & Co India, said that the existing tax regime (still high when taken in total impact) promotes sub-scale investments even though India's factor costs are comparable with those of competition.

"A streamlined tax structure with lower rate helps to grow domestic demand and create scale. It was amply proven in the past whenever excise duty on select products was cut. For example, over a period of 5-6 years, sales of two-wheelers multiplied manifold due to a 24-point reduction in the applicable excise duty."

Some of McKinsey's tax suggestions, as CII officials themselves said, are in line with steps already mooted but stuck in implementation.

Mr S.K. Munjal, President, CII, said in his opening remarks that it was very important to look at Government policy that impacts manufacturing.

Earlier reports on the sector too had cited taxation and regulation as impediments.

According to him, industry's requests to Government include simplification of indirect taxes, VAT be applicable to other indirect taxes also instead of just sales tax as proposed currently, a single tax rate instead of multiple rates, fine-tuning the existing import duty structure, flexibility in labour laws, easier methods to fund manufacturing and removal of infrastructure bottlenecks ($300 billion of manufacturing exports calls for 130 million TEUs of handling capacity at ports against the 40 million TEUs or so of today).

"The bottomline is that the opportunity in manufacturing is 3-4 times bigger than in services,'' Mr Pandit said.

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