Getting manufacturing muscle

The Centre’s move to come up with a National Capital Goods Policy is well-intentioned. The goal is to increase production of plant, machinery and tools within the country as well as to reduce imports and turn India into a net exporter of these goods. However, the targets, most of which are to be achieved in less than 10 years, are quite ambitious. Going from being a net importer of capital goods to being a net exporter in a matter of a decade requires more than just stepping up manufacturing and exports. Yet, there is no harm in setting out ambitious targets — particularly if these targets can act as a catalyst to improve the policy environment to increase output of capital goods. The policy targets to raise exports to at least 40 per cent of total production, from ₹61,000 crore to about ₹3 lakh crore, and thereby increase its share in global exports of capital goods to about 2.5 per cent from about 0.8 per cent currently. It aims to increase share of domestic production in the country’s capital goods market to 80 per cent by 2025. In the process, domestic capacity utilisation is hoped to be increased to 80-90 per cent. India is currently a net importer of capital goods — about 45 per cent of its demand is met by imports. Juxtapose that with the capacity utilisation of the capital goods industry which is at 60-70 per cent, and it suggests that Indian manufacturers are currently not meeting market expectations.

To achieve all these targets as well as increase its market-share, the capital goods industry needs to become more competitive — both in technology and costs. Higher costs of machinery will push cost-conscious project developers to cheaper products from markets such as China. Special provisions envisaged in the policy such as a domestic value-addition clause and regulation of second-hand imports can at best be short-term measures. The market-share of indigenously produced goods cannot be increased in the long term by erecting non-trade barriers or with local sourcing of capital goods as a condition for new projects. Domestic production needs to be demand-driven, with strict adherence to delivery schedules.

The National Capital Goods Policy has correctly identified that a long-term, stable and rationalised tax and duty structure is essential for the growth of the domestic industry. Among other measures, it has called for correction of the existing inverted duty structure anomalies whereby finished goods attract lower duties than parts and components, there’s a uniform customs duty on imports of all capital goods-related products, and a uniform goods and services tax regime across all capital goods sub-sectors. The rollout of GST requires political consensus, and though the Government is confident of getting the legislation through Parliament in the monsoon session, one cannot be sure till the Bill actually makes it to the statute books.

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