Needed – a Budget for medium-scale units

The government’s determination to revive Indian manufacturing has been widely welcomed. A number of initiatives towards eliminating barriers in the ease of doing business parameters have already been put in place or are under consideration; the same holds true for attracting investments in electronic/defence. The forthcoming Budget session can take these forward.

Contradictory trends seem to coexist. Indian manufacturing exports have performed extremely well. Our world market share has grown from less than 0.70 per cent in the 1990s to over 1.60 per cent now. But the share of manufacturing in GDP has fallen from 16 per cent to below 13 per cent, implying that the risk-rewards ratio between manufacturing and alternate investment avenues is adverse.

There has been significant trade diversification towards non-traditional markets in Africa and South America. However, low-technology and price-sensitive products have an excessively large share in our export basket. Technology products account for the majority of our import basket.

The progressive rollout of the WTO fair practices code and the communication and logistics revolutions have ensured a level playing field to manufacture anywhere and to compete in any market. A Delhi trader can track supply/demand conditions in Shanghai, Johannesburg and Kolkata with equal felicity. Bulk shipment costs between Shanghai-Chennai and Ahmedabad would not be widely dissimilar.

A major share of world manufacturing is dominated by global value chains, consisting of component suppliers and assemblers. The component suppliers are also technological entrepreneurs bringing into play their unique processes.

A large defence equipment manufacturer or consumer electronic company or high fashion retailer often source from Indian suppliers, but more often from other countries because of a greater density of alternate suppliers.

Also, scale economies of production along with the existing density of similar producers often dictate the location of choice for new manufactures. Hence the Silicon Valleys or Shenzhens or Shanghais.

It is important to recognise that Indian banks played a pioneering role in encouraging initial manufacturing growth. This was supported by the imposition of priority sector lending norms and the creation of credit guarantee schemes.

Priority sector norms have been diluted by the inclusion of retail lending schemes; lending to the medium sector has also been taken out of its purview. Industrial loan guarantee schemes also ended in the 1990s.

While the previous NDA government launched a substitute it was only for micro industrial ventures involving loan values below ₹1 crore. MSME norms have not been revised in tandem with the changes in the consumer demand profile.

Indian banking is currently grappling with the twin problems of Basel 3 implementation and rising NPAs and has become extremely conscious of capital and default risk. Entrepreneurs will need to grapple with these constraints.

MSME norms should be revised according to international benchmarks and priority sector lending norms must be revisited. The existing credit guarantee schemes for medium-scale enterprises must be supplemented by new schemes to support such ventures (investing say ₹50-100 crore).

Inadequacy of promoter equity is another challenge. An angel investment fund managed by a reputed market regulated institution would boost entrepreneur interest in manufacturing.

Also, since the advanced economies are experiencing recession/slowdown and will grapple for solutions to protect jobs in a WTO friendly manner, further quality and environmental control barriers can be expected.

Indian industry has been hurt in the past. Recognising the likelihood of future regulatory barriers is thus important.

As a departure from convention, the need to adopt internationally benchmarked regulations could be focused upon in Part A of the Budget speech. Part B could give some attractive tax shelters.

Loan guarantee schemes with the appropriate tax incentives will also help manufacturing.

The writer was formerly the chairman of Exim Bank of India

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