Of cost, complexity and corruption

How do we compete by borrowing at an average of 12 per cent when our competitors in a flat world have access to sub 3 per cent or even negative rates? The Indian investor who is used to a 10 per cent return on his FD expects a minimum of 15 to 18 per cent on his investments in risk capital. How does a business guarantee such a high return?

The complexity of laws, rules and regulations, and their interpretations by licence raj-bred inspectors continue to scare away investors. Most businesspersons have learnt to take this in their stride, building the cost into their calculations. The main focus of any business is to gain maximum market access. In a globalised world, this access is available at zero, in several cases near zero, import duties. Hence why bother with ‘Make in India’ as long as ‘Make for India’ or ‘Fake in India’ works. After all, the 3 Cs — cost, complexity, corruption — have always been around.

There are three main policy instruments available to any government that intends to increase the share of manufacturing in its GDP.

Protection for domestic manufacturing through levy of import duties . Ideally, this would be done in three slabs: highest duties for import of final products, lower levy on intermediaries, parts and components, and the lowest on raw materials. WTO’s thrust towards low-bound rates, and zero duty in some sectors has rendered this measure ineffective. Import duties also mitigate some of the disabilities of higher costs and complexities. The sectors that have faced zero import duty have been rendered non-competitive.

China stayed away from a zero duty regime till its domestic manufacturing industry was strong enough. We rushed into these blunders without adequate thought or preparation. A decade after the electronics sector went to zero import duties, we are still discussing the impact of inverted duty on some product lines in this sector.

Relief in direct taxes . Exports and software enjoyed tax holidays for an extended period of time. The finance ministry is now opposed to any exemptions in direct taxation. So this instrument stands blunted. Mega investments are the only exceptionThe reasons that compel a tax break for mega projects apply equally, if not more to smaller units. North block is however opposed to any such exemptions.

Tweaking indirect taxes There are excise duty exemptions in some geographies and differential duty for some sub-sectors.. Tweaking the indirect tax chain will hurt some in the value chain, but for the moment this seems to work at least as far as attracting investments for cell phones is concerned. The continuation of such a dispensation in the GST regime is now essential for assembly operations to continue. Deepening this value chain will require extending the differential to parts and components in a phased manner.

There is another instrument available. Sector-specific subsidies, grants and incentives can be used to enable ailing industries to compete. An effort in this direction was made in the electronics sector: 25 per cent capital subsidy and project support for electronic manufacturing clusters are the two major pillars of the National Policy for Electronics. While this outreach has attracted reasonable investments, the target figures are far way. It is surprising that the policymakers have decided to curtail this apparatus by limiting it to three years rather than the 10 years declared earlier. The cluster policy has been scrapped altogether.

Yet another instrument used effectively by governments is providing preferential market access to domestically manufactured products for their own procurement. The US has been effective with its ‘Buy America’ policy since 1933. In India, however, this too has been rendered ineffective. Several qualifying tender conditions ensure that domestic manufacturers do not have a chance at even making an application.

A “surgical strike” on enabling manufacturing competitiveness is needed. A detailed study of champion’ sectors, selected on the basis of their potential, will reveal the root causes of their inability to compete globally.

Smart policies aimed at mitigating their impact will then need effective implementation with close monitoring by the highest authorities. Without this, ‘Make in India’ will remain a marketing slogan.

The writer is MD of Deki Electronics Ltd and heads the CII-Government of India panel on electronic hardware

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