Column : Building manufacturing through capital goods

Written by Chandrajit Banerjee | Chandrajit Banerjee | Updated: Nov 13 2012, 08:58am hrs
Capital goods refer to machinery and equipment used in the production of other items. These include machine tools, industrial machinery, construction & mining equipment, electrical equipment, and so on. The capital goods industry is the mother of all manufacturing industry and is of strategic importance to national security and economic independence. For this reason, industrial policy following Independence placed strong emphasis on the sector, with several huge public sector enterprises being set up to boost production, including Bhel, BEML, HMT and others. Today, the capital goods industry contributes about 12% to manufacturing output, and its progress is closely watched as it mirrors investment activity and forecasts the next growth cycle.

The capital goods sector has grown rapidly at over 14% CAGR from R1.6 lakh crore in 2005-06 to R3.1 lakh crore in 2010-11. It provides direct employment to 14 lakh persons. Almost all sub-sectors have outperformed the general industrial index growth during this period. The largest sub-sectors of heavy electrical and engineering goods have done well in the last five year plan.

However, the capital goods sector has lagged in recent years following slow growth in the world economy. In fact, the rate of growth in the sector for April-September of this year stands at a negative 13.7%. User sectors, such as infrastructure, construction, and so on, have cut down on capital expenditure and deferred orders. Users have also increasingly moved to importing capital equipment, given embedded technologies. Indian capital goods are subject to relatively high indirect taxes as compared to overseas manufacturers. At the same time, a 0-5% customs duty on imported capital goods encourages trading. Lack of finance deters small manufacturers.

If manufacturing is to grow at 12-14% as envisaged under the National Manufacturing Policy, the capital goods sector, the core of manufacturing, should grow at around 17-19%. The target for the 12th Plan has been envisaged as close to 17% to multiply turnover 2.5 times. At the same time, it is proposed to double the employment arising out of the sector and create an additional 14 lakh jobs by the end of the 12th Plan.

Various policy initiatives need to be put in place to build the competitiveness of the domestic industry. Industrial cluster parks, common facility centers, and cluster competitiveness can help to create an ecosystem for the development of the capital goods industry. A synergy of large and small enterprises would be needed to modernise and upgrade manufacturing facilities. SMEs require assistance for acquiring technology, including through overseas mergers and acquisitions. A corpus fund set up by the government could help in this as well as in the working capital requirement.

The top-most priority is to infuse the required technology into Indian capital goods manufacturing. R&D, education and training, IPR purchase and ownership, funding, and technology development and acquisition domestically and from overseas are being looked at in the 12th Plan schemes.

Import substitution through building competitiveness of Indian manufacturing will be integral to the capital goods industry. Overall, about 30% of domestic demand is currently being met through imports, and it is as high as 50% in some sub-sectors such as machine tools, metallurgical machinery and textile machinery. Lack of adequate technology of critical assemblies and subsystems hinders domestic production. Additionally, India has not adequately leveraged export markets for capital goods, one of the largest traded items globally.

A holistic trade policy has to be instituted for promoting capital goods. Anti-dumping measures on machinery and equipment sold at below cost price can be stepped up. At the same time, inverted duty structures that promote import of finished goods rather than inputs must be rectified. In free trade agreements, care must be taken to protect indigenous manufacturing capabilities. Rise in imports from China is also a major consideration, as its artificially depreciated yuan, tax advantages, government subsidies, and cheaper funds place Indian industry at a disadvantage. Regarding export markets, greater efforts will be required to build the India brand.

Increasing value addition in India in the capital goods sector could be encouraged through mandating a local procurement clause as also technology transfer. Government procurement should accord higher preference to local content.

Skill development is a key strategy required for the capital goods sector. Science and technology skills for the longer terms including basic and applied research must also be prioritised. At the factory level, skills supplied through the DGET and vocational certificate training need to be expanded. CII is working with the government to supply skills through modular programmes, as also to devise necessary curriculum. Additionally, CII is working on Visionary Leaders for Manufacturing Program for building managerial leadership.

Due to its strategic importance for the country, a strong policy environment to encourage manufacturing of capital goods, enhance value addition and support technology transfer is needed.

The author is director general, Confederation of Indian Industry