In recent months, the manufacturing sector has exhibited deceleration in contrast to the high growth it displayed before the global economic crisis. This may be attributed to a number of causes resulting from a fraught global environment as well as domestic factors. However, CII feels that this is a temporary phenomenon and dynamism would be reinvigorated shortly as confidence picks up.
The government had instituted rapid response measures to minimise the impact of the global economic crisis, which helped manufacturing recover faster in India than in many other countries. Now, the stimulus rollback is bound to affect demand and supply conditions. This is not just the Indian experience but is seen across most economies this year.
As finance minister Pranab Mukherjee mentioned in his interaction with financial journalists earlier this week, the global economic environment is still vulnerable and fragile. Recovery in the US, the largest economy, remains uncertain, while troubles in the EU and the natural disaster in Japan contribute to the overall situation. Even in robust Asian economies, growth has slowed down.
Along with global inflationary pressures and volatile commodity prices, the macro framework today is sapping global investor confidence. This is being reflected in India as well. Manufacturing is no more unviable today than it was when growth rates were in double digits some quarters ago.
Inflation is an additional factor contributing to manufacturing deceleration as it impacts the spending power of consumers. The raising of interest rates to tackle inflation has led to the cost of investments going up and, consequently, the rate of investment growth too has gone down. This further adds to supply shortages. It is to be hoped that this month?s central bank policy statement would desist from further hiking the headline interest rates.
In terms of policy, a number of proposals are on the anvil. Industry is aware that the government is engaged in deliberations on important issues and we could soon see many of these policies being announced. For instance, the implementation of the National Manufacturing Policy that proposes to minimise the costs of doing business could boost manufacturing growth and attract significant investments. Introduction of the Direct Taxes Code and the Goods and Services Tax would be instituted as targeted by next year, while several key Bills are in advanced stages of the parliamentary process.
Importantly, there is a need for progress on implementation and administrative issues at the desired speed. The institution of a few fast-track large infrastructure projects could greatly improve the climate as well.
The government has taken measures to support industry during the economic crisis in the past and we are confident that this time as well, it would take timely action to inject dynamism into the manufacturing sector.
The author is director general, CII
RP Singh
India has been left behind in manufacturing and the economy?s growth has been driven primarily by the services sector. While the government would like to retain the edge we have in the services sector, GDP growth in the days to come cannot be sustained only on the basis of growth in the services sector. The reinvention of agriculture sector, which is a must for the country to sustain a high GDP growth in the long run, would call for infusion of capital in agriculture and also redeployment of existing agricultural workers into other sectors. Services alone cannot absorb such a large number of workers and, to find an alternative to this, manufacturing has to grow. We must realise that the only sector that can absorb this workforce will be manufacturing.
Historically, India has been left behind in the manufacturing race and we are way behind not only to China but also countries like Thailand, despite low labour costs. To a great extent, the ecosystem available for starting and running a manufacturing unit is responsible for this state of affairs. We must realise that bilateral agreements like the FTA with Thailand have also resulted in killing the electronics industry in India.
The lack of capital for the SME sector is another major issue to be tackled. The venture capital culture has not picked up in India. So while young entrepreneurs from India are able to start a business in the US, they are not able to do the same in their own country. Another problem area is that while India and China almost opened up at the same time, the pace of growth in China has been higher due to quick decision-making at policy levels. We need to fix various leftover issues of the 1991 industrial policy.
A string of radical policy changes may not be feasible in the short term as this would require lot of budgetary support, in the face of huge social commitments (on account of inclusive growth). But the least we can do is to bring about changes in the business environment by reducing the regulatory burden to the maximum extent possible. So, one of the major instruments for manufacturing policy is simplifying business regulations.
Historically, countries have leveraged upon government procurement and infrastructure deficit to facilitate the growth of major sectors. But we have not made any such at WTO. Decisions like permitting import of project equipment at concessional or zero duty to boost a particular sector, especially in the case of power sector, have also adversely affected the growth of manufacturing in India.
It may be necessary to call for global bids for equipment with a view to fully realise the value of the money spent. The global players are basically system integrators. Apart from calling them to integrate the system in India, we should ask them to gradually increase the local value addition in their processes. This would encourage manufacturing without hurting the timelines of the projects.
Being a pluralistic society, we need to consider the concerns of all stakeholders. This may be more time consuming but will finally be more rewarding.
The author is DIPP secretary, Government of India (As told to Timsy Jaipuria)