Commerce and industry minister Anand Sharma discusses a range of issues ? the decline in FDI inflows to India in 2010, a manufacturing policy under formulation and the phenomenal rise in India?s exports in recent months that appears somewhat at odds with the slow growth in world trade ? and addresses some concerns of the domestic pharmaceutical industry in an exclusive interview with Timsy Jaipuria and KG Narendranath. Excerpts:
The latest World Investment Report by Unctad notes a more pronounced shift in global production and consumption in favour of the developing economies. India, sadly, does not seem to benefit from this shift in terms of FDI inflows when other emerging economies such as Brazil and Indonesia do. (FDI inflows to India declined by a steep 31% to $25 billion in 2010). China has quickly made up for its reduced competitiveness in low-end manufacturing by moving to high-end production. Clearly, indecision of government agencies at the federal and state levels and consequent delays in clearances has been one reason for the below-potential FDI inflows to India, along with other macro-economic factors. What is your view on it?
This (the decline in rate of growth of FDI inflows) has been engaging our attention. When I was at the Bric submit in Sanya on the Chinese island of Hainan in April, even the Chinese minister (for trade) had underscored this aspect (of low-end manufacturing gradually shifting away from China). The reason for the shift is an increase in wages in China and the fact that they have reached a saturation point (when it comes to manufacturing). Not only the companies of other countries which had over the years established manufacturing bases in China but many of the Chinese companies too are shifting to other locations, in particular Vietnam, Thailand and Malaysia. If ideal conditions were here in India, these investors would indeed have looked at the country with more interest.
In fact, this issue was raised by many during my interactions with global investors in Washington and New York during my recent visit to the US. American companies ? a very large number of them ? who have invested in China for manufacturing have said that they would like to shift to India or establish a new base here. In fact, there is a visible enthusiasm and interest in investing in India. At the same time, there have been some issues (with respect to attracting FDI) last year, which I would say, was a bad year in this respect.
What the investors need is the assurance on the policy predictability and stability. They also expect the government to make more progressive changes (in policies and rules) to boost investor confidence.
We don?t deny that last year, there was a sharp decline in FDI inflows while even during the peak of the economic crisis, India was indeed attracting investors. We have been concerned over this. But, you may note that we are doing well this year. During April-June this year, FDI inflows crossed $16 billion, an increase of 19% on an year-on-year basis. Mind that that figure doesn?t include two major investment proposals cleared by the Cabinet Committee of Economic Affairs (CCEA) recently ? Cairn-Vedanta and Reliance-BP deals, which would add another $13 billion or so to the FDI figure. We?re confident that some of the policy roll-outs being planned ? read the new manu- facturing policy and FDI in multi-brand retail ? would further boost inflows.
The manufacturing policy would be a key initiative that would help incentivise investments, including FDI. We are close to finalising the policy. Already, the Prime Minister has given an in-principle approval for the policy. There has been a series of meetings among the department of industrial policy and promotion (DIPP) in my ministry and the departments of revenue, environment and labour at the level of the secretaries and chaired by the principal secretary to the prime minister.
I have just had a review of the policy draft. Whatever fine-tuning was required of the policy draft has been done to a satisfactory level and the loose ends have been tied up. I have also met the finance minister twice on the issue over the past week on this policy. I am sure that we should be in a position to move the Cabinet soon for the final clearance to the policy.
As decided in a meeting of the high-level committee on manufacturing chaired by the prime minister recently, the policy will seek to create the best of global practices for manufacturing in the country, incentivise investments and attract technologies so that India is made a hub of manufacturing ? sort of a workshop of the world.
The national manufacturing and investment zones (NMIZ) will be integral to the policy. There will be only five such zones ? virtually greenfield industrial cities/townships where units adopting green technologies enjoy additional sops. The central government will support these zones with infrastructure linkages and the states? equity will be the land. NMIZs would play a major role in achieving the government?s stated objective of increasing the share of manufacturing in GDP to 25% from 16% now. The focus will be on setting up globally competitive non-polluting industries ? electrical, mining and earth-moving equipment, engineering goods etc.
The NMIZs would address issues of delays in regulatory clearances to a great extent. A regulatory body within these zones will facilitate clearances and the construction would commence in an environment of certainty with many of the state-level approvals having been obtained before the land was provided by the states. The environment impact assessment study has been completed in case of some of these zones and some states, in anticipation of the policy, have already acquired the requisite land. As I said, we are also keeping out any polluting or hazardous industry from these zones.
So, each NMIZ would be akin to a Jamshedpur or Chandigarh or precisely a combination of both. After independence the one industrial city that came up was Jamshedpur and the lone planned city that came up was Chandigarh.
Indeed, this is an ambitious project. But we have the experience of most special economic zones (SEZs) not actually serving the purpose of job creation, being focussed on real estate business and not multi-product ones.
There is no question for NMIZs becoming small. We don?t intend to allow a proliferation of these zones, but would restrict their number to five. So, the concept is different from that behind SEZs. We have before us examples of other economies?like China, Germany and Korea?benefitting immensely from large industrial townships. In the designing of these zones, we have drawn inputs from the best of consultants. The idea of NMIZ is also in perfect harmony with the seven smart cities which are coming up along the Delhi Mumbai Industrial Corridor being developed with Japanese funds.
How would you address the issues of land acquisition that might come in the way of these zones?
The locations (states) will be chosen carefully. The policy is very clear that NMIZs will not come up in environmentally sensitive or fragile areas. Only uncultivable land will be acquired for these zones. Acquisition of multi-crop land for these zones won?t be allowed.
And another pertinent issue is of (availability and treatment of) water and here advance work has been done by some of the states. I can tell you that three states ? Maharashtra, Gujarat and Rajasthan ? have moved faster to set up NMIZs. But we will also have to ensure a reasonable level of geographical distribution and that?s why the idea to set up five zones.
How will you ensure that each NMIZ generates high employment so that they play a key role in the government?s inclusive growth agenda?
One can?t give an exact or even ballpark figure on the jobs that an NMIZ would create because these are ultimately business decisions. But, naturally, these zones would create a lot of employment. Each NMIZ would necessitate many streams of economic activity. Jobs would be generated in multiple areas of infrastructure ? electricity generation, road-building, setting up of schools, colleges, skill-training centres, R&D institutes, research laboratories etc. We also want to create an intellectual property pool by way of these zones. The technologies created at the zones can be purchased by the industry for making their production processes more competitive. This would also be helpful to the foreign firms who want to be involved in IPR creation with use of Indian manpower. Let?s not overlook the fact that the share of manufacturing in India is stagnating at 16% since 1990, whereas the corresponding figure in comparable economies is twice that or even more. It is clear that India can?t afford to steadily grow and create opportunities for its people without expanding the manufacturing base. We need to assimilate high-end technology and facilitate innovation so that India is in the line of technology leaders in future.
The finance ministry, through the Direct Taxes Code, has proposed to close the liberal tax regime for SEZs. As per the DTC Bill, only those SEZ units which commence operations by March 31, 2014 will qualify for the sundry tax incentives. Isn?t there a dichotomy as your draft policy moots tax incentives for NMIZs?
The draft policy speaks of capital gains tax exemption for NMIZ units if the income from sale of assets is reinvested and used for setting up another unit in the zone within a period of three years. Further, there are special customs duty incentives for greener technologies. I?m sure that the same kind of tax benefits that are available for SEZs will be there for NMIZs also, if not more. I?m discussing the matter with the finance minister.
How will the proposed federal land acquisition law impact the NMIZ project?
A new national land acquisition law is under preparation and that is the domain of the rural development ministry. As it comes, it would indeed be of help. In fact, some states like Haryana already have progressive land acquisition policies. However, we are not linking the NMIZs with the national land acquisition policy as the industrial zoning and mapping has to be done by the state governments. The idea is to develop a suitable partnership among the Centre, the state concerned and industry and cut delays.
China puts indigenisation and technology transfer conditions on foreign investors and yet it is able to attract FDI many times that India gets. How efficient is our FDI policy in ensuring a reasonable level of technology absorption by Indian companies from their foreign partners and promoting greenfield ventures?
Once you have large-scale value-added manufacturing, creation of IPR pool and technology assimilation would be natural concomitants. For instance, in engineering technology, we are moving up the ladder because the manufacturing capacity in the sector has increased in recent years. It is expected that 100 million Indians would join the workforce within a decade. Unless the manufacturing industry expands considerably and the people are trained to be employed in the sector, it would be impossible find remunerative jobs for the new entrants into the job market. It is a huge social challenge the dimension of which cannot be understated. Eventually, services also will grow on the strength of manufacturing growth but services industries alone won?t be in a position to employ 100 million young men and women.
There is a proposal in the DTC to impose minimum alternate tax (MAT) on SEZ units at 18.5%. Your ministry has pitched for a lower MAT rate for them.
My view is that this (MAT on SEZs) should not have come a year earlier as should have been harmonised with DTC. Since the DTC is in Parliament, I cant comment on it now, but the finance minister has been fully sensitised to the industry?s concerns on this issue.
As per the WTO, world trade is projected to grow at just 6.5% in 2011 as against 14% last year. Despite the uncertainties that cloud major markets (the US and EU), India?s merchandise exports grew by a phenomenal 46% in April-June, even higher than the target to grow exports at 25%. What is it that makes this happen?
There has been a deliberate effort by the industry and the exporters to diversify the export basket and export to non-traditional markets. There is also some recovery in the global markets although it is not only rather weak, but also uneven and uncertain. The pre-recession demand levels in developed countries have not been fully restored as yet, and this (restoring the previous demand situation) might take time.
Apart from the diversification of products as well as markets, what has helped in achieving the high export growth are FTAs, Cecas and Cepas (all bilateral agreements for liberalising trade and/or investments). Thanks to the India-Asean FTA, two-way trade between the two crossed the $50 billion mark last year. Our exports to ASEAN countries have grown by $5billion whereas imports have increased by $3.5 billion. So, even the trade balance is turning in our favour.
The agreement with Japan signed in February is one of the most ambitious ones among similar pacts Japan has signed with other countries or even among those India has signed with other nations. It gives as an assured entry into their services sector. Under the pact, the Indian pharma industry would get the same treatment as Japan gives to its domestic industry.
The proposed India-EU bilateral trade and investment agreement (BITA) has raised a lot of concerns in the Indian industry. The pharma industry is worried about the possibility of New Delhi agreeing to EU demand for a TRIPS-plus patents regime. Indian automobile companies too have denounced the move to cut import tariffs on automobiles as part of the agreement.
I can assure you that there won?t be a separate chapter in the India-EU BITA on IPR. There will be nothing in the pact that binds us to anything beyond what has been agreed to under the TRIPS agreement and provided for under India?s own patents law. Our policy is clear in this regard: we we will not change any domestic laws for the purposes of entering into any bilateral agreement. We have recently reached an interim understanding with Brussels on preventing the seizure of India?s generic drugs exports by the European Customs Authorities while in transit through Europe. The EU has agreed to move its Parliament for new regulation in this regard even as India reserves the right to not withdraw the case now before the WTO dispute settlement body. The case is now put under suspended animation.
Another important issue in this context is concerning the EU demand for data exclusivity. (Data exclusivity denotes protection of the test and other data pertaining to new chemical entities (NCEs) that is submitted to the drug regulators from unfair commercial use. This is provided for under Article 39.3 of the TRIPS agreement. But the EU wants something more than this: first, it says the regulator should not rely on the innovator data to approve generic products that are bio-equivalent to the originator?s product and secondly, it wants the facility to be available for not only NCEs but other pharma products as well). On this issue, we have made it clear that India has made rich contribution by the world?s generic pharma industry and there is no way we can allow any shift in our approach. We are committed to policy that would not delay production of generic medicines. We will not accept the demand for data exclusivity. We won?t agree to anything TRIPS-plus, as we are also concerned about investments in the Indian pharmaceuticals industry. We want the Indian generic drugs industry to continue growing. We are producing close to a quarter of the generics in the world and our industry is a big hope for countries that look for good quality generic drugs at affordable costs.
Is there a proposal to bring down the FDI level in pharmaceuticals from 100% now to avert frequent takeovers of Indian drug companies by foreign MNCs?
We?re not against FDI in the sector, but would want greenfield investments, rather than take-overs of Indian companies. There have been some bona fide concerns over the spate of takeovers in this industry in the last two-three years and the likelihood of more such deals. In a meeting convened by the Prime Minister over this issue a few months ago, it was decided that Indian drug companies need to be encouraged to invest more in innovation and R&D so that they don?t have to sell new molecules developed (NCEs) at the later stage of clinical trials because of prohibitive costs. It has to be ensured that the ownership of molecules developed by Indian companies rests with them.
Indian pharma firms? ability to bring down prices of drugs has been indisputable. For example, in the case of first and second generation of ARVs (anti-retroviral drugs for HIV/AIDS), the cost of treatment for one patient used to be around $11,000-$12,000 per year. Indian generics initially brought it down to $1,000-1,100, and subsequently to $400. That is why we are keen to retain the leeway and flexibility to invoke the TRIPS-compliant facility of Compulsory Licensing (CL) to sidestep patents in public welfare interest. The Doha declaration on public health provides for exports of generics produced under the CL mechanism to countries with insufficient drug manufacturing facilities.
While countries like Brazil, Malaysia and South Africa used the CL mechanism for their domestic purposes, we have not done in so far. We won?t hesitate to use the CL option to ensure production and marketing of life saving medicines in the country. In many therapeutic areas like oncology, anti-bacterials (new generation TB drugs for instance) etc., newer drugs are reaching the market, and we will have to ensure these are available to Indians at affordable prices. An inter-ministerial group anchored by the Planning Commission is looking at the whole gamut of issues relating to the drug industry with a view to crystallising a coherent policy. The idea is to develop a public private partnership to strengthen the Indian pharmaceutical industry.
There is a view the US has turned protectionist after the global economic crisis…
Yes, after the economic crisis, many countries have adopted an inward-looking approach and resorted to non-tariff barriers to keep competition to their domestic industries at bay. We have been consistently of this view that these measures are counter productive. During the visit of President Obama to India, the US side indicated that they were willing to negotiate a BITA with India. There will be two interactive sessions between the two sides before the next meeting of India-US trade forum that will be in October in New Delhi.