– By Brajesh Kumar Tiwari
On February 1, 2023-24’s budget is scheduled to be presented. Budget 2023 should focus on implementing reforms relating to ease of doing business for MSMEs and boosting exports to achieve the Make in India (MII) mission.
Backdrop: Without robust manufacturing, no large nation has progressed from poverty to prosperity. The ‘Make in India’ program launched on 25 September 2014 is the flagship scheme of the Modi government, this campaign had some stated goals. Such as ensuring the growth rate of the manufacturing sector at 12-14 percent per annum; To increase the contribution of manufacturing sector to the Gross Domestic Product (GDP) to 25 percent by 2022 and create 100 million additional manufacturing sector jobs in the economy by 2022. Now these targets have been extended till 2025, however due to the current pace and lack of infrastructure, the target is not visible till 2025 or even 2030.
It was publicized during the Corona pandemic that companies leaving China would relocate to India; however, the majority of these businesses have shifted their base to Vietnam, Taiwan, Thailand etc., and only a small number have relocated to India. India contributes barely 1.6% of the world’s exports, despite having the fifth-largest economy. The Make in India programme initially prioritised Défense production, but it was not as successful as anticipated. Although India’s arms imports declined by 33% between 2016–2020, But it still remains the world’s second largest arms importer, just after Saudi Arabia as reported by Stockholm International Peace Research Institute (SIPRI).
One of the primary objectives of the campaign was to increase the manufacturing sector’s share in Indian GDP targeting 25 per cent by 2022. In 2014, the share of manufacturing in India’s Gross Domestic Product was 15.07%. Last year, it fell to 14.07%. The economy of China is more than five times larger than that of India. Manufacturing’s GDP contribution is 29%, which is double India’s. Even in neighbouring Bangladesh, manufacturing is approaching 20%, as the country has emerged as the world’s second largest producer of readymade garments, after China. Other Asian countries with a larger share of manufacturing in GDP than India are South Korea (26 percent), Japan (21 percent), Thailand (27 percent) and Singapore and Malaysia (21 percent).
It is evident from the above that this particular objective of “Make in India” was missed by a long margin.
Today India has emerged as a preferred investment destination which is evident from the fact that India recorded the highest ever annual Foreign Direct Investment (FDI) of US$ 84 billion in the last financial year. It was US$ 45 billion in the financial year 2014-15. Total FDI inflow in the country, in the last 22 years (April 2000 – March 2022) are $ 847 bn while the total FDI inflows received in the last 8 years (April 2014- March 2022) was $ 523 bn which amounts to nearly 40% of total FDI inflow in last 22 years. Even first time FDI equity inflows in the manufacturing sectors have increased by 76 per cent in FY 2021-22 (USD 21.34 billion) compared to previous FY 2020-21 (USD 12.09 billion). India which has traditionally been a net importer of toys, has become an exporter. India’s toy exports received a growth of 636% in April-August 2022 over the same period in 2013. India has rapidly made its place in the Ease of Doing Business index released by the World Bank, India’s EDB rank was 134th in the year 2014, it has increased to 63 in the year 2021. India is ranked 43rd in the Global Competitiveness Report Index published by the Geneva-based World Economic Forum, up from 60th in 2014. The creation of corona vaccines by Indian firms is a striking example of homegrown ingenuity.
Still to Achieve:
But even reforms in all these ranks have failed to revive the manufacturing sector and are not giving the required support to the Make in India campaign. Despite all efforts to promote self-employment, the level of unemployment has broken the record of 4 decades. According to figures from the World Bank, India’s unemployment rate for 2020 was an all-time high of 8.00%. By 2022, when There was also an objective of creating 100 million additional jobs by 2022. This task has been made incredibly challenging by COVID. However, the nation was already dealing with the biggest unemployment crisis in its history when COVID arrived. According to the CMIE Data, 42% of graduates between the ages of 20 and 24 were unemployed in 2017. In 2018, it reached 55.1%, and in 2019, it reached 63.4%.
However, it did not happen overnight. A company’s closure results in the displacement of thousands of workers. General Motors (2017), MAN Trucks (2018), United Motors (2019), Fiat (2019), Harley Davidson (2020) and Ford (2021) have all decided to exit the Indian market in the last five years. The Federation of Automobile Dealers Associations says these exits resulted 65,000 job losses and a loss of Rs 2,500 crore to dealer investments. According to a report by McKinsey Global Institute, that around 18 million people in India will be forced to move to a different occupation by 2030.
India is still battling with its trade deficit. The country’s trade deficit grew to USD 228,83 billion from USD 140,65 billion in the same time of the previous fiscal year, as exports increased only by 9.0 percent and imports jumped by 25.0 percent due to an increase in energy prices. Even The total goods exports in 2021-22 amounted to $422 billion, up sharply from the pre-COVID levels of $313 billion in 2019-20. India’s main export partners are: the United States (15 percent of the total exports), United Arab Emirates (11%), Hong Kong (5%), China (4%), Singapore (4%) and the UK (3%).
According to data from Ministry of Commerce and Industry, in 2021-22 India purchased items from 216 countries and regions throughout the globe at a cost of 61,305 crore US dollars. 15.42 percent of India’s total imports came from China. India’s bilateral commerce with China hit a record $135.98 billion in 2022, according to Chinese Customs data released on January 13, 2023. The increase was driven by a 21% increase in Indian imports of Chinese commodities. There is no justification for the importation of Harmonized System products (HS-84, nuclear reactors, boilers, mechanical appliances and their parts) Similarly, imports valued at $21.61 billion under HS-85 (Electrical Machinery) and $1.97 billion under HS-94 (furniture, bedding, mattresses, cushions, light fittings, illuminated signs, nameplates, and prefabricated buildings) in January-November 2021 were unnecessary, as the majority of these items could have been produced locally. China is India’s biggest supplier of goods, with a 13.75 percent share ($75.87 billion) of India’s total imports of $551.70 billion from April to December 2022.
It is true that the government is working to establish a competitive, dynamic environment to support sustained economic growth and boost its importance in international trade.
The manufacturing sector is anticipated to benefit from the implementation of recent policies such PM Gati Shakti (supply chain), National Single Window Clearance (providing a single digital platform to investors for approvals and clearances), GIS-Mapped Land Bank (a one-stop repository of all industrial infrastructure-related information), and the Production-linked Incentive (PLI) plan. With the aim of making India one of the world’s main manufacturers of this essential component, the PLI for semiconductor manufacturing has been set at Rs. 760 billion (US$ 9.71 billion).
What ‘MII’ needed from this Budget:
A favourable tax policy regime and a robust business environment for foreigners planning to stay and work in India are urgently required. The PLI scheme was launched in 2021, with an initial investment of approximately Rs 2 lakh crore for 13 sectors. These incentives have a significant impact on domestic manufacturing. It is therefore recommended that the government maintains its focus on it. The MSME sector in India accounts for more than 45% of manufacturing output. As a result, greater connectivity of MSME to the global economy is urgently required. To increase exports, PLI schemes should be extended to MSMEs and emerging industries.
It has been suggested that the 15 percent corporate tax rate for new investments in manufacturing be extended to all industries, including the service sector. Since inflation has touched everyone hard, it is recommended that direct tax increases be avoided and that the 18 percent interest rate for late payment of GST be reduced to 6 percent for small and medium-sized enterprises (SMEs). There is a need for a tax incentive on capital or operational expenditures for extending and utilising new-age technology applications such as Artificial intelligence (AI), Internet of Things (IoT), and Machine Learning (ML).
Manufacturers frequently struggle to receive timely payments, so the NPAs (non-performing assets) policy for MSMEs should be 180 days rather than 90 days. Import duties on raw materials should be in the lowest or nil slab, intermediates in the lower 2.5-5% slab, and finished goods in the standard slab. The National Logistics Policy (NLP) is expected to be implemented in this budget. The NLP will alleviate bottlenecks and lower costs. India’s logistics costs are currently around 14% of its GDP. To compete with other developing countries, the government should reduce logistics costs to 6-8% of GDP.
The ₹200 crore support given under Market Development Assistance (MDA) scheme for promoting exports to $470 billion is just a “drop in the ocean”. As a result, an Export Development Fund with a large corpus is required for aggressive marketing.
Strict laws and policies place restrictions on the manufacturing industry, whether it be in the form of excessive paperwork, high energy and logistics costs, labour costs, land requirements, or environmental approvals.
The manufacturing industry in India continues to be fatally flawed by the country’s poor infrastructure. Compared to China, which spends 20% of its GDP on infrastructure development, our nation consumes only 3% of its GDP annually. India has one of the lowest per capita energy consumption rates in the world and an annual power deficit of more than 10%.
India may in future make itself the next ‘Global Manufacturing point’ which is anyway fed up with China and is looking for alternative manufacturing hubs. There is a need to free the manufacturing sector from cumbersome rules. Product and service innovation will also have to be focused so that India can become a leader not only in manufacturing, but also in research and development. There is a great need and scope for collaboration between industry and academia for skill education, in which a skilled labour can be created.
The Way Forward:
Over the last two years, exports have increased dramatically. With rapid growth over the last two years, India’s manufacturing exports reached $418 billion in fiscal year 2022 (FY22). Though India contributes 3.1% of GDP, our export contribution to the world is only 1.6%, and given the current opportunities, there is enormous scope, potential, and triggers for growth. Morgan Stanley predicted in recent research that India would become the world’s third-largest economy by 2027. Manufacturing’s share of GDP is expected to rise to 21% from 15.6% by 2031, and India’s share of global exports will double. Because India aspires to be the world’s new age factory, the upcoming Union Budget is likely to include provisions to boost the ‘Make in India’ mission. Much more than policy window dressing is required for the economy to increase manufacturing activity. The government needs to understand that passing a number of Bills through Parliament and holding investor conferences won’t be enough to spark industrialization.
(Brajesh Kumar Tiwari, associate professor, Jawaharlal Nehru University. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)