Cohesive approach needed for manufacturing sector

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Published: December 10, 2014 1:14:20 AM

It is now well established that the flow of investment in the country (gross fixed capital formation) has been coming down...

It is now well established that the flow of investment in the country (gross fixed capital formation) has been coming down as a percentage of GDP from 29.9% in Q2 of last year to 28.3% in Q2 of the current fiscal. Higher investment has the most significant role to boost the fortunes of a developing economy. The recovery in the post 2008 financial meltdown phase has shown that stimulus measures in terms of higher investment by the government, in developing or developed economy, has helped them to notch positive growth in GDP, stave off recession and cut down unemployment rate. But the underlying enabling factor was always an anticipated improvement in business scenario and growth in
manufacturing.

The manufacturing sector in India is behaving erratically in the recent period. In 2012-13 it grew by 1.3%, came down to (-) 0.8% in next year and in the current year (April-September’14) it has grown by a meagre 2%.

Out of the various sub-segments under manufacturing, the fabricated metal sector is experiencing a marginal growth in H1 of FY15 after going down negatively in the past 2 years, back on the basic metal sector with a strong positive growth of 13.6% in H1. The growth in basic metals is linked with brown field expansion of existing major steel plants where investment is already earmarked. The machinery and equipment sector (with strong steel-intensity) has plunged down to negative phase in the last 2 years before rising to around 5.5% in H1.

The manufacturing of motor vehicles, other transport equipment and furniture making is gradually exhibiting a positive growth after disastrous performance in last 2 years. The silver lining is provided by the electricity generation whose growth rate of 4% in 2012-13 is followed by 6.1% growth in next year and the current rate of 10.4% in H1. No wonder the manufacturing of electrical machinery, which has clocked a 14.5% growth in last year, exhibits an exemplary 23.8% growth in H1.

The rising imports of Grain oriented steel sheets also indicate the rising appetite for raw materials by the sector. It goes to the credit of the new government to give priority for FPA with coal producers, reserve blocks for power producers under re-auctioned coal blocks, announce a plan for $400-bn investment and power generation target of 100 GW by 2022.

The sole uncertainty in this positive outlook for the power sector happens to be the investment to be made by the IPPs and unlocking of investment in the stalled mega power projects. Private investment has a major role to play in all infrastructure sectors and a reduction in interest rate would be a strong enabler. The same is very much true for working capital needs of some of the ailing manufacturing sub-segments like manufacturing of motor vehicles, other transport equipment, furniture and machinery and equipment. The home loans under a high interest regime are also not helping the demand side.

The government’s recent efforts to simplify the rules and procedures involving doing business in the country where the country has a dismal record compared to some of our neighbouring countries, are indeed laudable. It remains to be seen if all these simplifications specifically with regard to defence equipment are actually implemented at the state level with requisite precautionary measures while encouraging small and medium enterprises to improve their order position. A lesser number of clearances required for starting the enterprise through on-line industrial licences and industrial entrepreneur memorandum would go a long way to simplify and rationalise the regulatory environment. A cohesive approach at all levels may do wonders in changing the health of the manufacturing sector.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal

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