Growth of the sector
Studies have estimated that every job created in manufacturing has a multiplier effect in creating two to three jobs in the services sector. A developing country like India, where employment generation is the key to a successful economic development, needs a robust manufacturing sector to obtain a holistic development of the sector. Make in India (MII) had been launched with an objective to increase the share of the manufacturing sector to the Gross Domestic Product (GDP) to 25% by 2022, from 16%, and to create 100 million new jobs by 2022.
According to a report by the India Brand Equity Forum (IBEF), India is expected to become the fifth largest manufacturing country in the world by the end of year 2020. The IBEF also states that the Gross Value Added (GVA) at basic constant (2011-12) prices from the manufacturing sector in India grew 7.9% year-on-year in 2016-17, as per the 2nd provisional estimate of annual national income published by the Government of India. Manufacturing sector grew at a CAGR of 7.32% between FY12 and FY17. Business conditions in the Indian manufacturing sector continue to remain positive.
Sectors like food processing, indo-swadeshi alliance automobiles, India’s automobile hub, textile, startups, biotechnology, IT, pharmaceuticals, electronic manufacturing, aviation, defence, and mining are performing above average. The Government of India has permitted foreign investment in almost all sectors with a few exceptions, such as
atomic energy and lottery business. The International Monetary Fund (IMF) also states that India is likely to grow at consistently higher rates (>7%) and retain its position as one of the fastest growing economies till 2020.
As per official data released, India’s economic growth dipped in the January-March quarter to 6.1%. The growth of manufacturing sector was recorded at 7.9% in 2016-17. The MII drive is also likely to facilitate India as a hub for hi-tech manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either set up or are in process of setting up manufacturing plants in India.
The major challenges faced by the manufacturing sector are lack of skilled training, regulations and restrictions, sluggish developments and innovations, high healthcare costs, and several environmental issues. International Monetary Fund (IMF) had earlier raised concerns about the pace of the reforms which are being passed. The IMF pointed out that Indian economy is facing “decelerating pace of reforms”.
However, with the passage of the Goods and Service Tax (GST), it is likely to ease business and enable a cost cutting flow of goods across different states of the country. It will also re-establish the logistic sector further boosting the manufacturing sector of the country. Infrastructure, which is an essential pillar of the manufacturing sector also, needs a powerful boost by the government as the sector is highly dependent on industrial corridors and road networks. While the Union Budget 2017-18’s several great policies have aided the sector, the expectation from Budget 2018-19 is no less. This year’s budget should be more progressive and add further impetus to this movement.
With feasible laws on land and labour coupled with constant improvement in the infrastructure, it is likely that India may emerge as the new manufacturing sector hub.
Shyam Motwani, EVP and Business Head of Godrej Locking Solutions and Systems, said on budget expectations, “The Make in India and MSME focused sops will provide a fillip to the manufacturing segment. It would be interesting to see if the government would also induct special incentives for the manufacturing segment to move towards more eco-sensitive practices. It will align with the government’s commitment at the Paris Agreement of COP21. However, the growth story of the country has to be supported with equal emphasis on technology exchange and skilling. Otherwise, the debate over jobless growth shall not cease to exist.”
2017-18 Budget allocation
New greenfield ports to be developed on east and west coasts.
100% FDI in marketing of food products produced and marketed in India.
Government will amend Motor Vehicle Act in passenger vehicle segment to allow innovation.
MAT will be applicable for startups that qualify for 100% tax exemption.
For creating an eco-system to make India a global hub for electronics manufacturing a provision of Rs 745crore ($110 million) in 2017-18 in incentive schemes like Modified-Special Incentive Package Scheme (M-SIPS) and Electronic Development Fund (EDF).
Growth of the sector
Post- PM Modi’s demonetisation drive, India’s economic growth slowed to 6.1% in the fourth quarter ending March 2017, compared with 7.1% in the previous quarter. However, government data showed the gross domestic product grew 7.1% in the full financial year 2016-17, slower than 8% recorded in the previous year. According to report by trading economics, GDP from construction in India decreased to Rs 2235.39 billion in the third quarter of 2017 from Rs 2339.19 billion in the second quarter of 2017. GDP from construction in India averaged `2090.35 billion from 2011 until 2017, reaching an all-time high of Rs 2339.19 billion in the second quarter of 2017 and a record low of Rs 1855.78 billion in the third quarter of 2012.
An Invest India report on ‘Building a sustainable Future’ states that major growth for the construction sector in India is expected to increase from 2.9% in 2011-15 to 5.6% during 2016-20.The activities that registered the highest growth include export cargo (10%), highway construction/widening (9.8%), power generation (6.6%), import cargo (5.8%) and cargo at major ports (5.3%). The government’s key policies under the sector include Land Acquisition Bill, Real Estate Regulatory Authority Bill, Smart City Mission, HRIDAY (Heritage City Development and Augmentation Yojana), Swachh Bharat Mission, Industrial corridors, Atal Mission for Rejuvenation and Urban Transformation, Pradhan Mantri Awas Yojana (Affordable Housing for All by 2022) and National Mission for Clean Ganga. Governmenat data shows that the FDI equity inflow was $363 million in construction development from April 2000- September 2017.
Shortage of qualified workers and technology adoption has been the biggest drawback in the sector. Growing materials costs and overbuilding constructions are leaving the sector grappling with serious challenges.
“The Union Budget 2018-19 will be the first post-GST budget of India and also the last full budget of Modi-led NDA government for this term. Thus, the industries will keep a close watch on the policy changes and initiatives the government would unveil in the budget. The GST has been great in creating a level-playing-field for branded locks and hardware manufacturers and unorganised sector. Re-arranging the income tax slabs has been a long awaited demand, and it would be interesting to see if the government would finally push for it in this budget. Such a move is expected to provide a further boost to consumer spends on branded and trustworthy products. The real estate industry, which faced a cyclical year in terms of business owing to the regulatory changes such as GST and RERA is expected to witness a bounce back in this quarter. However, it would be imperative that the government extends a strong push to the infrastructure, Smart Cities and Housing for All initiatives”, said Shyam Motwani.
Samir Jasuja, founder and CEO at PropEquity, said, “Developers have launched several projects to cash in on subsidies under PMAY elligible projects which includes several affordable housing projects pan-India. There is definitely stable demand for ready-to-move-in, resale properties and about to be completed projects and we can see developers rushing to complete their launched projects. Affordable housing segment is a key pillar of Indian government’s Housing for All policy and we can expect some positive announcement on it in the upcoming union budget.”
However, it was stated that the Budget missed out on providing any additional income tax incentives to first-time home buyers or providing higher tax savings on housing loans and house insurance premiums, which should be rectifies in this year’s budget allocation.
2017-18 Budget allocation
Need for granting infrastructure status to affordable housing.
The total allocation for infrastructure is Rs 3,96,135 crore in 2017-18.
Under the budgetary provisions, developers will get one year’s time to pay tax on notional rental income on completed unsold residential inventory.
Size requirements of affordable house from built-up area to carpet area of 30 sqm and 60 sqm.
The Budget also proposes to complete one crore houses by 2019 for the houseless and those living in kutcha houses.
Allocation to Pradhan Mantri Awaas Yojana Gramin was also raised from Rs 15,000 crore in 2016-17 to Rs 23,000 crore in 2017-18.
Growth of the sector
Last year, the infrastructure sector’s growth slowed to a 19-month low. Reduced output of cement, electricity and coal slowed the pace of expansion of the country’s eight infrastructure sectors to 0.4%. The core sector had expanded 4.1% in May and 7% in June last year, indicating that the high base of last year has also muted the growth.
The eight infrastructure sectors of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity constitute 40.27% of the total industrial production. Muted core sector could further dent industrial growth that was placed at 1.7% in May.
As per data released by Commerce and Industry ministry on August 2017, cement production declined 5.8% in June from 0.4% fall in May. Coal output nosedived 6.7% from a 3.2% decline in May. Refinery production declined 0.2%. Crude oil output rose a meagre 0.6% in June and electricity production was up 0.7%. Only natural gas and steel showed a sharp rise in production in June at 6.4% and 5.8%, respectively.
In last year’s Budget speech, Finance Minister Arun
Jaitley had said that India will invest as much as Rs 3,96,135 crore in creating and upgrading infrastructure in the next financial year. Jaitley said an effective multi-modal transportation system was important for a competitive economy and stressed upon ‘synergic investments’. The last Budget also included integrated infrastructure planning comprising roads, railways, waterways, defence and civil aviation, and the largest-ever rail budget of Rs 1.31 trillion, an 8.26% increase over the Rs 1.21 trillion allocated to the national carrier in 2016-17.
According to the IBEF, the Indian ports and shipping industry plays a vital role in sustaining growth in the country’s trade and commerce. India is the sixteenth largest maritime country in the world, with a coastline of about 7,517 km. The Indian Government plays an important role in supporting the ports sector. It has allowed Foreign Direct Investment (FDI) of up to 100% under the automatic route for port and harbour construction and maintenance projects. It has also facilitated a 10-year tax holiday to enterprises that develop, maintain and operate ports, inland waterways and inland ports.
The Press Information Bureau also reported that the twelve major ports under the Ministry of Shipping handled a record 647.43 MT of traffic in FY17, registering an annual growth rate of 6.79%, as against 4.32% last year. With this, these ports have out- performed private ports for the second consecutive year. The private ports have registered a traffic growth rate of 4% this year.
With the proposed Budget, the infrastructure sector is expected to witness a huge growth. Fresh opportunities are also on the anvil. Prime Minister Modi’s schemes like the Delhi-Mumbai Industrial Corridor, smart cities and the creation of logistics network are likely to facilitate the infrastructure sector. Urban Infrastructure Development is round the corner giving a boost to rapid growth of urbanisation, urban transport, and water supply projects. However, the sector too possesses heavy challenges. Planning-oriented issues, lack of investments, projects in limbo, delay in implementation and execution, land acquisition and environmental issues, and lack of coordination between government and other nodal agencies are setbacks in the sector.
Amol Prabhu, Partner, Shashi Prabhu and Associates, said, “The year 2017 has brought about a striking change within the real estate sector with policy implementations like the RERA, REITs, GST, and not to forget the demonetisation drive. With the Union Budget 2018-19, most of the players within the sector are hoping for tax revisions and infrastructure incentives for the sector. Additionally, the industry players are also expecting the government will reduce the GST rates from current rate to a more standardized and affordable rates including the input tax credits. The government should look at providing higher subsidies on sustainable technologies like Electric Vehicles, Solar Energy and other for ‘Green Technologies’ for highest environmental benefit which is the integral part of government’s agenda. Also, government should accelerate infrastructure development like highways, water supply and small airports for development of interior in tier-II and -III cities. Seeing the current situation of the market the above recommendation can help bring life back into the sector.”
2017-18 Budget allocation
Revival of underserved airports. Centre to partner with states to revive small airports for regional connectivity.
Total outlay for infrastructure in Budget 2016 now stands at Rs 2,21,246 crore .
Rs 27,000 crore to be spent on roadways .
65 eligible habitats to be connected via 2.23 lakh kms of road. Current construction pace is 100 kms/day.
Rs 55,000 crore for roads and highways. Total allocation for road construction, including PMGSY, -Rs 97,000 crore.
Rs 3000 crore earmarked for nuclear power generation.
Government drawing comprehensive plan to be implemented in next 15-20 years for exploiting nuclear energy.
Government to provide incentive for deep water gas exploration.
Total investment in the road sector, including PMGSY allocation, wouldbe Rs 97,000 crore during 2016-17.
To approve nearly 10,000 kms of National Highways in 2016-17.
Allocation of Rs 55,000 crore in the Budget for Roads. Additional Rs 15,000 crore to be raised by NHAI through bonds.
Total outlay for infrastructure - Rs 2,21,246 crore.
Investment in nuclear power generation to be drawn up.