The ‘Make in India’ initiative launched by the Hon’ble Prime Minister is a laudable objective but the reality is different. Indian manufacturing industry developed after Independence backed by high import tariffs which encouraged Indian companies to put up green-field factories in all sectors to meet India’s requirements. However, with the collapse of import tariffs in the 1990s under pressure from IMF, Indian manufacturing has once again collapsed and contributed a mere 15% of India’s GDP versus 33% in 1999. The reasons for the decline of manufacturing are easy to explain as follows:
1. Major inputs for manufacturing are power, furnace oil, interest, and infrastructure costs. In India, most of these inputs are supplied by the public sector companies and prices are more than 200% higher than international rates. For example, the power costs in India from State Electricity Boards are on an average Rs.7 per unit despite them being supplied power at Rs. 3 per unit by NTPC. This huge delta in higher rates is mostly to offset theft of power which is around 40% and also to give free power to farmers.
With respect to furnace oil, the government should have followed its own import parity pricing policy as per the Petroleum Policy of 1990. However, this has been completely disregarded. Oil companies are charging more than 100% of the imported price of furnace oil. With respect to interest rates, they are around 15% to 16% for MSME which is much higher than the rates of developed countries. Finally, the infrastructure costs such as transportation are much higher than international rates as petrol and diesel suffer from nearly 200% taxes. For example, the freight cost from Tianjin, China to Tuticorin, Tamilnadu is around Rs.4,000 per ton whereas from Tamilnadu to New Delhi it is around Rs.7,000 per ton. These exorbitant costs make manufacturing unviable.
2. The maximum import duty protection is a mere 7.5 % making it much cheaper to import into India than producing at home. That is why India has a trade deficit of $200 billion year on year.
3. Manufacturing was a major source of revenue, after independence for the government, and it continues to be so despite it being over taxed and unable to absorb the higher costs. Many items are outside the ambit of GST such as cement, and steel and many other items which go inside the factory gate but may not be involved in the direct process of production are also ineligible. In addition, other taxes such as petrol and diesel at the central level and captive power tax at the State level are not under the ambit of GST rendering Indian cost of production to be much higher on account of taxation. In fact, our exports are also not zero tax rated.
4. The regulatory procedures from various government agencies also are time consuming and follow outdated practices imposed by the British under the Factory Act to restrict manufacturing. The same continues rather than being outsourced to professional regulators which would encourage and promote manufacturing rather than restrict it. This results in time delays which is very expensive in terms of money.
5. There is very little FDI investment in India in manufacturing. This is the truest test of competitiveness as it allows foreign companies to compete with domestic companies which we welcome for the overall development of India. On the other hand, many Indian companies have gone overseas leading to outsourcing of manufacturing from India.
Some instances to illustrate the above are as follows:
a) The calcium carbide industry closed down in 2004 due to imports from China. In 1996, with the import duty of 40%, the calcium carbide imports from China were cheaper by Rs.2000 to 4000 per ton despite inner transportation of 1000 kms in China followed by sea transportation from China to South India.The major culprit for Indian carbide not being competitive was very high power rates in India (5 times that in China).
b) Soda ash too got outsourced overseas in the late 1990’s by Indian companies such as Nirma and Tata Chemicals as acquiring plants overseas was cheaper than expanding capacity in India. The import of soda ash led to foreign exchange outflow and loss of jobs in India. While this decision is good for the company it reflects poorly on the government for not encouraging soda ash manufacturing at home.
c) Likewise, despite imports of nearly 1.5 million tons of PVC into India, no foreign companies want to put up a plant in India and Indian companies are also not expanding as it is not viable with the very low duty protection of 7.5%
d) Another example is that of ilmenite. India despite having a huge reserves of ilmenite ore which is the main raw material for manufacturing of titanium dioxide imports ilmenite ore and also imports titanium dioxide.
These are few illustrations of how Indian manufacturing is uncompetitive versus its foreign counterparts. This is mainly due to very low import duty which is much below WTO bound rates and also high input costs supplied by government companies. In the coming years, the rate at which manufacturing is outsourced overseas, the share of manufacturing will fall to single digits which does not reflect well on India’s economic activity which is only dependent on the service sector.
6. Even Indian exports have been impacted as the government has not paid various incentives under export schemes and also not replaced them with new ones in time leading to loss of export incentives as well as not removing the element of tax in the exported product.
Manufacturing in India is a challenge for which both Indian companies have to be complimented for continuing manufacturing which has become very unviable and yet they continue. We welcome foreign competition into India but that is not happening. This reflects poorly on the government policies. The latest technology has been adopted in case of Caustic soda which converted to energy efficient membrane cell technology around 2005 unlike Europe and USA which continue to use old technologies.
7. Finally, Indian government has very rashly signed the Free Trade Agreement FTA with many countries leading to imports from them at negligible rates of import duty of 1% to 2%. This has further impacted Indian manufacturers such as caustic soda and PVC resin amongst many others. Despite industry’s insistence to provide a level playing field versus its foreign counterparts, the government has refused to aid the legitimate demand of domestic industry. Instead of signing FTA the government should encourage FDI into India, so that companies put up factories in India to cater to its large market.
It should be incumbent on our government to also emulate the practice adopted by Japan, Singapore, China and other countries in Asia which give a special focus to domestic industry.
The way forward is to have a MITI like body made famous in Japan which was a collaboration between business and government constituted by Emperor Hirohito in the 1950s to develop Japan from the ashes of World War II. The total quality manufacturing movement in Japan fostered world class companies in Japan and the same should be emulated in India starting from the government to the corporates to facilitate growth.