COMMERCE & Industry Minister Anand Sharma recently announced that the country would soon get a National Manufacturing Policy, adding that his ministry has cleared the Cabinet note on the proposed policy. While his statement shows his ministry’s concern for a sector which is the second largest in its share of Gross Domestic Product (GDP) and which has a huge employment potential, one doesn’t know a specific policy will help factory output.
The proposed policy has the objective of creating 100 million additional jobs and augmenting the share of manufacturing to 25 per cent of India’s GDP by 2025 from the present 15-16 per cent. It also favours the establishment of National Investment and Manufacturing Zones (NIMZs) with world-class facilities. Prime Minister Manmohan Singh gave in-principle approval to the manufacturing policy on June 9.
The government’s emphasis on manufacturing has not come a day too soon. The Index of Industrial Production (IIP) has been showing a lot of volatility in the recent times. It needs to be pointed out that manufacturing has about 80 per cent weight in the IIP; so, the IIP almost invariably reflects the changes in manufacturing.
In June 2011, it grew by 8.8 per cent, up from 7.4 per cent in June 2010. This pleasantly surprised the government; Finance Minister Pranab Mukherjee found the figures “encouraging.” However, economists were less enthused. One reason was that the impressive June rise was primarily because of almost 38 per cent increase in capital goods which, by the way, have been showing even greater volatility over the months. Minus capital goods, the IIP rose just by 3.8 per cent.
Secondly, the rise was not reflective of the trend. In the previous two months, the show was not very good, as evident from the fact that in the first quarter of this fiscal, industrial growth was 6.8 per cent, down from 9.6 per cent in Q1 2010-11.
The milieus in India and the world do not augur very bright prospects for industry. Quite apart from the political crisis looming large, policy paralysis, and a hawkish Reserve Bank at home, there are the issues of fragile recovery in the developed world and uncertainty in the United States, the world’s biggest economy.
What policy interventions are needed is also quite well known. The Eleventh Five Year Plan (2007-12) document said that “the rates of indirect taxes in India remain among the highest in the world. Most industrial products are subject to Central Value-Added Tax (CENVAT) on the manufactured value, at an average of 16 per cent and a State VAT at a modal rate of 12.5 per cent of retail value (though there are a number of goods that are exempt from State VAT and some are subject to lower rates of tax). At present the incidence of CENVAT and State VAT together is about 23 per cent. In addition, States and local levels of government levy such taxes as octroi or entry tax, etc. The overall rate of indirect taxes compare unfavourably with those prevailing in Association of South-East Asian Nations countries, which are closer to 10 per cent–12 per cent.”
This is perhaps the most important issue for industry, but it cannot be addressed given the government’s precarious fiscal situation and its proclivity to launch more populist, revenue-guzzling schemes. The Plan document also talked about inadequate infrastructure, labour inflexibility, lack of skilled workforces, and paucity of raw materials.
Economic Survey (2010-11) also lamented about that the “slow rate of capacity addition in physical infrastructure sectors is constricting industrial sector growth. Capacity addition in core sectors and removal of infrastructure bottlenecks would spur industrial sector output in the medium to long term.”
The National Manufacturing Competitiveness Council had suggested a growth rate of at least 12-14 per cent for manufacturing, something which is in the realm of possibility if government policies are benign. In his opening remarks at the Planning Commission meeting, Prime Minister Manmohan Singh proposed 9 per cent growth rate for the economy during the Twelfth Five Year Plan. For this, the IIP has to expand by 9 per cent plus.
Fortunately, policy makers are not unaware of the measures that need to be taken to rejuvenate manufacturing. And, as per their own statement, they also want a National Manufacturing Policy. On the face of it, this is as simple as two plus two equaling four. A rational manufacturing policy can be simple but for the distortions added by Congress-style politics.