SURYA THINK TANK
ACCELERATING INDUSTRIAL AND EXPORT GROWTH IN INDIA
Surya Foundation Think Tank on Industry and Export Growth in India comprising of eminent experts deliberated on the Issue of “Accelerating Industrial and Export Growth in India” and arrived at recommendations as ennumerated in the succeeding paragraphs.
PART-I
CREATING A MACRO ENVIRONMENT FOR INDUSTRIAL GROWTH
1. Overview
(a) Industry contributed 29.73%, Agriculture & allied sectors 15.87% and Services sector balance 54.40 % to India’s total GVA of 169.61 lakh crores in 2018-19.
(b) The Breakup contribution in Industry Sector is: Manufacturing-16.83%, Construction-7.54%, Mining-2.70 %, Utilities (Electricity, Gas, Water etc.)-2.6%.
(c) In the study of raising/doubling Agriculture/Farmer’s income, an estimate puts a figure of 80 million surplus people in Agricultural activities to be shifted out of the sector. Considering the low skill level of the people to be shifted, focus on accelerating industrial growth (which can provide low skill jobs as well) in India assumes special importance besides its contribution to GDP growth.
2. Attracting Foreign Direct Investment (FDI)
(b) The Govt. has done well to ease FDI norms permitting 100% in select areas (including recent announcement allowing 100% FDI in Coal Mining, Contract manufacturing, easing sourcing norms in single brand retail etc).The recent decision to reduce corporate tax rates to 25% and in case of new units to 15% should spur foreign inflows for green field investments and expansion. Where India’s vital interests are involved (e.g. emerging technologies). India can negotiate special terms, to attract FDI, against competing countries. E.g. Solar Photovoltaic, Electronic components / Chip Manufacture, Electric mobility etc. With regard to Solar PV development, the Govt. procurement route can also be taken, with assured take off provisions over a period to facilitate the process.
3. Strengthening “Make in India” initiatives
(a) This will help not only reduce imports (reducing CAD), provide much needed jobs in the country, but also considering the size of Indian markets, may enable India to become an export hub in these very areas (e.g. Foreign JV’s in Auto sector contributions to India). India must focus on Electronics, Telecom equipment, solar modules (right up to wafer stage), Pharma (including basic formulations), bio technology, special & alloy steels (not just being content as a large primary steel producer), Aluminium downstream products, chemicals, heavy plants and equipment, desalination equipment, medical devices , special chemicals etc. While protectionism in the long run may harm rather than benefit India, nevertheless the import duty structure & policy decisions must support India’s nascent import substitution investments.
(b) The Govt’s National Policy on Electronics (NPE2019) envisions to position India as a global hub for Electronic System Design and Manufacturing (ESDM). The Policy envisages by 2025 a domestic production of 400billion US Dollars with a net positive balance of payments. The Phased manufacturing programme (PMP), notified for mobile sets has paid rich dividends with production of handsets gone up from 60million units/valueUS3Billion dollars in 2014-15 to 290 billion units/ value26 billion US dollars in 2018-19. The PMP concept needs to be replicated quickly for other fields of electronic manufacture. The focus will have to be towards progressive increase domestic value addition to levels of best global attainments. India must leverage its vast market potential to persuade all global electronic majors/technology leaders, along with their vendor network to set base in India-keeping in view of short technology life cycles which characterise this field and frequent in shift in Technology Leadership between firms. Protectionism against cheap imports through Free Trade agreements, in the infancy stages of all above initiatives will be absolutely essential.
(c) The “Make in India initiatives” in Solar photo-voltaics (modules & cells), however is lagging behind and needs immediate addressing. This is very urgent considering the large scale addition in solar capacity Indi planned by India (100,000MW by 2022) and the need to reduce dependence on Chinese imports in this massive initiative. The Govt needs to immediately entrust the task of setting up indigenous capacity to a PSU major like BHEL (with a good track record of indigenisation). with an annual capacity like 5,000MW meeting minimal economy of scale requirements. Besides above, there is enough scope for Foreign majors/ Indian private sector to further set up 100% FDI or JV plants. It will be interesting to mention the enormous support Solar industry received in China in initial stages with very low interest loans& cheaper factor inputs.
4. Focus on Private Investments in the Country: Reviving Private Capex. This can be achieved by ensuring Macroeconomic stability, having a close control on Fiscal Deficit, Current Account Deficit (CAD) and Inflation. These steps will help lowering interest rates and boost private investments It It is hoped further substantial interest rate reduction will take place progressively (around 200 points), especially considering the low trans mission rate to customers by banks. India’s “effective interest” rate is very high as compared to other competing investment markets. Immediate attention should be on Rural demand growth, with almost nil wage growth now to be tackled by the massive infrastructure investments Govt is planning. Some inhibiting factors to private investments presently appear to be the high degree of Corporate indebtedness, declining trends in personal savings(with increasing trend in house, auto loans etc ), a fear of uncertainty in facing cheap (Chinese) imports and a risk averseness approach in corporate leadership A number of distressed assets available through insolvency process at cheaper prices presently can be another reason for lack of enthusiasm for green field investments.
5. Competitiveness of Indian Industry
(a) For Indian manufactured goods to be competitive, input costs of capital, fuel, electricity, land, etc will have to be brought down progressively. Land acquisition laws, labour acts will require reforms both by the States & at the Centre. Indian industry, by and large is presently in a fragmented state, often to evade implications of strict labour retrenchment laws. There is need to build “Economy of Scale” to compete globally. There is an urgent need to introduce flexible labour policy (with adequate safeguards for labour with good security/termination benefits) at least in export oriented SEZ, Coastal economic zones. The present initiatives of Ministry of Labour is more focussed on codification and refinement of existing labour laws than transformational changes.
(b) The New Indian Industry in emerging areas may require some hand holding by the Govt in the infancy stages of manufacture, as East Asian economies had done. It is interesting to note that China often uses a model of a public sector agency bearing high infrastructure cost of establishing industries (including environmental protection measures) at the start and makes available to private industries, on lease or rent, at low upfront costs, in the initial stages of growth of the industries. There is also need to address high input costs of utility and support services in electricity, water, logistics etc. Structural reforms like Direct Benefit Transfer (DBT) for agricultural electricity to farmers, avoiding high industry tariff due to effect of cross subsidisation realistic pricing of water etc will need to be looked into urgently. Logistic costs (presently around 12%) will need to be halved with completion of Dedicated freight corridors of Railways, high speed network of roads enabling faster & cheaper transportation.. Railways cross subsidising loss making passenger segment with high Coal freight rates is hurting India’s industrial competitiveness.
It is equally important for Indian industry to focus internally on continuous cost reduction besides quality and innovation to become globally competitive. With a global surplus capacity in steel production emerging and being blocked by US tariff embargo, China, Japan & Korea are diverting their production into India, lowering prices. While govt is supporting the Indian steel industry with anti-dumping measures, it is important for Indian units to continuously bring down the costs, especially the Steel PSUs.
A study reveals that total value added constitutes barely 20% of the value of output in India’s organised manufacturing sector. (Material inputs – 60-65%, Fuel – 6-8%). In USA the proportion of value added to gross output is 50% and in China it is around 30%. This issue requires a review.
6. Capital for Growth : The new Govt has announced an ambitious plan for investing 100 Lakh crores in its five years period for infrastructure (and development). As present resources are limited, the Govt may have to bring in private sector investment including Public Private Partnership (PPP) models in a big way and go for long term borrowings from the public. As private savings are showing a downward trend it is important the newDirect Tax Code (DTC) changes encourage personal savings rate.
7. The Govt can also take steps for deepening the Bond Market. In the recent budget (July 2019) use of recourse to foreign sovereign bonds was mentioned. Here there is a case for Govt for going for large long term multilateral or bilateral loans- these may give more flexibility for moratorium period for interest commencement and also provide some flexibility for readjustment for loan repayment.
Effective & Efficient Utilisation of Capital resources for Growth
8. (a) In the first five years period of the present Govt (2014-19) substantial focus was given to investments in the Road and Rail sector. The pace of construction in Road sector particularly has picked up commendably, after the decision to go for EPC & Hybrid annuity models. It is now necessary that the projects taken up in Road & Rail sectors are completed end to end quickly and the assets are put in to productive use by opening up for cross traffic. These projects have not only benefited providing low skill construction jobs but have also enabled demand/growth in associated steel, cement, and allied sectors. The focus in these sectors must be on toll revenue (Roads) and Railways increasing tariff in passenger segment, where around Rs 30,000 crores loss annually being incurred. In the Road sector, with success in Pradhan Mantri Grameen Sadak Yojana (PMGSY), more emphasis should be given to creation of rural networks to open up the rural hinterland, besides border access.
(b) For the next five years (2019-24) priorities must shift particularly to water infrastructure including creation of large, medium and small storage dams, interlinking river projects, irrigation schemes, drinking water supply mission, desalination projects in coastal areas, ground water replenishment works. Agriculture& allied sectors (Horticulture, dairy development, fisheries) will require considerable investment support to enable rural income to rise.
(c) The power sector requires a boost particularly in setting up Thermal power generation & Hydel plants to meet increased power demand for the trajectory tofive trillion dollar economy. The fertilizer sector would require progressive modernisation/augmentation to meet growing agriculture demands, with necessary reforms. Coal mining sector will have to be encouraged to meet the present shortfall leading to import of 200MT annually. Steel, Iron ore and other metal mining sectors will require inputs. Special focus will have to be given for Exploration in mining to discover India’s resources in strategic minerals.
(d) There is an imperative need to urgently address the need for “Building Human capital”. The Primary education particularly in rural sector will have to be strengthened to improve “learning outcomes”. Primary health sector, particularly in rural areas with low average incomes, is dependent on Govt funding. There is a case to propagate emerging “Telemedicine concept” in villages/remote areas. Suitable funding will have to be earmarked for Digital India Vision. Competing investments in Road and Rail sector should be avoided as far as possible. There is also need to avoid overlapping investments in the same areas by Centre& state Govts especially with regard to welfare schemes.
(e) There is need for a Central planning setup to assess the need for growth in above mentioned priority sectors and decide relative priorities. These will facilitate placement of uniform base load orders on the Indian industry for thermal, fertilizer, chemical, water treatment plants and other heavy equipment. In the past while BHEL and private sector established higher production capacity (20,000MW) fo thermal power plants annually, later these capacities remained idle for want of orders. It is suggested an inter-ministerial group may be formed to select the projects and fix relative inter se priority between the sectors and also determine the annual base order load on the industry. NITI Aayog can have an overview on these recommendations. The revival of Heavy Engineering sector will help MSME revival & job growth.
(f) Indian PSU’s must continue to bid & acquire overseas assets in Oil and Gas, Coal (specially coking), and in scarce metals. Necessary funds to support overseas acquisitions will have to be planned.
9. Boosting Exports
(a) Focus in this area is vital to India’s sustained growth. Exports must occupy a central place in India’s strategic thinking. The share of India’s exports in Global trade is very low. The Govt has done well to set an ambitious target of 1,000 billion USD by 2022 from present 330 billion USD by focusing on select products and diversifying markets.
(b) Considering the large segment of population below poverty line & large young population joining the work force annually, India need to pursue negotiations with EU, USA for special concessions for garments & apparels to continue for some more period. For Steel export to USA, withdrawal of safeguard duty of 25% imposed, should be sought in the context of large Energy and Defence purchases India is planning from USA. The focus of Indian export strategy should be progressively towards higher value added products and so the need to develop internal capabilities in this direction- cost, quality, innovation leadership.
(c) From a long term perspective, India should select some sectors where it possesses potential competitive strength e.g. textiles, steel, pharma, bio technology, engineering goods’ heavy equipment, Electronics/Solar cells, special chemicals and nurture them as MITI Japan did post war, when entry to some sectors were banned. Agro exports should receive special attentiona farmer friendly, stable agro export/import policy will need to be evolved.
(d) With our phenomenal success in IT sector, which needs to be sustained the Service sector holds considerable promise. Potential exists in India emerging as an area of low cost, high quality medical attention. If the education sector can be opened up for entry of Foreign universities, India can emerge as a Global education hub. The Legal sector can be opened up for foreign entry and in the long run India can develop as a centre for legal services, arbitration etc.
(e) Undue RBI intervention in sliding rupee value should not be attempted as at this stage it will strengthen exports.
(f) Considering India has not been able to export its sugar, milk powder in surplus years due to prices being not globally competitive, it is important for the Govt to appoint export sector wise committees in all thrust areas to examine causes for weaknesses and suggest remedial measures. Needless to mention India’s export success will ultimately depend on the leadership it establishes in cost, quality and innovation of its products.
(g) Subsidies should be embedded in earlier parts of the supply chains rather than at the end, a strategy adopted by export intensive countries.
10. Revisiting / Renegotiating Regional, Bilateral, Free Trade Association Pacts : Cautiously approaching RCEP
Experience has shown that India has been adversely affected in trade balance and these pacts have not benefitted India as was expected.
Data shows that in 2018-19, India had a trade deficit in US Dollars of 53.6 Billion with China and if all proposed Regional Comprehensive Economic Partnership (RCEP) members (ASEAN, China, Japan, South Korea, Australia, New Zealand) are taken together, the trade deficit is around 105 billion US dollars. Imports from China, ASEAN has led to slow down/decay of India’s FMCG & small scale sector over the years. The IT services sector in India, on the contrary, is facing barriers in these pacts. India, therefore, must tread cautiously on RCEP entry.
11. With RCEP, India’s metal sector, dairy sector, agricultural/cash crops sector (pulses, cardamom, pepper, and coconut) will also be seriously affected. There is a global surplus in steel production of 200-300 Million Metric Tonnes essentially in China, Japan, Korea which are export intensive. In Dairy Sector, India follows the Amul Model of aggregation from small cattle owners (2-4 herd size) and it will be difficult for this costlier model to compete with Mega Size Cattle farms in Australia with large free grazing grounds.
12. Basic inequity in WTO & FTA agreements : There has been an inbuilt inequity in above agreements towards India’s Information & Communication Technology (ICT) interests: Under WTO agreement in 1994, ITA4 and ITA1 – benefits for other countries in the ICT and electronics sectors in terms of access to the Indian market at zero duty were frontloaded, instant, massive and irreversible; benefits to India were relatively minor, back-loaded, illusory and reversible in an instant for example immigration policies (US H1B visas) that are not covered under WTO.
13. WTO agreement and later FTAs, PTAs and Comprehensive Economic Cooperation Agreements (CECAs) were entered into in the past with inadequate or no consultation with industry and little clarity on the overall balance sheet for India in quantitative terms across all sectors. WTO/ preferential trade agreements negotiations are/were predicated on “protect what you have” which helps those with existing strengths, hurts those with future aspirations.
14. Many of the items being imported on large scale through the above trade pacts were items that were being earlier manufactured in India like FMCG items. Today FMCG sector is importing components in a big way. With the grand leap China took in manufacturing during the last 3 decades, with foreign technology but strong indigenous commitment & focus on R&D China has reached a pre-eminent position as a manufacturing hub for the world with cost competitiveness. In the above context, “Make in India” will only be a distant dream unless Govt takes steps to correct the situation by forcing large MNCs to take up component manufacture in India.
15. To enable “Make in India” initiative happen, India must use its large market potential as a leverage - demand more time for easing out (protectionist) duties and measures and insist on the large trading partners (China, Japan etc) to reduce the trade deficit by bringing in FDI in areas where it provides large market access. India on its part will have to provide the necessary supporting environment. The Govt must keep in view the tremendous pressure the country faces for job creation. Manufacturing would need to be encouraged, for India’s survival.
16. It would be important to examine in this context, the reasons for lack of success of well intentioned schemes like Special Economic Zones (SEZs), Coastal Export Zones - perhaps an apprehension in Indian investors that it may be difficult to compete against the onslaught of cheaper imports. Even in traditional areas like steel, where India has had competitive strengths, dumping has been a major issue. Anti-dumping measures are reactive and take time to introduce. There is a case to initiate labour reforms, with flexible labour policy coupled with some higher wage/severance pay support, in SEZ to start with. A similar policy was followed by China - “One country, two systems”.
If entry into RCEP is considered useful to long term interests of India, Govt needs to insist on safeguards built e.g. longer gestation periods for its critical areas of industrial development to reach level playing field, provision of automatic trigger mechanism, restrictions on rerouting of imports through ASEAN countries- splitting supply chain by doing some value additions in another country to bypass country of origin restrictions.
Considering India’s demographic situation (with large number of young people joining workforce), India has to pursue a policy of some “Economic Nationalism”. Import substitution items, involving large investments must be kept out of the ambit of Free Trade Agreements for a substantial period at least.
OTHER FOCUS AREAS
17. Greater Contribution from Indian R&D for future industrial growth.
(a) Institutions like ISRO, Atomic Energy Commission, DRDO (Missiles) have made Indian R&D proud with self reliance when foreign technologies were denied to us. However such a contribution have not come forth from Industrial side R&D, or other Govt scientific institutions and India continues depend on foreign technical collaborations, JV’s whenever a change over to a new technology is required. Probably a part of the problem rests with “Risk Averseness” of Indian Industry leaders.
(b) Ministry of Science and Technology may examine putting some R&D projects on priority e.g. Solar Photovoltaic research etc and also collaborate with PSU’s of different ministries for taking some concepts from idea to commercialisation stage. Mission approach will need to be created. There is also need for a peer review of R&D work being done by our scientific institutions to make their contribution effective. Foreign scientists could also be co-opted in key areas where India has high stakes. The Indian education system could also progressively need to encourage “creative thinking”.
18. There is need to create specialised Development Finance Institutions (understanding special problems and risks of different sectors) to provide long term non banking funding option to Industry. There is need for cost of Capital to come down Govt Provident Funds, National Pension Scheme may permit greater option for equity investments of less risky nature to give better long term return to subscribers, enabling also broad basing of capital markets.
19. Besides focus on the primary side of agriculture, involving production of crops, time has come to look at the potential of agriculture on the secondary side in use of agricultural wastes and residue for value added bi - products i.e. ethanol for fuel blending, by products from alcohol, particle boards from agricultural residue, biomass for distributed power generation etc. Thus, Secondary Agriculture has considerable potential. By integration with Industry, innovative solutions can emerge in this field with Capital and Skill Support from Industry.
20. Dr. S P Mukherjee R Urban Mission was launched in 2015 with an outlay of around Rs 5,000 crores, seeks to create a Rural Development model of Urbanisation in developing about 300 model townships, around India, in the centre of a cluster of villages. These townships, with all urban amenities (electricity, digital connectivity & modern infrastructure support) are expected to provide good educational & health care facilities both public and private. With this it would be possible to attract Small Scale Industries/ MSME with some financial incentives. This project needs close monitoring. The 6,000 census towns which emerged in last census can also attract small scale industries. Agro processing units should also be encouraged.
21. Progress of Delhi-Mumbai Industrial Corridor will also have to be expedited and similar Corridors in other regions of the country as planned should be taken up to enable FDI and other private investments for industrial growth to come up.
Transition to Knowledge Economy
22. Knowledge building as a pursuit will have to be nurtured for India to reach “economic supremacy”. India’s foray in IT three decades back has paid rich dividends to the country in the large Foreign exchange earnings the country has derived. There is need therefore to bring in higher level of knowledge base in industrial scientific, medical, agriculture sectors as this intervention will make India leap forward towards five trillion dollar beyond economy. Many developed countries have accelerated GDP’s without natural resource strength based on pursuit of knowledge. China has made large scale investments in knowledge building. Many MNC’s operating in India areas are setting some of their global R&D activities in India. R&D efforts (including FDI based) will need to be encouraged extending some incentives in this regard. This will enable India to be a global hub for R&D in due course.
Ease of doing Business for MSMEs at the Ground Level
23. PHD Chamber of Commerce Delhi (in collaboration with Delhi School of Economics) has conducted recently a survey on this subject and has published its findings and recommendations in September 2019 (https.//www.phdcci.in/wp-content/uploads/2019/09/ Ease-of-Doing-Business-for-MSMEs.pdf), may be considered by the Govt for measures to boost the MSME sector so vital to India’s Industrial growth. These are briefly as under :—
a) MSMEs sector plays an important role in India’s development in terms of employing around 111 million people and contributing around 40% in exports. However, despite being regarded as ‘the engine of economic growth’ MSMEs in India are still facing several challenges.
b) The PHD survey reveals that at the aggregate level, 45% of the respondents opined that there is an improvement in the doing business environment for the MSMEs. Of the rest 55%, around 32% of the respondents opined that there is a need for improvement in the doing business climate for MSMEs while 23% were indifferent about improvement in the business environment.
c) Respondents with positive perception agreed to a significant improvement in number of tax payments in a year, cost of transportation and logistics, reduction in time involved in transportation of goods, time required to enforce a contract, time to obtain an electricity connection and adequate supply, starting of a business, online availability of business procedures and availability of IT enabled business procedures, among others.
d) However 32% of the respondents with negative perception disagreed on the improvement in availability of land, process to acquire a land, cost of land, cost for starting a business, cost of labour, cost to register a property, single window mechanism for approvals and clearances, common application for business approvals, compliances under various labour laws, cost of business approvals and clearances, procedure for registering a property, electricity tariffs and number of tax returns to be filed in a year, among others.
e) It may be mentioned that the states which have performed well on the Business Reforms Action Plan (BRAP) have observed high growth of Gross State Domestic Product (GSDP). Further, it has been observed, few states with high rankings on BRAP witnessed high industry growth.
f) Surveys by other Agencies: Other surveys on the subject indicate at the ground level considerable delays in single window clearance mechanisms, hangover of the “Inspector Raj”, delays in disbursement of loans by banks due to reluctance on part of Junior Executives to take permissible discretionary approach in the context of recent NPA fallout etc.
g) The payment of all pending GST refunds to MSMEs within 30 days, withdrawal of Angel Tax provisions for Startups and their investors, and provisions for banks’ lending to NBFCs for further on-lending to MSMEs up to Rs 20 lakh per borrower under the Priority Sector Classification have yielded positive results. Prompt action taken by the Finance Minister recently for infusion of capital into PSUs to improve liquidity, fast clearance of MSME outstandings by Govt/PSUs and now on urging by Govt - the corporate for clearing MSME dues expeditiously, is improving the environment.
Ushering in Structural Reforms across Sectors
24. (a) There is urgent need to quickly usher in the much needed structural reforms within next two years across sectors (agriculture, industry, banking and finance, governance, legal & administrative etc). These will bring benefits not only to the concerned sector but have benign impact on other sectors as well.
(b) Important areas in Agriculture include adoption of APML act by states towards a PAN India agricultural market, making a beginning on the second green revolution focussing on eastern sector with good rainfall and rainfed areas which missed the first green revolution. On water security interstate agreement on sharing of water should be brought about which is holding up storage dams and river linking projects and making water a concurrent subject will help the issue. Legislation for conservation and management of water with grass root level (panchayat) participation and pricing of water should be enacted quickly.
(c) In Power sector, States will have to introduce Direct Benefit Transfer (DBT) scheme to farmers for agricultural supplies, address sickness of Discoms. Solar energy applications for rural / agricultural needs under the new KUSUM scheme of Ministry of Power will need to be expedited. The Govt may review market distortions arising out of subsidies which is holding up GDP growth.
(d) Banking, NBFC reforms and regulation, insolvency code fine tuning amendments in light of recent experience, financial resolution process will have to be quickly addressed.
(e) New direct tax code proposed to be adopted after review should encourage personal savings, support development and growth.
PART-II
SECTOR WISE ANALYSIS
25. Steel Sector
(a) The National Steel Policy (NSP) 2017 aims to build a globally competitive Indian steel industry with a crude steel capacity of 300MT by 2030-31 (against the present production level of 130 MT in 2018-19). India’s finished steel consumption grew at a CAGR of 5.69 per cent during FY08-FY18. In 2017-18, the country’s finished steel exports increased 17 per cent year-on-year to 9.62 Million Tonnes (MT).
(b) NSP 2017 also plans to meet domestically entire demand of high grade auto steel, electrical steel, special steels and alloys for strategic applications by 2031, seeks to encourage Indian steel industry to be a world leader on energy and raw material efficient production by 2031. Considering the large scale imports of special & alloy steels now taking place, it is vital to the country that Ministry of Steel advances the target of above import substitution to 2024. FDI/JV’s can be invited as these will also help securing global market linkages for finished products.
(c) The proposal of the Ministry of Steel to create a cluster of secondary steel manufacturing units should enable improved infrastructure and ready availability of common support services. Creation of as centralized coal gasification project may help gas supplies to direct reduction units in the cluster, besides helping fertilizer production.
(d) There is need to intensify iron ore exploration and mining to address a shortage scenario beyond 2030 as also incentivize iron ore fines beneficiation. Ministry of Steel has done well to bring a draft National Steel Scrap policy to promote use of Scrap particularly for secondary arc/induction furnace units which will also address future iron ore shortages.
(e) Shortages in Limestone will need to be addressed by earmarking steel grade limestone exclusively for steel consumption. Exploration and Mining for limestone mining will need to be intensified. Future shortages in Manganese, Ferro – alloys, preserving Chromite reserves, from long term angle will also have to be addressed.
(f) Overseas acquisitions of Coking coal, mines and critical mineral resources by Steel PSU’s should be encouraged.
(g) Eexpeditious auctioning of Iron Ore Mines due for renewal March 2020, with seamless transfer of statutory clearances, will have to be attempted to avoid shortages in iron ore supplies. The Govt has permitted Steel PSU captive mines to increase production to meet the impending crisis.
(h) There has been a suggestion that primary steel producers should have more access to captive mining to ensure reduction in cost of finished steel. This can be considered on merits. The steel units, without captive mines can take part in new/renewal auctions also.
(i) Delays in statutory clearances for Iron ore mining and other infrastructure projects need to be drastically brought down, with greater responsibility equally on part of project developers to internalize environmental concerns in their mitigation plans. It is heartening to find Hon’ble Minister of Environment; announcing the ultimate aim is to bring down clearance time to around 100 days.
(j) Facing Threats of Cheap Imports.
● India is second lowest in cost of conversion of steel form iron ore, next to Ukraine. Despite this, India suffers a cost disadvantage of 80-100US Dollars/ton in exports due to structural issues. Taxes on Iron ore (Royalty, DMF etc Rs1100/ton + Electricity duty -Rs500 + fuel - Rs 500 + Customs duty on input items Rs 650) is around Rs 2,750/T
● Effective taxation in mining (after DMT etc) in India works to 65% (against 45% in other mineral rich countries) Due to auction system in mineral scarce country like India, costs also go up by aggressive bidding.
● There is a need for review of “Mineral concession system”, MMRD Acts and also for subsumed taxes to be refunded to offer level playing field in global competition.
● Global steel scenario: In 2011 - 2019 period, surplus capacity has ranged from 450 to 700 Mnt. China/Japan/Korea (CJK), besides Asean accounts for two-thirds of imports to India (with excess capacity in CJK - low domestic demand/high export intensity). The surplus capacity is around three times India’s current production.
● USA (besides EU, Canada) has levied, suo moto, 25% safeguard duties against India despite no application of injury filed by their domestic industries. Displaced exports from CJK, due to US tariff hike is now targeting India
● FTA’s have resulted in trade deficit in steel. As per Steel sector demand, steel needs to be excluded from trade agreements including RCEP- there is need for auto trigger mechanism in trade agreements and. DGTR should suo moto initiate safe guard measures.
● The Ministry should also lay annual targets (in its MOU with Steel PSU’s) for energy savings, improvements in yield and Quality and most importantly reduction in cost of steel production through internal improvements. No doubt, Indian steel PSU’s are making greater contribution to social infrastructure since inception in their area of operation, while in foreign countries this is taken care of by general state expenditures.
(k) The Ministry of Steel is facilitating setting up of an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to spearhead research and development activities in the iron and steel industry at an initial corpus of Rs 200 crores (US$ 30 million). This fund must immediately focus on building indigenous prototypes in select steel plants for high grade/alloy steel production/simultaneous with efforts for collaborations/JV’s. CSIR should also join the mission with its national metallurgical laboratories.
● NSPs suggestion to convert iron ore fines to pellets, use of slurry pipelines for transportation will need encouragement.
● Govt may have to consider approaching Supreme Court to remove the ban on mining in Goa in select areas with provision of adequate environmental safeguards.
26. Fertilizer Sector
(a) The Fertilizer sector plays a crucial role in supporting India’s Agriculture growth. As of now, the country has achieved 80% self-sufficiency in production capacity of Urea. As a result, India could manage its substantial requirement of nitrogenous fertilizers through the indigenous industry besides imports. Similarly, 50% indigenous capacity has been developed in respect of phosphatic fertilizers to meet domestic requirements. However, the raw materials and intermediates for the same are largely imported. For potash (K), since there are no viable sources / reserves in the country, its entire requirement is met through imports.
(b) The actual production of all the Fertilizers during the year 2016-17 was 414.41 LMT. The estimated production of all the Fertilizers during the year 2017-18 is expected to be 462.20 LMT showing an increase of more than 11% in comparison with the previous year. The rapid build-up of fertilizer production in the country has been achieved as a result of a favorable Govt. policy environment facilitating investments in the public, co-operative and private sectors.
(c) Ministry of Chemicals and Fertilizers has advised Govt’s decision to revive 5 closed plants of Fertilizer Corporation of India (FCIL) and Hindustan Fertilizer Corporation Ltd. (HFCL) namely Talcher Coal Based, Ramagundam, Gorakhpur and Sindri plant of FCIL and Barauni plant of HFCL by setting up new ammonia – urea plants of 12.7 lakh tonnes a year capacity. These projects are expected to be completed by 2020 and provide an increase in national production of urea by 72 lakh tonnes. This is a welcome step.
(d) The Government had announced New Investment Policy (NIP)-2012 on 2nd January, 2013 and its amendment on 7th October, 2014 to facilitate fresh investment in urea sector and to make India self-sufficient in the urea sector. Under the said policy, Matix Fertilizers & Chemicals Limited (Matix) has set up a CBM(coal bed methane) based Greenfield Ammonia Urea complex at Panagarh, West Bengal with the installed capacity of 1.3 MMT per annum. The commercial production of Matix has started on 1st October, 2017. Chambal Fertilizers & Chemicals Limited (CFCL) has also proposed to set up a brownfield project with capacity of 1.34 million tonnes per annum at Gadepan, Rajasthan and expected to go into to commercial production by 2019.
(e) The requirements of major fertilizers in (2017-18) was 242.51 MT Urea, 50.36 MT DAP and complex fertilizers 90.38 MT. Joint Ventures abroad meet 25% of our requirement of Urea, 90% in case of Phosphates, either as raw material of finished fertilizers (DAP/MAP/TSP) and 100% in case of Potash. It is recommended that the overseas Joint Ventures (JV) efforts may continue. Possibility of JVs in friendly gas rich countries (like Qatar) may also be examined.
(f) New Urea Policy 2015: New target energy norms have been fixed for gas based urea plants grouping them in three categories Progress in this regard will have to be monitored. The Industry, however, has been representing that while above is a well intentioned move, the industry is unable to bear the full burden of capital required and some capital subsidy is needed. Industry has also requested deferring implementation by 2 years to give time to them. Decision to Neem coating of Urea (enabling the slow release of nutrient and preventing the diversion of urea for other purposes) and also the decision to increase Neem coating from 75% to100 % will lead to substantial benefits.
(g) Targeting Fertilizers Subsidies
● The scheme of paying subsidies to fertilizer companies on the basis of quantity sold to an Aadhar verified farmer have enabled to a large extent elimination of spurious beneficiaries, diversion to adjacent countries etc. However the last mile of reforms delinking the subsidy from industry and adopting a targeted Direct Benefit Transfer (DBT) to farmers needs to be planned and implemented. The subsidy to the farmer will have to be decided on a rational based on land holding, crop used, soil conditions etc. For successful implementation, data regarding, landholding, soil testing etc will also have to be built. The DBT approach will also force the fertilizer companies to bring down cost of production and become competitive in the market.It will also give farmers a choice-opting for high value added fertilizers
● The Shanta Kumar Committee: on agricultural reforms, in 2015, had prescribed an uniform Rs 7000/ hectare direct cash transfer in place of fertilizer subsidies. The Govt can consider this report, with some (region) specific modifications, as a starting point to (DBT) exercise.
(h) Major Challenges in Fertilizer Sector
● Reforms in Subsidy payments to Industry: Due to almost stagnant retail price of urea and cost push in production, the level of subsidy has been increasing over the years. At present, subsidy accounts for 75% of cost of urea production. It means, industry has to collect 75% of sale revenue from the government and delays lead to higher working capital with interest charges which is not recognized in the subsidy formula. The outstandings to industry is presently over RS 45,000 crores. Present DBT allows payment to Industry only after sale to farmers through Point of Sale (POS) machine which has further delayed payments to Industry by further 6 months. There are also outstandings on freight payment. There is urgent need for deeper reforms to review the subsidy payment issue by the Govt. This is very important to attract further private sector investment in this vital sector.
• Rationalization of Prices for Balanced Fertilizer Nutrient inputs: Current Nitrogen (N), Phosphorus (P) and Potash (K) i.e. NPK use ratio is 7:2.7:1 against desirable ratio of 4:2:1 on an average basis in the country though there are further regional variations. Fertilizer use per hectare is less than 10 Kg in North-eastern States while it is 213 Kg in Punjab and 262 Kg in Telangana. To overcome the issue Govt policy includes use of customised fertilizers and encouragement of 45 coated fertilizers and Nutrient Based Subsidy (NBS) policy for P & K Fertilizer. The Govt has launched soil health card scheme in February 2015. However, fixed subsidy in P&K fertilizer has been brought down gradually leading to high retail prices of these products. The distortion in NPK use ratio is essentially due to disproportionately low of urea in India vis-a-vis other fertilizers. As per the latest data available for second half of 2018, retail price of urea in China is US$352 per MT, Pakistan US$254 per MT, Bangladesh US$192 per MT as against only US$ 80 per MT in India. The DAP to urea price ratio is now 4.74:1 in India (against 1.58:1 in Bangladesh). This issue require urgent review by progressively increasing urea prices and reducing P&K prices..The Ministry of Agriculture should bring out a consolidated report ,based on soil testingcards, the nutrient shortfall/distortion in NPK use for studying remedial measures.
• The Govt needs to be complimented to revive Coal based fertilizer production, at Talcher. Post independence, India did set up Coal based fertilizer technology at Sindri (with Lurgi technology). The economics of the Talcher plant should be evaluated to set up more coal based fertilizer units, in view of non availability of gas. Prima facie coal based plants may involve higher energy consumption (30%), but will be instrumental in reducing gas imports. The Sector has also been demanding higher priority in gas allotment from the Govt. for existing plants
• The Ministry of fertilizer may pursue the subject of forming JV’s in friendly gas rich countries in the Middle East for urea/phosphatic/potassium fertilizers, as done in the past.
27. Coal Sector
(a) Efforts are needed urgently to boost indigenous production to avoid import of coal for Thermal generation, with total annual import of coal including coking requirements, reaching around 200 MT annually. With considerable future reserves in India being deep underground (overburden 300 meters and above), India must make a beginning on deep underground mining, inviting FDI’s also to bring in modernization. It is interesting to note that Govt has now allowed 100% FDI in coal mining.
(b) Coal India, besides stepping up production (to reduce imports) should also focus on bringing down the cost of coal. The decision to open up commercial mining to private sector is welcome and action should be taken to expedite auctions. It is important to address well in advance issues like environmental & forest clearances, land acquisition and Railway coal evacuation projects, before going for auctions to avoid unnecessary risk on the investors. c. Blocks for commercial mining should be economically viable (at least 15 million tonne annual capacity to provide an economy of scale in operations and arranging for evacuation projects).
(c) Encouragement may be given to Coal Bed Methane (CBM) and Gasification (Surface & underground) projects.
(d) Statutory clearances in coal and other mining projects must be streamlined, in view of excessive delays (in years) now taking place. It is heartening to note that Hon’ble minister for Environment has recently announced taking corrective steps in this regard.
(e) Coking coal reserves in the country should be used exclusively for steel production. Considering considerable research is going on abroad on conversion of non coking coal to coking coal (e.g. USA). India through bilateral relation seek joining these projects.
28. Oil and Gas
(b) India will also have to pursue vigorously gas pipe line schemes from central Asia or Middle East (TAPI, Iran- India underground sea pipe line avoiding Pakistan) etc. based on economical and security considerations.
(c) Thrust may be given to exploration for Oil/Gas in India. Govt has announced several policies-HELP, open acreage, favourable royalty terms etc.
(d) Production of ethanol from sugar cane(with Govt recently permitting extraction of ethanol from sugar cane juice itself (against earlier practice of extraction from molasses only after recovery of sugar) should be encouraged. Govt has permitted 20% blending in auto fuels now and present level of blending is only 6%. Ushering in Second Green revolution in Eastern Sector, with good rain fall can augment sugar production/ethanol manufacture reducing oil import.
29. Mining & Metals : Encouraging Exploration
(a) Reforms in the mining sector for national mineral security: With a view to bringing about transparency and reduce discretion, the Govt in 2015 amended the Mines and Minerals (Development and Regulation) Act to replace the first-intime system of grant of mineral concessions by an auction process. In 2019, National Mineral Policy has been aligned with the legislation. While at first glance the change appears to be progressive, it has had some negative impacts and has reduced sectoral activity substantially, particularly in exploration of scarce/strategic minerals.
(b) Auction of mineral resources are tricky as valuation of resources deep underground are prone to error. Many of the State Govts do not have the technical capacity to manage the auction processes. As a result in the last 4 years, only 54 Blocks have been successfully auctioned. Of these, 24 are for Limestone, 19 are for Iron Ore, 4 are for Gold, 3 are for Graphite, 2 are for Manganese, 1 is for Bauxite, and 1 is for Diamond. The Gold and Diamond auction is for prospecting stage. Base metals and other mines capable of producing technology related metals, including rare earths have not been able to come up to auction level. The exploration data needs to meet credible internationally recognized standards to enable auction of a mine. Not many mineral deposits have been explored to this level, reducing the supply for auction. Most important, exploration, which is the process of identifying and investigating areas for minerals has ground to a standstill in India because exploration (not to be confused with surveys by Govt agencies using public funds) which is a high-risk high-reward activity undertaken by the private sector, uses venture capital .The international practice of awarding the mine to the successful explorer ensures funding of the exploration effort. The auction process disrupts this.
(c) Govt. needs to constitute a High-level Committee to look into the experience of implementing the provisions of the Act as amended in 2015, and suggest reforms to restart investments, exploration and mining in India especially on strategic minerals, since minerals security is a component of National Security.
(d) Leases of around 258 mines (iron ore, bauxite, lime stone, manganese) areset to be cancelled by March 2020 (as per 2015 decision) & will have to be auctionedunder Mining & Minerals Regulation (Development) act. The auction involves manychallenges-special permission from state & central Govt, slow progress of G2level exploration standards with respect to these mines. Original environmental & other clearances will have to be seamlessly transferred to the new lease. This requires urgent review.
(e) There is need for close monitoring of effective utilisation of accruals to District Mineral Foundation (DMF) & National Mineral Exploration Trust (NMET) for their effective utilisation. This will reduce local resistance to mining& give a fillip to scarce mineral exploration.
30. Textiles Sector
(a) India is the world’s second largest producer of textiles and garments after China. It is the world’s third largest producer of cotton after China and the USA. Indian textile industry is currently estimated to be US $108 billion. The industry is the second largest employment generator after agriculture by employing 45 million people directly and 60 million people indirectly.
(b) The Indian textile industry presently contributes around 14 percent to industrial production, and 4 percent to GDP, 17 percent to the country’s exports, and 21 percent employment. Indian textile industry currently possesses a share of 4.7% in world market of textiles and clothing. India has abundance of natural resources like cotton, jute and silk.
(c) Issues in Textile Industry
● The Indian textile industry is highly fragmented and is being dominated by the unorganized sector and small and medium industries. The changing government policies at the state and central government levels are posing major challenges to the textile industry. The tax structure GST (Goods and Service Tax) make the garments expensive. Another important threat is rising interest rates and labour wages and workers’ salaries.
● The Union Ministry of Textiles, which has set a target of doubling textile exports in 10 years, plans to enter into bilateral agreements with Africa and Australia along with working on a new textile policy to promote value addition, apart from finalising guidelines for the revised Textile up gradation Fund Scheme (TUFS).
● The Textile Industry has suffered a setback with USA withdrawing General System Preference (GSP) relaxation for India stating it is no more a developing country. Much of US apparel manufacture has shifted to Vietnam, Bangladesh etc. European Union has also imposed a sanction through multi-fibre quotas. It is important for India to negotiate for extension of these relaxation for some more years, considering India’s low per capita income and large section of population below poverty line. This is also to be leveraged in the context of India’s large energy purchases planned from USA.
● The Govt has recently given export incentives to Indian apparels which is a welcome move.
● Introduction of flexible labour policies will help this sector achieve economy of scale needed for global competition.
31. Electronics Sector
(a) With commencement of ‘Make in India” initiative in Electronic manufacture in 2014-15, production has risen from 29 Billion in 2014-15 to 70 Billion dollars in2018-19 . India’s electronics market (one of the largest in the world) is expected to grow around CAGR of 25%.
(b) Govt of India announced the National policy on Electronics (NPE2019) inFeb 2019, with the vision to position India as a global hub for Electronic System Design & Manufacture (ESDM) and creating an environment for the industry to compete globally. The policy envisages by2025. India would be able to achieve “Net positive balance of payments” and Domestic production will reach 400 Billion US Dollars, with value addition of 40%.
(c) Success of Phased Manufacturing Programme (PMP) notified for mobile phones can be seen from production of mobile handsets going up from 60million units/value 3billion US Dollars in 2014-15 to 290 million units/value 26 billion dollars in 2018-19, with 260 manufacturing units already set up for mobile subassemblies PMP needs to be extended for other manufacturing sectors like, in industrial, consumer, defense, medical electronics as well.
(d) To facilitate economy of scale manufacture, India should plan Mega Special Economic /logistic Zones (of size of Suzhou in China). The PMP should focus initially on high labor intensive items and progressively go upwards to high value/ capital intensive items, inviting world class companies, giving incentives. The initial phases could focus on metals (PCB, sheet metal, plastics, wires), passive parts(resistors, capacitors, inductors, power products), Low complexity ATMP items (Assembly, Test, Mark, Pack) of ICs, switches, displays progressively to high value semi conductor manufacturing. This should be followed by Indian Design led manufacturing creating Indian IP rights.
(e) Govt has also initiated schemes for promotion of Electronics like Capex subsidy (20% SEZ, 25% non SEZ), an Electronics Development fund with a targeted corpus of Rs 5,500 crores for promotion of innovation, IP creation, R&D and product commercialisation under ESDM.
(f) The challenges the sector faces is short technology life cycles, emergence periodically of innovative/disruptive technologies, constant miniaturization and addition/integration of multiple functions in one unit. In India, besides above, challenges of absence of world class infrastructure, high cost of capital, lack of adequate incentives for exports, cumbersome processes in export, exist.
(g) Indian manufacturing suffers from an 8-22% competitive disadvantage and systemic inefficiencies because of various factors in the Indian economy in a sector that is characterized by high volumes, high velocity and low margins.
(h) Basic inequity in WTO & FTA agreements : There has been an inbuiltinequity in above agreements towards India’s Information & Communication Technology (ICT) interests. Under WTO agreement in 1994, ITA4 and ITA1 –benefits for other countries in the ICT and electronics sectors in terms of access to the Indian market at zero duty were frontloaded, instant, massive and irreversible; benefits to India were relatively minor, backloaded, illusory and reversible in an instant through for example immigration policies that are not covered under WTO.
(i) WTO agreement and later FTAs, PTAs and CECAs were entered into in the past with inadequate or no consultation with industry and little clarity on the overall balance sheet for India in quantitative terms across all sectors .WTO/ preferential trade agreements negotiations are/were predicated on “protect what you have” which helps those with existing strengths, hurts those with future aspirations.
(j) China has made a head start of over 2 decades in establishing large manufacturing base for global Electronic majors. With entry into WTO, China’s share of global exports in mobiles is 60%, China+ Hongkong is 10%. Rerouting of imports into India through small ASEAN countries like Vietnam (which provide substantial incentives to its electronic manufactures) is another major issue.
(k) Against the above background, India faces challenges of cheap electronic imports facilitated by Free Trade Agreements (ASEAN), entry of China into WTO. Unless protective measures are taken by India in time. India cannot succeed in its ESDM programme. The dangers are likely to increase manifold if India joins RCEP without protective safeguards for its emerging industries.
(l) If India wants to seize the opportunity of inviting Electronics MNC’s leaving China now, following US-China trade disputes, the time to insist on some protectionism is now.
(m) The Govt’s encouraging local production had succeeded in getting global majors like Foxconn, Flextronics, Wistron etc to set up base in India. Handset companies like Samsung, Apple, Xiaomi, Vivo and Oppo have come in but the value addition is very limited with assembly operations only and with large scale import of components and sub-assemblies. It is hoped with thrust from the Ministry and with some protection from imports, the value addition should increase progressively.
(n) The recent announcement of 100% FDI in contract manufacturing and easing of sourcing norms in single brand retail should spur FDI investments in Electronic Manufacturing Sector. Export led growth model in manufacturing may have questionable relevance in today’s globally protectionist environment – so may not work unless we choose some niche areas which still have potential –another strategy could be domestic demand used to create volumes and subsidize exports rather than the other way around, with overflow into export as in auto sector and ancillary industry.
(o) Telecom, self-reliance and 5G – there is need for domestic capacity creation– we are good in areas where there is or was technology denial – e.g. space and some areas of defence (missile tech) – we need to leverage our status as the largest defence importer globally to force manufacturing to come to India and stimulate ancillary industry growth through local sourcing. Trade access to domestic market be given only to those who invest in India and create employment in India – but allow FDI and tech to flow in freely and encourage unfettered competition domestically.
32. IT Sector Achievements : India is the leading sourcing destination across the world, accounting for approximately 55 per cent market share of the US$ 185-190 billion global services sourcing business in 2017-18. Indian IT & ITeS companies have set up over 1,000 global delivery centres in about 80 countries across the world. .India’s IT & ITeS industry grew to US$ 181 billion in 2018-19. Exports from the industry increased to US$ 137 billion in FY19 while domestic revenues (including hardware) advanced to US$ 44 billion. Spending on Information Technology in India is expected to grow over 9 per cent to reach US$ 87.1 billion in 2018. Revenue from digital segment is expected to comprise 38 per cent of the forecasted US$ 350 billion industry revenue by 2025.Venture Capital (VC) investments in the IT & ITeS sector stood at US$ 53.0 million during Q4 2018.
(a) Issues & Challenges in IT Sector
● Considering the rapid disruptive technological changes in the sector like emergence of Artificial Intelligence, Deep machine learning, Blockchain Technology, Cloud computing, emergence of Big Data, IT companies in India will have to quickly reskill the work force and be on par with global developments. Nationally shrinking of IT workforce will have to be strategized. It is good IT companies are making overseas acquisitions specially on niche innovation which will enable the companies to follow the global trend closely. To the credit of IT firms in India and their resilience, it must be said they are, changing their business models, cutting costs, embracing automation and undertaking massive reskilling of their work force to emerging technologies (having already completed retraining 50% of their 6 lakh digital employees by 2019). Nasscom has launched an online platform which is aimed at up-skilling over 2 million technology professionals and skilling another 2 million potential employees and students.
● While IT companies achieved success in the past three decades without Govt support, it is important now that Indian IT industry is facing downtrend, the Govt should plan some substantial orders on the new technology platforms like Artificial intelligence(AI)I etc for Indian firms in Digital India building (Govt, Banks, PSU digitisation, Weather/Agriculture remote monitoring applications etc). This will enable Indian firms to hone their skills in home markets before launching globally. It is gratifying to note that the Govt identified Information Technology as one of 12 champion service sectors for which an action plan is being developed. Also, the government has set up a Rs 5,000 crore (US$ 745.82 million) fund for realising the potential of these champion service sectors. In the Interim Budget 2019-20, the Government of India announced plans to launch a national programme on AI and setting up of a National AI portal NITI Aayog is going to set up a national level programme that will enable efforts in AI and will help in leveraging AI technology for development works in the country. National Policy on Software Products - 2019 was passed by the Union Cabinet to develop India as a software product nation.
(i) In free trade agreements (e.g. ASEAN) entered into by India, while India opened its markets to product imports, other partners have introduced protective measures against Indian IT services. The RCEP entry, in discussion stages, is also likely to impact India adversely. India should seek level playing field for its IT services
(ii) Way forward: We need to exploit our strengths in IT - global IT BPM industry growing at 10% even now, but weaknesses are that we are not creating new tech, or platforms which dominate. Hence focus in this area is necessary Nature of industry has changed, especially HW, but also SW – no longer manpower intensive, increasingly skill intensive so we need to consciously target sectors which still remain employment intensive or where employment intensity is likely to remain high and incentivize investment – entirely based on employment created. Regulation should be progressive to foster digital innovation – enable it – sectoral regulation also important
(iii) Concentrate on our core strengths and areas where we have comparative advantages e.g. services. India should be open as an economy in terms of investment and technology, but be cautious when it comes to access to the market and data – making sure we extract the full value/ price of it in any deal
33. Pharma Sector
(a) India is the largest provider of generic drugs globally. Indian pharmaceutical sector industry supplies over 60 per cent of global demand for various vaccines (major supplier to WHO for Diptheria, Tetanus, Measles), meets 40 per cent of generic demand in the US and 255vin UK Affordable anti retroviral (ARV) drug from India were a major factor in AIDS patients getting greater access to affordable treatment.
(b) Presently over 60 per cent of the anti-retroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms. Meeting 30% annual UNICEF requirements, the industry has also helped in reducing treatment cost of life threatening diseases e.g. Hepatitis C, Chronic Myeloid Leukaemia.
(c) The pharma sector’s production is expected to grow with CAGR of 22.4% from 2015 to reach around US$ 55 billion by 2020. India’s pharmaceutical exports reached US$ 19.14 billion in FY19 and in FY 20 expected to touch 22 billion US$. Pharmaceutical exports include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products India’s biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a year and reach US$ 100 billion by 2025.
(d) Investments and Recent Developments : The Union Cabinet has given its nod for the amendment of the existing Foreign Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100 per cent under the automatic route for manufacturing of medical devices subject to certain conditions. In October 2018, the Uttar Pradesh Government announced that it will set up six pharma parks in the state and has received investment commitments of more than Rs 5,000-6,000 crore (US$ 712-855 million) for the same. The Government of India unveiled ‘Pharma Vision 2020’ aimed at making India a global leader in end-to-end drug manufacture.
(e) Opportunities Ahead : Indian Pharma Industry has a vision to grow to US$ 120 billion by 2030 by establishing leadership position in the US generics space, diversifying into large markets such as Japan, China, Latin America, Africa, Australia etc. Markets like Japan are very lucrative (80 billion US$ 2018) but would require patient nurturing as acceptance in Japan takes longer time with rigid quality expectations. India’s thrust to reach poorer households with affordable healthcare (including Ayushman Bharat), combating chronic diseases, presents the sector considerable growth, with development of required drugs. India has the potential to pursue development of biosimilars, gene therapy and speciality drugs with a supporting and facilitating role from department of Bio- technology. The Biosimilar market could exceed US $60 globally by 2030. India also needs to capitalise on patent expiry of branded molecules of value US$ 250 billion during period 2018-24. The Industry will have to develop a strong molecule level strategy, regulatory compliance and faster time to market. Drug MNC’s attempt to ever green their patents will also have to be resisted. On Govts part there is need to have stable policies regarding price and for regulatory bodies to make the process of clinical trials approval faster e.g. accepting foreign approvals to Indian drugs as sufficient for home market.
(f) Threats : Besides Indian Govts own policy of rigid price controls for many critical drugs, there is also pressure on prices of drugs leading lower margins in USA to contain their rising healthcare costs. Regulatory clearances abroad are also time-consuming. There is need for India to foster a strong innovation ecosystem for drug development. For e.g. China hastened growth of its small pharma research based by attracting Chinese-born scientists (over 50,000 PHDs) through the “Thousand Talents Plan” through generous funding support (75000 US$ annually). These scientists on return helped China in developing alliances with Drug MNCs, with Biotechnology firms, cancer research institutions abroad. China has rationalized its clinical trial data requirement accepting International Multicentre Clinical Trial (IMCT) for their Chinese Food and Drug Authority since 2015. Approval time for clinical trials (CTA) for small and large molecules was reduced by over 60% with simplification of processes.
(g) Need for urgent interventions in Pharma Sector :
The Govt of India must quickly encourage Indian Pharma firms to set up production of basic formulations (API) for which Indian firms are highly dependent (80%) on China. This dependency brings in attendant risks of supply chain disruptions and unexpected price rises. This can affect India’s pharma export security also. In initial stages of API development in China, Mega SEZs were set up (10 times the size in India) lowering Capex requirements and subsidising land waste/environmental facilities and ushering in flexible labour laws. Borrowing cost in China in these SEZs were reduced to half, reduce logistics support was provided with cheaper electricity and other utilities inputs. India may study this model and take action to setup Mega Pharma parks. Priority for indigenization of APIs may be given to top high value import items. It is understood Pharmaceutical Export Promotion of India is finalizing draft project report (DPR) for setting up API facilities in India.
(h) The Pharma sector (like IT) is a very knowledge based sector and R&D expenditure should receive tax break. China has invested considerable amount in HR development, similarly, India must focus developing some existing Pharma teaching institutions to global standards and focusing on Pharma research with Industry collaboration.
(i) Considering the hold ups to India Pharma export companies due to USFDA inspector observations, it is necessary for Indian drug quality inspection agencies to come up to the level of USFDA. Pharma companies should also strengthen their internal inspections.
(j) There is need for Pharma sector to increasingly embrace digital and advanced analytical (AA) solutions.
34. Auto and Ancillary Sector
(a) This industry, employing almost half the industrial work force, is facing downward trend, with demand reduction of 30% in passenger segment and 20% in commercial segment. Besides country’s general slowdown in economic growth, global slow downs, the major contributory causes appear to be uncertainties in BS4 vehicles produced before switch over to BS6 in April 20, urgency expressed for introduction of Electric vehicles. On the Commercial vehicle side, quicker turn around due to GST introduction, permitting of higher axle loads have led to higher utilisation of existing fleet and consequential less demand for new purchases The Finance minister has recently allayed fears on quick introduction of Electric vehicles and for BS4 vehicles in new BS6 era, the policy will be reviewed including bringing in a policy of scrapping with incentives.
(b) It is specially recommended that the pace of introduction of Electric Vehicles must keep pace with indigenisation of Electrical equipment, to avoid large scale Chinese imports and keeping in view job losses in the sector without undertaking advanced preparations.
(c) Quick action will have to be taken to establish indigenous manufacturing facilities for batteries, motors, inverters in large scale for electric vehicles. Recently an Australia entrepreneur has offered to export Lithium to India.
35. Heavy Industry & Capital Goods Sector
(a) There is need to allocate sector-specific research funds (e.g. processes for special, electrical, steel, high grade copper& advanced material research) for strategic industry sectors. Provide 2-year income tax holiday on sales of products emanating from a defined “new technology” list.
(b) Significant challenges and gaps exist in high end, heavy duty, high productivity and high precision technology across sub sectors. There is need for setting up an Inter – Ministerial Capital goods technology committee to review technology gaps in Industry and take remedial measures.
(c) For high-value and high-technology imports, there is need to introduce “Technology Transfer” as a pre-requisite and specify “Minimum Domestic Value Addition” threshold. It is also required to promote technology development and acquisition support to SMEs through existing mechanisms such as Technology Acquisition and Development Fund through DIPP .and Industry-academia collaboration model available through CSIR Tech Private Limited.
(d) Refine fiscal incentives to promote R&D and technology development- extend definition of industrial R&D till point of commercial production to avail tax benefit.
(e) India’s research intensity (R&D as percentage of GDP) is only 0.9%, while in China it is 2%, in USA-2.8% & Japan-3.4 % India must increase its R&D investments &strictly monitor R&D performance. There is also need for upgrading testing and certification for structure across key capital goods sub-sectors (strengthening organisations like CMTI, CPRI etc.). India’s Design capabilities will also have to be enhanced.
(f) India must strengthen its overseas consultancy and project activities so that this could facilitate use of more Indian machinery & plants. This will also enables overseas experience which will also give exposure to new technologies coming up. India must also address progressively giving tied up credit to overseas projects, as the economy grows.
(g) In high value procurement, life cycle costing should be the determinant and not only the purchase cost
(h) IRDA may encourage insurance companies to underwrite Insurance Products to cover risks arising from failure of products/systems based on indigenously developed technologies, with necessary safe guards.
(i) Encourage 5-10% spend on “development orders” with domestic sources, in case of imports.
36. Cement Sector
(b) Present capacity utilization is however only 70%, Return on capital employed is slipping below 11% due to slower investments from Govt., liquidity problems in Real estate sector, impact of global down trends etc. Problems include shortage of coal supplies, rail wagons for transport. Volatilities in input prices of coal, pet coke, power (26% of operating costs) have also been a matter of concern.
(c) Cement sector profits, however has been good, EBDITA margins going up (cement price has been hiked recently to Rs 380 per 50 Kg bag (against earlier figure of Rs 355). The higher profit margins in the sector is attracting FDI.
(d) There is scope for increasing exports, special clinkers.
(e) The Industry has been demanding a lower tax slab of 18% (presently 28%) with steel etc being charged less. This could be considered when there is buoyancy in GST revenues.
37. Gems & Jewellery Sector
(a) Gross Gems & Jewellery exports from India in 2018-19 was US dollars 39.68 billions & gross cut and polished diamonds exports stood at 23.8 billion US dollars.(contributing to 13% of country’s merchandise exports).The SEZ/EOU’s did well with exports going up by 24% to 12 billion US dollars. This is a highly labor intensive sector, using skilled craftsmen and part of it is unorganized. The sector is also heavily import dependant for raw materials.
(b) The industry has been complaining of serious liquidity crunch since “Nirav Modi Case”. This requires review.
(c) The industry has also been demanding quick implementation of “Baba Kalyani” report which has recommended duty free sales from SEZ/EOU’s to domestic areas. While these units are already paying a gold import duty of 10%&GST of 3%, other duties should be abolished. Currently such sales attract duty of 15% equivalent to import duty on import of gems & jewellery. This may be considered.
(d) The Industry may bring in self regulation with regard to complaints of mix up of synthetic & natural diamonds by setting up sophisticated detection equipment.
(e) To respond fastly to changing fashion trends globally, the Industry with support from Govt should set up design centres.
38. MSME Sector
Commerce survey report of September 2019 on “Ease of Doing Business for MSMEs”
(https://www.phdcci.in/wp-content/uploads/2019/09/Ease-of-Doing-Business-for-MSMEs.pdf) may be given due consideration by the Govt.
(a) Capital Gain Tax - Permitting Capital gains derived from selling a property should also be allowed to be invested in MSME sector(bonds) to encourage the growth of MSMEs across the country. The section 54 of the Income Tax Act must be extended to cover the industrial sector.
(b) Indirect Tax Benefits - Indirect tax benefits could be provided under GST similar to that provided in VAT regime through Industrial Promotion Scheme. Lower rate of tax should be levied on products manufactured by MSME manufacturing industry.
(c) Equal treatment for PSU and MSME entities - There should be equal treatment for PSU and MSME entities and all government procurement agencies must accept supplies from PSUs and MSMEs against a guarantee certificate.
(d) New Bill of definition of MSMEs - New Bill of definition of MSMEs should be passed as soon as possible in the Parliament. This will give a huge boost to investment and employment along with productivity.
(e) Simplify land acquisition - Simplification of land acquisitions is required as it remains complex, because of the difficulties in establishing legal ownership and a ‘clean’ holding for purchase.
(f) Speedy addressing of intellectual property rights - Cutting the average time for addressing pending intellectual property rights applications from more than five years to 18 months.
(g) Reduction in logistics cost - Logistics cost should be reduced from 14% of invoice to 8% to make MSMEs competitive internationally.
(h) Increase awareness among MSMEs - Frequency of awareness campaigns for MSMEs sector need to be increased so that every industry can take optimum benefit of the Government schemes.
(i) Crucial Role of Infrastructure PSUs in sustaining MSMEs - Exim Bank of India funding for Make in India- Most private sectors infrastructure projects prefer to buy imported capital equipment instead of Made in India – MSME products since almost all the imported capital goods come with concessional long-term finance at very low interest rates supported by the Exim Banks of the exporting countries. Therefore, the Exim Bank of India may be allowed to provide concessional long-term funding to Indian Infrastructure projects especially the central government PSUs on the same terms as those provided for project exports under Make in India scheme.
(j) Reduction in the High primary security and collateral security demanded by Banks - The current bank norms result in double securitization by banks, where in the first place they demand primary security of 133% of the fund based limit and, in addition collateral security worth 125% of the proposed limit is required in order to sanction the case, bringing the security requirement to 258% of the finance provided by the bank. It is recommended that the total of primary security and collateral security for loan limits given by banks should be brought down to maximum 75% for MSMEs.
(k) Delays in Realisation of Bills / Receivables - The working capital cycle of MSMEs keeps prolonging due to delays in realization of their bills/receivables. Due to such delays MSMEs find it extremely difficult to service their debt instalments or interest obligations in a timely fashion, leading to their classification into NPAs. It is therefore, recommended that the 90 days limit fixed by RBI for classifying overdues of MSMEs should be increased to 180 days so that MSMEs are not constrained to divert their working capital towards servicing of their loan-instalments and clearing of their overdues at the cost of their normal business operations. This improvement in the RBI guidelines will save a large number of MSMEs from turning sick or getting closed resulting in loss of economic activity and loss of employment, and further preventing avoidable classification of bad debts and unwarranted litigationby banks thereby saving the banks from losses.
(l) Modification in the Restructuring Scheme for MSMEs announced by RBI - The Reserve Bank of India announced the policy for restructuring of existing loans to MSMEs up to Rs. 25 crore that are in default as on 01-01-2019 but classified as ‘Standard’. This restructuring facility has been opened for standard accounts only which may become NPAs later but not for those MSME accounts which have already become NPAs before 1st January 2019. As a result of this, the restructuring will cover only a small fraction of the MSME default accounts- say only about 5% or so and not the bulk of NPAs in the MSME Sector. It is therefore recommended that at-least one year period should be considered for eligibility of MSMEs’ stressed and NPA accounts for eligibility under the restructuring scheme. All such accounts which turned into defaults or became NPAs after 1st January, 2018 should be covered under the policy of RBI for being eligible for restructuring.
(m) Delayed Payment of Bills and Receivables of MSMEs - Large number of MSMEs undertake their operations as vendors to Government Organizations including Public Sector Undertakings and Private companies or work as ancillaries to big companies as their suppliers of components. Payment of bills and receivables from buyers of MSMEs are generally delayed. As a result of these delays, MSMEs face financial hardships and liquidity constraints which lead to severe pressure on their working capital management and many of them turn into ‘Non-Performing Assets’ (NPAs). It is therefore recommended that punitive measures should be introduced against the habitual defaulters who do not meet their payment obligations as per agreed terms maximum in 45 days. For example, their accounts can be classified as defaulters as it happens in case of non- payment of bank dues. In addition, stringent regulations should be introduced for dishonour of Cheques against the issuers of such Cheques in addition to the existing provisions.
(n) The services sector is a people driven sector and investments in the sector MSMEs can lead to higher employment generation. The availability of developed infrastructure, advanced technology, access to capital, skilled manpower, among others have a huge potential to bolster the growth and competitiveness of service sector MSMEs. Such factors would strengthen the functioning and growth of service sector MSMEs and would bring them at par with international benchmarks. Incubation and handholding MSMEs by the government could play an eminent role in transforming service sector MSMEs into a backbone of Indian economy.
(o) Few areas where thrust needs to be given include, developing market access for service sector MSMEs, effectively addressing financing needs, reforms in the area of IPRs, skill development of human capital, employment generation and studying international practices with respect to ease of doing business in the services sector, among others. Ecommerce has enough potential to boost the growth of service sector MSMEs. An intelligence generation cell needs to be setup that could make several small businesses and MSMEs aware of national rules and regulations encompassing the e-commerce. These measures would foster the growth of service sector MSMEs and would make them competitive with MNCs in domestic and foreign markets.
(p) In a nutshell, reforms in ease of doing business at the ground level especially for the small and medium sized businesses along with desired reforms in labour laws such as fixed term employment for flexibility in hiring by industry across the States would be crucial to strengthen the manufacturing sector, Make in India Programme and create millions of employment opportunities for growing young workforce.
