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2011-05-19

Manufacturing Boom

In an ambitious move to revamp India's manufacturing prowess, the government has come out with a draft National Manufacturing Policy. What is it all about, here is a detailed analysis

Objective

 The new policy will help to raise the share of India in world manufacturing sector by making it a manufacturing hub, generate employment and jobs and focus on skill development and training, “Currently the contribution of manufacturing sector to GDP is only 16 per cent and efforts should be made to increase it in both “value and volume”” Mr. Anand Sharma, Minister for Industry and Commerce said. The minister’s inspiration is neighbouring China, which has grabbed the status of the manufacturing hub of the world through a combination of relaxed laws and strong infrastructure support. The policy focuses on removing the problems that have bedevilled the five-year-old special economic zone (SEZ) policy — the government’s earlier attempt at aping China — and prevented it from achieving the full target.

 

Implementation & Significance

A three-pronged strategy is being prepared to give a boost to industrial potential using innovative and green technology, create at least 100 million jobs and raise manufacturing sector's share considerably, adding that national manufacturing policy would help achieve these goals. The new policy too envisages setting up zones, but unlike SEZs, they will not necessarily be focused on exports; nor will they exempt the members from paying income taxes etc. However, unlike SEZs, the full onus of acquiring the requisite land will be placed on the state governments and the developers are also likely to get low cost loans, another big demand from the current SEZ developers. “This is what SEZs were lacking. It is solving a lot of the problems for the developers as well as for the individual units inside,” says Chintan Patel, Associate director - real estate practice at audit and consulting firm Ernst & Young, India. If implemented in the current form, he feels, the government may actually be able to increase the share of manufacturing industries from 15% of the total national production (GDP) to 25% in 12 years. One area of significant difference between the primarily foreign investment-oriented SEZs and the new manufacturing zones will be in taxation. While SEZs are considered ‘foreign deemed territory’ and the units inside are exempt from paying nearly all Indian taxes, the tax incentives for manufacturing zones will be much more modest. The draft has mooted a moratorium on all local taxes for ten years and exemption from paying income taxes in proportion to the size of sales within the zone.

 

Advantage: Manufacturer

The biggest advantage, as far as a manufacturer is concerned, is the ease of getting regulatory clearances. Under the current rules, a manufacturing industry must get two to three dozen clearances from different central, state and local governments, including those from state pollution control boards, central environment and forests ministry and other forms of licenses. The guidelines suggest ‘time outs’ and other mechanisms to ease the process of getting approvals. For example, wherever the laws permit, the onus of gaining the approval will be shifted to the zone itself, rather than the individual units. If the clearance cannot be awarded to the zone, the zone or another single agency must be empowered to issue such clearances to member units on behalf of the government, suggests the draft.

 

Overview

The new proposed manufacturing policy aims to protect the interests of SMEs, increasing the sector's share of manufacturing in the economy. The government aims at increasing the share of the manufacturing sector from 16-17 percent to 25-26 percent of the GDP by 2020. Manufacturing contributes over 80 percent in the country's overall industrial production. The tax, clearance and labour related changes address the issues of the manufacturers while the promise of low cost funds and easier land acquisition solves the problems of the developers.

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