Time To Leverage Strengths
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For inclusive growth across India, the government is now laying emphasis on manufacturing — to increase its contribution to the gross domestic product from the current level of 15 per cent to 25 per cent. This objective got a boost from the ‘Make in India’ announcement by the Prime Minister. While there is little doubt that accelerated growth along with a strong manufacturing industrial base is essential for sustainable economic development, the question to ask is: How do we achieve this?
First, policy-makers should identify our comparative advantages. India has abundant natural resources such as iron ore, coal, bauxite, manganese, etc., in addition to growing domestic demand and a young workforce. The policies of the government have so far encouraged export of natural resources (such as iron ore) instead of making them available for value addition within India. This has caused enormous damage to our manufacturing sector as we failed to use our competitive advantage to our benefit. The existing laws governing allocation of mining resources have sparked several litigations due to their lack of transparency. The outcome was cancellation of iron ore mining and coal concessions. As investments worth several thousand crores were made following the allocations, their cancellation brought further discomfort to investors.
For the first time, we find that all stakeholders — the government, civil society, business leaders and the judiciary — appear to be on the same page regarding the transparent allocation of natural resources through auctions. So investors will now have a degree of certainty in allocations.
It is also of paramount importance that the criteria for eligibility to participate in such auctions should be value addition within India. In auctions, existing players who have made substantial investments should be accorded priority, followed by prospective investors. This will ensure that our natural resources are put to the best use, that is, maximising our camparitive advantage, within the country. Until the Mines and Minerals Development and Regulation (MMDR) Act is amended to this effect, we will continue to export our valuable iron ore resources and import steel from Russia, China, Japan and Korea. Second, logistical costs make our manufacturing uncompetitive. For instance, during the current year, railway freight was increased in July, congestion cess was imposed and haulage charges were hiked, adding to the burden on industry. In spite of domestic demand, lack of infrastructure and exorbitant logistical costs made it impossible to realise our dream of ‘Made in India’.
In order to build efficient, affordable infrastructure and attract investments, we need to take a fresh look at our public-private partnership (PPP) models. The PPP model currently in vogue in the infrastructure sector has several infirmities and rigidities, making it unviable for an investor — all risks lie with the investor and offer low or zero returns. Infrastructure, by definition, is capital-intensive and has a long gestation. The government can attract investment from the private sector for creating world-class infrastructure and making our manufacturing sector competitive only if our PPP model is amended to moderate implementation risks, assure returns and reliable cash flows.
Third, the federal structure of our country restricts trade within India. We are still struggling to introduce goods and services tax (GST), which is a transformational reform. While lack of infrastructure and high cost of transportation are restricting free trade in India, the cascading effect of taxes is dampening the prospects of leveraging our domestic demand. The introduction of GST by subsuming all taxes and not allowing too many exemptions and categories is the need of the hour.
Fourth, globalisation poses challenges for Indian manufacturing. For instance, the US restricted supply of certain steel products from India for several years by imposing anti-dumping duties. On the other hand, there has been an unrestrained dumping of products in India by foreign companies, thanks to sluggish global demand. This undermines the very competitiveness of Indian manufacturing. For instance, Indian steel companies figure prominently in the top echelons of steel makers world-wide, yet manage to make no inroads in the global market. The government should set up a separate cell to monitor the dumping of manufactured products and initiate action expeditiously to curtail this unfair trade practice.
There are enormous delays in receiving approvals for various projects. What makes matters worse is the delay in release of payments and refunds by the government. The Digital India initiative should, hopefully, resolve this problem with timely clearances and prompt release of payments without any bureaucratic hurdles.
While the government should expeditiously amend land and labour laws to facilitate investments in manufacturing, restrictions on raising capital from approved lenders abroad, end use, interest ceiling, etc., should be relaxed.
India has immense potential to become a global manufacturing hub if our inherent comparable advantage is leveraged with appropriate government policies.
The author is joint managing director & group CFO, JSW Steel
(This story was published in BW | Businessworld Issue Dated 26-01-2015)