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Union Budget 2018: Incremental Steps But No Big Bang In Manufacturing

It is a number of small steps in the right direction. But there is not much that suggests a transformational ‘Make in India 2.0’ initiative

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If you were looking forward to big bang proposals to move manufacturing to the next level you may be a tad disappointed with finance minister Mr. Arun Jaitley’s proposals in Union Budget 2018. In a series of incremental steps, the government chose to push its flagship ‘Make in India’ agenda: It increased outlays on textiles, hiked import duties, reduced the corporate tax for MSMEs and focused on agriculture, infrastructure, and healthcare.

The highlight, of course, was the flagship National Health Protection Scheme providing an yearly coverage of Rs 5 lakh per household for over 10 crore families--billed as the largest such initiative, globally. The other major thrust was given to infrastructure, where capital outlay was proposed to be increased from Rs 4.9 lakh crore to Rs 5.9 lakh crore.

Tax factor
The Make in India programme has got a shot in the arm from the proposed custom duty increase on a range of products like mobile phones, TVs, automobiles and even juices. That will, in turn, jack up prices of imported products and, hence, aid domestic manufacturing. Customs duty on import of mobile phones rises by 5% while TV components now attract an increased duty of 15%. In the long term, it will promote local manufacturing of consumer electronics in India.

The budget also announced an increase in customs duty on import of completely knocked down and completely built units of motor vehicles. Duties on specific parts and accessories of motor vehicles have also been increased from 7.5%/10% to 15%. Automakers who import components will be affected and increase car prices; however, domestic component manufacturers will benefit from this shift of demand towards indigenous products.

Protection by increasing import duties may be good for domestic manufacturers in the short term, but it needs to be accompanied by steps that enhance competitiveness and efficiency. Tangible steps in encouraging futuristic technologies like electric vehicles, automation, 3D Printing and advanced defence equipment will go a long way in improving manufacturing effectiveness. The budget speech briefly mentioned these topics; however, one hoped for more encouraging announcements in that direction.

Textiles
Textiles is another sector which got a leg up, as its capital outlay has been increased from Rs 6,000 crore (2016) to Rs 7,148 crore– this will boost the apparel and made up segments. Since textile is a labour-intensive industry, the incentive will help large-scale job creation.

MSME Boost
The government also gave a significant boost to MSMEs – a sector that also is a major generator of jobs. Against an across-the-board reduction in corporate taxes (as expected by the corporate sector), the finance minister proposed a reduction in corporate tax rates by 25% to all companies with a turnover of under Rs 250 crore in FY17. MSMEs contribute to one-third of India’s overall manufacturing output; this reduction allows them to invest more in growth and boosts manufacturing.

Labour Reforms
The finance minister also proposed significant labour reforms by extending fixed-term employment to all sectors beyond apparel. This allows employers to hire workers for short-term assignments and ensures that temporary workers are treated at par with permanent ones, as regards statutory benefits. The move is expected to bring a large chunk of unorganised manufacturing labour into the formal pool.In fact, any labour reform automatically aids manufacturing.

Ripple effects from healthcare and agriculture 
Healthcare measures, the focus of Union Budget 2018, will now lead to the setting up of 1.5 lakh healthcare centers that will bring services closer to households. Similarly, the government’s focus on agriculture will see a doubling in the capital outlay for the food processing sector from Rs 715 crore to Rs1,400 crore. These initiatives will benefit both healthcare and agriculture, including medical equipment & food-processing equipment manufacturers.

Infrastructure outlays across defense and railways
The government has proposed to increase the railway capex targeted at rolling stock, expansion and electrification of lines. Similarly, the budget allocation for roads & highways has been increased to Rs 1.2 lakh crore. Besides, two defence industrial corridors have been proposed to stimulate domestic production. These additional outlays will spur manufacturing activity in defence, construction equipment, and rolling stock (wagons, locomotives) along with core sectors like steel and cement.

In summary, It is a number of small steps in the right direction. But there is not much that suggests a transformational ‘Make in India 2.0’ initiative.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Union Budget 2018


Sudarshan Sampathkumar

The author is a partner with Bain & Company and is based in Mumbai. He is a leader in the firm's Industrial Goods & Services practice

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Deepak Jain

The author is a partner in Bain & Company's New Delhi office. He co-leads Bain India's Industrial Goods & Services practice

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