Disequilibrium | One Step Forward, Several Steps Back

In the theatre of the absurd called India, it is normally one step forward and several steps backwards. While we keep moaning about improving the ease of doing business and ensuring that India takes baby steps towards becoming a manufacturing hub through the Make In India programme, our bureaucracy refuses to unshackle itself from the licence raj mindset which was replete with a draconian inspector raj regime. As we know nothing has really changed and foreign investment continues to find impediments and imponderables strewn in its path as it ventures into India. Making them irascible and crabby, the fear of the unknown stalking them at all times. Beginning with the inability to repeal the swingeing land acquisition bill, the very tentpoles required for a Make In India scenario are not available in India.

In the continuing litany of woes, here is another very recent example which is symptomatic of the prevailing situation in India where the bureaucracy and inspector raj is so deeply entrenched in the system that it is impossible to evict them.

On December 1, Assistant Commissioner - special investigation and intelligence branch in the Office of Commissioner Customs - Imports and General, New Custom House, near IGI Airport sent an innocuous but very curious and dangerous missive to the Deputy Commissioner - Import Shed All Cargo Complex - Import, New Delhi on the Import of mobile parts and mobile phones in CKD (completely knocked down) and SKD (semi knocked down) condition by the manufacturers of mobile phones without payment of duty.

The terse order went onto say: It is requested that no consignment of mobile parts in CKD/SKD condition imported without payment of duty by mobile phone manufacturers be allowed clearance without a NOC (no objection certificate) from ACC - SIIB. This issues with the approval of Joint Commissioner SIIB - Import.

Further the order says that this needs to be circulated to all on priority. Which means that it has come into effect. Once again throwing into stark relief how the bureaucracy wants to sabotage the intent of the Government as it decides on what is manufacture and what is assembly. It is doubtful whether the top echelons of CBEC are aware of this order which not only wants duty to be paid on import of mobile phones, but impinges on the general principle of manufacturing in the country. Given that assembly is also part manufacture.

Take the example of Micromax, a genuine Indian success story. In June, the latest report from technology research firm Gartner Inc for worldwide mobile phones sales report for Q1, 2015 said that Micromax has a 1.8 per cent market share globally with 8,158,000 units sold. "During this quarter, local brands and Chinese vendors came out as the key winners in emerging markets," said Anshul Gupta, research director at Gartner. "These vendors recorded an average growth of 73 per cent in smartphone sales and saw their combined share go up from 38 per cent to 47 per cent during the first quarter of 2015." While it started its India manufacturing operations of mobile phones at its Rudraprayag facility in Uttarakhand last year, the overwhelming bulk of its handsets come from China using the cost and raw material arbitrage model. Shenzen is where a host of manufacturers have set up shop including Karbon, Maxx, Intex and Lava. When Micromax started out in 2008, it simply rebadged Chinese handsets and sold them in India. To attain the next level, it began to pursue a mix and match strategy where it got third party manufacturers to build its product portfolio in China and other countries, sourced components from abroad and manufactured some of the newer lines in India. Assembly continues to take place in India majorly, now what happens with this new Customs order, it obviously acts as a deterrent to even manufacture and assemble in India model because duty will have to be forked out.

In any case, top Indian manufacturers who have leveraged this model in the past have been forced to shift to India. The impetus for the move is rising production costs in China, which have increased by 20 per cent recently. Additionally, the Indian government introduced tariffs for electronic goods imported into India--with a 7 per cent tax on handsets priced above US$33 (2,000 rupees), compared to locally manufactured products which are taxed just 1 per cent. While Micromax is now planning to increase the output from its Indian facility, Maxx and Intex are setting up facilities in Uttarakhand and Himachal. Karbonn meanwhile is clear that manufacturing in India is not a viable alternative because of an absence of an ecosystem and parts. Number two Indian mobile manufacturer, Karbonn Mobile's director Sashin Devsare is on record as saying, "There has to be an ecosystem first for local manufacturing to be feasible." So in the interim, they have to deal with this double taxation. First the budget and now this new Customs order.

This comes against the backdrop of an aggressive government which is trying to get its Make in India programme to fly. In order to achieve first base with this, it is planning to organise a 'Make in India Week 2016' from February 13-18 in Mumbai with an aim to promote India as an investment destination and increase its share in global FDI. "The objective of the Make in India Week is to showcase opportunities to promote India as a preferred investment destination in the source markets overseas and to increase India's share of global FDIC besides highlighting India's manufacturing capability," the DIPP had said.

Till the energy to manufacture in India doesn't percolate down to the last man standing in the bureaucracy, India's dream of turning into a cost efficient manufacturing hub compared to China will always remain flawed. With so many clearances required to build a manufacturing unit, why should Indian entrepreneurs manufacture if the government doesn't provide the necessary comfort level on the ground. And as we know this begins with acquiring land, the single biggest obstacle with the new land bill in force, something that the BJP was unable to over turn.