Expectations Of The Manufacturing Sector
The manufacturing sector has played a transformational role in the growth ambitions of developing economies, given its high multiplier effect on employment and growth. With a vision to increase the contribution of the manufacturing sector in India to 25 per cent of the GDP by 2025, there has been an attempt to position manufacturing as the focal point of initiatives such as the Make in India program. However, in contrast to the dominance of the manufacturing sector in the growth trajectory of other emerging economies, manufacturing in India has not yet reached its true potential. Limited access to low cost project finance, complicated regulatory paperwork, dearth of skilled human resources and dependence on imported technology are some of the causes ofstifling manufacturing growth. Manufacturing as a percentage of GDP has dropped from 15.5 per cent in 2015 to 13.6 per cent in 2019. Annual growth in the sector since 2015 has not met the 12-14 per cent expectation of the Make in India program.
In the backdrop of a new Atmanirbhar Bharat aspiration, manufacturing may be a centrepiece for discussion in the upcoming budget. The sector pins its hopes on various announcements from the budget to pave the way for a transition to a self-reliant India.
The Covid-19 pandemic ravaged the economy and brought its manufacturing engines to a temporary halt. There have been significant disruptions to supply chains, increased uncertainty in the supply of raw material and volatility in customer demand. Industries in India have shown resilience in the face of adversity and led the economic recovery for the country.
Amidst other stimuli announced by the government, a focused stimulus in the form of production- linked incentives (PLIs) worth nearly INR 1.45 trillion was announced for 10 sectors. This stimulus can prove to be a result-oriented step in the right direction for domestic manufacturing. The identified sectors under this scheme are poised to benefit at a time when companies are realigning their supply chains and reconfiguring their manufacturing footprint.
Addressing short term challenges and sector- specific issues
As the manufacturing sector stages its recovery from the lockdown, certain sectors are looking forward to the budget to meet their expectations. The automobile industry, which witnessed an increase in demand for certain segments in September-December 2020, has faced lacklustre growth due to the pandemic, shrinking liquidity of NBFCs and weak consumer sentiments. A reduction from the current 18 per cent GST levels to offset the price increase on BS-6 vehicles is expected to increase traction.
The industry is also expecting announcements around the scrappage policy which will ensure that older polluting vehicles are replaced by new compliant vehicles, resulting in cleaner air and demand for new vehicles. The metals industry, in a bid to become more cost-competitive, awaits a reduction in the customs duty on the purchase of integral raw materials such as metallurgical coal, graphite electrodes and coking coal, most of which the steel industry is dependent on imports.
The energy sector, which is seeing an increasing emphasis on renewable energy (RE) in the overall energy mix, expects announcements on support for building transmission infrastructure, long-term capital availability for RE projects and privatisation of stressed Discoms during the budget.
Ensuring long term competitiveness of the manufacturing sector
There is an opportunity to achieve long-term growth and competitiveness of the manufacturing sector with this budget. Some of the key areas which could be incentivised through the budget include:
a) Indigenous R&D capabilities: Offering capital subsidies to set up indigenous R&D facilities and providing tax incentives on capital expenditure utilised for R&D purposes could be a step in the right direction to reduce dependence on imported technology.
b) Ease of doing business: Improving ease of doing business for corporations through simplified land and labour laws and expansion of commercial dispute resolution institutions.
c) Manpower skilling: Growth in manufacturing necessitates an increase in demand for skilled labour and productivity-enhancing reforms. To meet the needs of up-skilling and re-skilling of our workforce, sustained increase in allocation toward various schemes under the Skill India Campaign such as the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) could be expected from the budget. Such reforms will increase productivity and provide technically qualified workforce.
d) Digitisation of manufacturing: Provide an incentive to manufacturing companies adopting digital interventions like IoT to increase their competitiveness by improving productivity and product quality.
In fulfilling India’s quest to become a global manufacturing powerhouse and propel the next engine of growth, the sector optimistically awaits the announcements in what is deemed to be a once in a lifetime budgetary exercise.
