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The Industrial Policy, 1991, was one of the boldest initiatives a government could ever take under a very difficult economic situation; significantly dismantling the license raj and opening the door for foreign direct investment (FDI) heralded a major inflection point in India’s economic landscape.
More than three decades after that comprehensive overhaul, the world is now very different. Recent press reports indicate that an Industrial Policy 2023 (NIP'23) is in the works and is likely to focus on new industries, carbon neutrality, and endeavour to make India a major manufacturing hub. The expectation is that the NIP'23 will align its focus on the world we are in today.
Some interesting statistics
Services contribute 54 per cent of India’s gross domestic product (GDP), whereas manufacturing has stagnated at around 16 per cent. Agriculture employs about 49 per cent of the workforce, but it contributes only 15 per cent of GDP. On the other hand, between 1991 and 2021, the share of industrial employment has gone up from 15 per cent to 25 per cent.
A NITI Aayog document "Strategy for New India @ 75" lists several initiatives to increase the manufacturing sector's contribution as a percentage of GDP, but has mentioned various constraints, including regulatory uncertainty, investment, technology adoption and challenges to Ease of Doing Business (EODB).
In the above context, NIP'23 needs to provide a pathway for the manufacturing sector by bringing about holistic reforms, including linkages in areas such as infrastructure, logistics, warehousing, and power. There needs to be a combination of core and semi-core enablers to boost manufacturing, though the complexities in making that happen are enormous.
NIP'23: Core enablers
There are a large number of issues that need to be addressed for acceleration in India’s manufacturing base, the core areas being:
Direct incentives: The government introduced production-linked incentive (PLI) scheme across key sectors to create manufacturing champions for an Atmanirbhar Bharat. One assumes that the NIP'23 will identify products where the PLI should be extended, keeping in mind the China + 1 opportunity.
While a lower tax rate of approximately 17 per cent applies to new manufacturing companies, it should be extended to new manufacturing units as well, to curb complexities. The concessional rate of tax is available only if manufacturing has commenced by March 2024, however, given the required thrust on manufacturing, NIP'23 could seek to extend the date by a 2-3-year period.
Land resources: At a broader level, the availability of large tracts of land with clear titles is a major constraint in setting up manufacturing units. Additionally, India’s land record digitisation initiative has some major lacuna, and physical mode of registration is extremely cumbersome.
Logistics and warehousing: The National Logistics Policy, 2022, has laid down the reduction of the significant cost in logistics as its biggest objective and outlined an action plan for doing so; including improvement in transportation, inventory management, regulations, and integrated digital logistics systems. Given the interconnect between logistics and industry, one hopes that the NIP'23 is interlinked with these initiatives.
Employment and skill development: An increase in automation will likely lead to a reduction in the workforce and thus better quality and level of sophistication on the shopfloor. There is a huge lack of skilled employees, with its root cause lying in the functioning of the educational sector. While the National Education Policy, 2020, and various other skill development initiatives are a refreshing take on the education sector, the inaccessibility of technology to the economically backward class impairs educational outreach, especially in a post-coronavirus world.
Certain other issues and areas, including the ones brought out in the Ficci-Mckinsey Report titled ‘India’s Century Achieving Sustainable Inclusive Growth’, 2022, include:
India’s manufacturing sector has been slow to transition to advanced technology, particularly in sectors such as electronics, semi-conductors, and renewable energy components;
Certain goods have quality issues and lower brand equity than those made by peer economies;
Sectors are burdened by comparatively high cost of compliance, being an EODB issue;
Manufacturing units are usually set-up in areas at a distance from cities or towns, hence regional development of such areas to provide incentives to employees to relocate is important;
There is a huge disparity between India’s states - 40 per cent of net value added is contributed by Maharashtra, Gujarat, and Tamil Nadu;
Half of the states do not have any operational special economic zones.
The global landscape today is highly complex and volatile. Having said this, from an Indian standpoint, China + 1 is a significant opportunity. Considering India’s relatively high unemployment, the manufacturing sector is crucial to provide employment to a country housing 1/7th of the world’s humanity. In this context, one hopes that the NIP’23 will have some meaningful initiatives to enable India to realise its vast potential.
The author is founder, Katalyst Advisors, a boutique structuring and advisory firm, and former Managing partner (West) and Joint tax leader of PWC India.