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India poised to be a global manufacturing hub
An important aspect of “Viksit Bharat” is unlocking the potential of domestic manufacturing industry. For this, the government has envisaged an ambitious plan to make India as a global manufacturing hub. This in turn will help in creating meaningful employment opportunities in the country. To this effect, the government has formulated several policies including Make in India, Production Linked Incentive (PLI) scheme, which have been complemented by enhanced transparency in regulatory processes ensuring easing compliance burden on the industry.Success story: Electronics
The success of the electronics sector is a case in point. This sector has been touted as the poster child for the successful implementation of the PLI Scheme for Electronics. The scheme has been credited with attracting investments from big foreign companies leading to higher exports and employment generation. India has now become the second largest mobile phone manufacturer in the world. Building on this, the government also announced a similar scheme for boosting domestic production of semiconductors. It will be prudent for the government to also consider adding more sectors under the ambit of the PLI scheme. Specifically, there is merit in exploring a PLI scheme for the MSME sector. This is pertinent as MSMEs operate in sectors such as textiles, leather products, handicrafts etc. which have export potential. This will, of course, must be supplemented by facilitating policies.India and global value chains: Myth or Reality?
Another aspect of unlocking India’s manufacturing potential is to promote India’s participation in global value chains (GVCs). Policy support in the form of Atmanirbhar Bharat and PLI needs to be accompanied by a long overdue review of the customs duties structure. This has been a constant demand of domestic industry, particularly as India has progressively signed FTAs with more trade partners. The concession in tariff rates under these agreements have in some cases led to a case of inverted duty structure or predatory dumping practices, which impinges on the growth of the domestic manufacturing industry. There is also a growing recognition that tariff rates in India are considerably higher than other major developing countries which hampers India’s integration into global value chains (GVCs). Elevated duties on imports escalates the cost of imported inputs, which also feeds into the price of the finished final product, making it uncompetitive.
Customs duties: Overhaul on the cards
Customs duties are a source of revenue for the government, and tweaks in these rates are often a part of the Budget announcement. However, any increase or decrease in customs duty rate reflects the government’s aim to discourage or encourage the import of a particular product. High tariffs on certain products are aimed at protecting the domestic manufacturing industry from cheaper imports. This is based on the infant industry argument, which has its roots in the industrialization policy in the 1990s.China+1
India’s manufacturing sector is on the cusp of a revival as the World is increasingly looking at a China+1 strategy. To leverage this, and develop India into a global manufacturing hub, the government needs to continue with its holistic approach encompassing policy support through PLI, lower corporate tax rates, custom duty changes along with scaling up enabling infrastructure.India has a significant advantage over other countries due to a large pool of skilled workers, along with a thriving research and development sector. The success of electronics manufacturing can be replicated in other sectors such as automotive, pharmaceuticals and solar equipment, which will be key in establishing India as a global manufacturing hub. This will help in creating a booming manufacturing ecosystem which not only caters to domestic industries, but also places India on a global scale.
As the country envisages to herald a manufacturing renaissance, the upcoming Budget will play a key role in making this dream into a reality. The road ahead will require steady commitment, strategic policies and staunch execution. Focus on fiscal prudence, expansion of PLI scheme and greater participation in global value chains will be the building blocks of a new transformative era for the Indian manufacturing sector.
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Subscribe to The Economic Times Prime and read the ET ePaper online.