REBUILD INDIA - The Role of Manufacturing Sector.

By 2030, India is expected to be 3rd largest consumers of the world with US$ 6 trillion consumption expenditure. This is expected to drive manufacturing demand in the country. Chandranath Dey peeks into the details.

The global economy has probably never gone through so much of a stress prior to the present pandemic. Like the rest of the world, India shown green shoots of recovery. We can witness the recovery of the economy through improved manufacturing indices (PMI index measured 58.9 in October 2020 recovering from lows of 27.4 in April when the GDP contracted by 23.9%), consumer expenditure, sales of consumables, etc. (e-way bills up almost by 19 per cent, railway freight up by almost 14 per cent in October and GST collection tops Rs 1 lakh crore, 1st time since February.)

As every challenge opens numerous opportunities, this pandemic has also catalysed growth in the manufacturing sector and given India a unique opportunity of stepping into the world stage as a formidable manufacturing destination. An opportunity to 'Rebuild Manufacturing' in the country, ground up.

Business restructuring of global supply chains, emphasis on non-linear consideration of global trade, China+1 / China+2 strategy,  strengthening of domestics manufacturing has put India on a 'Double Engine Rebuild Path' in manufacturing primarily driven by the following:

What is important to understand is that this time, there has been a lot of research and reflection to understand the sectoral dominance, strengths, weakness & procedural hurdles in each sector and some well thought out initiatives to remove those hurdles has been introduced with honest approach to harness the strengths of the country and unlock the opportunities that lies ahead.

Challenges

The country has the firepower to play a pivotal role as a manufacturing destination catering not only to its domestic market but with much more significant and higher degree of influence in the world market. To attain that role, we must recognise the challenges and roadblocks head-on. While a lot of initiatives were taken to address these, we take a comprehensive look at what has been done and how that will make a difference and what requires further attention. While the demand in the industrial space seems to be robust in the near to medium term, there are two major areas which need improvements for growth of the sectors at a ground level.

Challenge #1: Doing Business: Policy and Incentives

While things like policy hindrances, taxes, incentives etc. has been historically been one of the biggest challenges in India, there has been significant efforts to clear some of those.

India has jumped 79 ranks in The World Bank's 'Ease of Doing Business' rankings during the period 2015-2020. India has repealed over 1,000 regulations in the last five years to reduce the compliance burden on investors. Several state governments have taken up different initiatives for ultra-fast approvals; some of the examples are:

- TS iPass: Telangana government liable to approve based on self-disclosures within 30 days of submission or it is considered deemed approved

- Karnataka government is allowing industries to commence work without having to wait for any statutory clearances for the first three years

- Tamil Nadu government has created a cross-functional team (government, industrial bodies, country representatives, etc.) to form Manufacturing Task Force

Corporate Tax: Lowest corporate tax of 17.16% amongst MITI-V countries for new manufacturing units operationalizing before 31st March 2023 to attract investments in the country. This has increased profitability for the companies building their new plants in India.

Production-Linked Incentive (PLI) Scheme: Shift of focus from capital investment based incentives to Production Linked Incentive (PLI) for specific sectors can go a long way to make India a manufacturing hub of the future. Government introduced the PLI scheme for electronics, pharmaceutical and medical equipment. This scheme is output-oriented through which manufacturers get cash incentives over 5-7 years for their production. The government is also considering extending the scheme to 7-8 more sectors to promote manufacturing on a large scale.

The government is further delving into the policy subject to further relax bureaucratic red tapes and overhaul the 'ease of doing business' hurdles by bringing in several initiatives including and not limited to fair assessment on a competitive environment of state's performance in attracting investments within the stipulated time frame. 

Challenge #2: Land acquisition & Approvals

Easing out Land Acquisition Hurdles: Considering land in India is a state subject, and land acquisition remains a concern in several locations due to local norms like 'ULCRA' or 'Zoning Restrictions' which provided significant hindrances for acquisition, aggregation and conversion of land. However, there has been some conscious efforts from central and state governments to ease out acquisition hurdles i.e.

- Identify land parcels with several central and state government authorities for industrial purposes

- Fast track and time-bound zoning conversion of land for manufacturing purpose

Ease of Approvals: There are several states and central government agencies that provide pre-establishment approvals & pre-operation approvals. Lack of coordination of different departments and multiple documentary requirements, is historically creating delays in project approvals. Recent steps to ease out approvals are however noteworthy;

- Relax bureaucratic red tapes and overhaul the 'ease of doing business' hurdles by bringing in several initiatives including and not limited to fair assessment on a competitive environment of state's performance in attracting investments within the stipulated time frame.

- Several states coming out with automatic / deemed approval route based on self-disclosures within 30 days of submission or are considered as deemed to be approved.

- Central government working on 'Single Window Clearance System.'

- States offer permissions through online platforms with proper tracking mechanisms

- Niti Aayog has recently released a draft model Act and rules for states on conclusive land titling intending to reduce land-related litigations and ease the land acquisition process for infrastructure projects.

Role of Technology

Addressing the major challenges and presenting a transparent structure has become paramount to get investor's confidence. Technology and its adoption has been key to such endeavours.

Internet of Things (IoT): IoT has become a mainstay medium to reach consumers that have triggered the e-commerce sector to attain newer heights. Indian online grocery achieved 76% jump (US$ 3.19 billion) in 2020 compared to previous year.

GIS Land Bank: Government has launched national GIS-enabled land bank system to provide information on industrial land. The information available on the system will include drainage, forest, key raw material heat maps (horticulture, agricultural, mineral layers), multi-layer of connectivity etc. It will help investors in getting real-time information about the availability of industrial land and resources.

Automation: India has been witnessing rapid growth in the adoption of manufacturing automation technologies. In 2018, India reached 4,771 industrial robot sales, an increase of 39% compared to the previous year as per World Robotics, 2019. This trend is expected to be accelerated due to the manual operational hurdles created by Covid-19.

Role of MSMEs

Measures focused on reviving MSME (Micro, Small and Medium enterprises) which were severely hit during the pandemic with impact on their workforce, working capital, growth capital and plans include:

- The definition of MSME was revised by raising the investment limit, and an additional criterion of turnover was introduced. The service sector was also brought under MSME.

- The government announced plans to replace trade fairs and exhibitions with e-market linkages to promote it.

- Restrictions in global tendering in government procurement tenders up to INR 200 crore (US$ 28.37 million) thus opening up more opportunities for smaller domestic manufacturers.

- Government has also created emergency working capital of INR 3 lakh crore (US$ 42.56 billion) for businesses including MSMEs.

- A provision of INR 20,000 crore (US$ 2.84 billion) was made for either NPA or stressed MSMEs

- To help MSMEs increase size as well as capacity, the government announced to set Fund of Funds (FoF) with an amount of INR 10,000 crore (US$ 1.42 billion) to provide equity funding support for MSMEs.

In addition to the above reforms announced by the Indian government, following policy changes, according to JLL, can also ensure that MSMEs are seamlessly brought back into the system:

- Offering rent-free periods / rental holidays to MSMEs working out of government lands or Industrial Development Corporation (IDC) premises.

- Offering capital influx or soft loans (0% interest) to MSMEs with at least 6-9 months of the moratorium period.

- Offering tax holidays wherever possible.

- Increase the percentage of sourcing of government essential and non-essential commodities from MSMEs to provide them with immediate opportunities.

Flex-Manufacturing Opportunity

On the industrial / light manufacturing front, built manufacturing spaces is expected to grow in near to medium term due to the following advantages of which include;

- Higher CAPEX Savings: Conversion of CAPEX (land & building) to OPEX (rent) | rented factories for lease tenure of 9 years and above

- Ready-Built Factories on Rent - Ready- to- occupy built industrial space for faster entry.

- Higher Specifications: 13 Mts.+ height | 6 MT/sq m floor strength | plinth – 1.2 mts. | Provision for mounting cranes.

- Built-to-Suit: As per tenant specifications in 6 – 9 months. Many organised developers in the country can provide global quality space

- Ultra-fast Approvals: Pre-approved for most industrial investments | non-polluting industries relaxed from several permissions.

Steps that can Further India's Investment Scenario

One key area that needs attention to attract foreign manufacturers is currency stability. The emerging-market economies have relatively low currency swings. However, India's currency swings are far greater than say China's.  The Indian exchange rate was INR 43.55 to the dollar in January 2000 and had weakened to INR 74.54 by October 2020, which means Indian rupee weakened by 71%. Currency volatility dramatically increases business risk. In contrast, a stable currency reduces risk and increases a company's investment, sales, profits, and brand value. The impact of the currency swings outweighs
the effect of an increase in sales revenue. Minimum risk attracts maximum investment, and it is this that India needs to focus along with other reforms to attract more investments far more than it already successfully has been.

An Outlook of the Manufacturing Sector in India

While Covid 19 has globally impacted the manufacturing sector, in India, this pandemic has also catalyzed the growth of the industry in a route which is much sturdier and more sustainable. In a recent Morgan Stanley research titled 'India’s Manufacturing – At an Inflection Point', it is estimated that India's manufacturing as a share of GDP will rise from approximately 15% of GDP currently to 20% by F2030, implying that the size of manufacturing rises from US$400bn currently to approximately US$1,175bn by F2030.

India is among the largest consumer market in the world. By 2030, India is expected to be
3rd largest (currently 6th largest) consumers of the world with US$ 6 Tn. consumption expenditure. This is expected to drive manufacturing demand in the country. India has a unique opportunity in leveraging its vast pool of skilled resources, competitive costing and developed eco-system for select sectors to get ahead in the global supply chain reconfiguration race. Indian manufacturing economy has an incredible opportunity to triple itself in 3 years.

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