Draft National Capital Goods Policy 2015

The Capital Goods industry is one of the key contributors to value added manufacturing in India. Capital goods include plant machinery, equipment and accessories required for manufacture or production of goods or for rendering services, either directly or indirectly. Currently, the Capital goods sector is contributing 12% to manufacturing sector which translates to 2% of GDP. It employs around 15 Lakh people across various sub-sectors. The sector also plays an important role in improving India’s trade balance.

Problems in Capital Goods industry

India’s 1956 industrial policy was in favour of domestic production of capital goods particularly machine tools. This created a strong capital goods sector in India. But the growth was not sustained on continuous basis because of the protection and support from the government was incomplete. The policy from 1980’s started dismantling the structure of import protection and public sector investment in the capital goods industry. This led to the weakening of the domestic industry and growth of the imports and foreign firm production in India.

For last many years, the capital goods sector is witnessing slow growth. The growth over the past 3 years has been a mere 0.3% annually. Imports contribute around 45% of capital goods demand and domestic capacity utilisation across its sub-sectors is only around 60-70%. Local manufacturers have not been able to effectively tap the global market. Delay in implementation of approved projects retarded the growth of the sector.

Main issues

• Inadequate growth of domestic market for capital goods.
• Falling share of domestic production in total domestic consumption and growth of more imports. This can be attributed to the underutilisation of domestic capacity and slowdown in domestic capacity creation.
• India failed to make a mark in the global market for capital goods, with its share in global exports placed at less than one per cent.
• There is inadequate capacity expansion in infrastructure and power industries, and institutional issues such as inadequate inter-ministerial coordination.
• Contractual clauses in public procurement policy inhibited the domestic production and have a “limited positive bias” in favour of domestic value addition.
• Permission to import second-hand machinery discouraged the domestic production. The provision of a zero import duty concession for several items imported under the “project imports” category has put the domestic industry at a disadvantage position.
• Trade agreements (FTAs) with several countries that have a comparative advantage over India in capital goods production as opposed to those with respect to which India has strong export potential.
• “Skewed tax and duty structure” has adversely affected the cost structure and competitiveness of the industry. In certain category of imports “inverted duty structure” is still prevalent. Inverted duty structure means lower import duty on finished products than on raw materials and components.
• Low technology depth is a critical problem with current levels ranging “from basic to intermediate”. This is the result of policy failure; with R&D spend in India, at 0.9 per cent of GDP which is low when compared to countries like South Korea and Japan.
• In India Capital goods industry is fragmented with many small units operating at uneconomic scale capacities. This made India uncompetitive in global market.
• Other issues are related low level of skill development and non-availability of long term finance to the sector.

Draft National Capital Goods Policy of India 2015

To unlock the potential for this promising sector and to establish India as a global manufacturing powerhouse, the Department of Heavy Industry, in consultation with industry bodies has drafted a National Policy on Capital Goods. It is the first time that a policy on Capital Goods is being framed.

Salient Proposals

• To improve the cost competitiveness of the sector with a long term stable and rationalized tax and duty structure.
• Expanding the capital goods market by drafting a comprehensive public procurement policy with amended qualifying criteria and introducing special provisions in contracts for domestic value addition.
• Promotion of development of new technologies through indigenous sources.
• Providing Technology Upgrade Fund Support across all capital goods sub-sectors.
• Creating a level playing field vis-à-vis imports by restricting imports of second hand machinery and mitigating duty disadvantages.
• Supporting availability of short and long term of financing at competitive rates to capital goods manufacturers.
• Enabling skill development by setting up sub-sector specific Skill Councils. Enabling higher participation of India in standard creation and developing support system to improve compliance.
• Developing manufacturing clusters with shared facilities especially for SMEs.

The implementation of the above recommendations both in letter and spirit may usher a new phase in capital goods industry in India.