National Capital Goods Policy, 2016

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 around 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 in Capital Goods Sector

• 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.

National Capital Goods Policy, 2016

To unlock the potential for this promising sector and to establish India as a global manufacturing powerhouse under Make in India initiative, Government has unveiled a National Capital Goods Policy 2016. A draft policy was released earlier in November 2015.

The policy seeks to address some of the key issues including availability of finance, raw material, productivity, quality and environment friendly manufacturing practices, innovation and technology, creating domestic demand and promoting exports.

Key features of Policy

Increasing Exports

The National Capital Goods Policy 2016 aims at increasing exports to 40 percent of production, from the current 27 percent.

Push to Domestic Production

The policy aims to increase the share or domestic production in the country’s demand to 80 percent from 60 per cent, potentially making India net exporter of capital goods.

Technological Improvement

The policy aims to facilitate improvement in technology depth across subsectors, increase skill availability, ensure mandatory standards and promote growth and capacity building of MSMEs.

HIEMDA Scheme

The policy seeks to enhance Indian made capital goods export through a ‘Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)’.

Increased Budgetary Allocation

This includes strengthening existing scheme of DHI (Department of Heavy Industry) on enhancement of competitiveness of Capital Goods sector by increasing budgetary allocation.

Technology Development Fund

The policy advocates launching a Technology Development Fund under the public-private partnership (PPP) model to fund technology acquisition, transfer of technology, purchase or JPRs, designs and drawings as well as commercialisation of such capital goods technologies.

Integration with subsectors

The policy looks to integrate key capital goods sub-sectors. It also seeks to make standards mandatory in order to reduce sub-standard machine imports and provide opportunity to local manufacturing units and launch scheme of skill development for Capital Goods sector.

Start-up Center

The policy also suggests creation of a ‘Start-up Center’ for capital goods sector’ to provide an array of technical, business and financial support sources and services to promising start-ups in manufacturing and services.

Standardization

The policy also calls for mandatory standardisation, which includes defining minim urn acceptable standards for the industry and adoption of International Organization for Standardization norms.

Comment

This is for the first time that government in India has come up with a national policy for capital goods sector. The implementation of the above recommendations both in letter and spirit may usher a new phase in capital goods industry in India.