India is working at a hectic pace to woo MNCs planning to shift their production units from China in the post coronavirus world. The Finance Ministry has asked a select group of industry representatives to send "implementable" suggestions on an urgent basis to make the country a global manufacturing hub.
"Please clearly specify the problem areas at the central level and the state level so that the same can be addressed. Suggestions are needed urgently and it would be better if sent by Monday (April 20, 2020)," Minister of State for Finance and Corporate Affairs Anurag Thakur's office wrote to industry captains on Friday, April 17.
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The Commerce Ministry has identified sectors where China's share in total imports to India is significant. Official sources said that central government departments have already been working on steps to ensure some of the key items which could be sourced locally instead of importing them.
As cost of production in the country is high compared to production hubs in South East Asia, the government is working on various suggestions to make the local industry more competitive. One of the key proposals is to do away with cross-subsidisation in areas like power and rail freight so that power costs to industry can be globally competitive.
In order to keep electricity cost low for households, tariff for industrial connections is quite high. Similarly, rail freight rates are kept high to cross-subsidise passenger fares.
Free or subsidised power to farmers and households have added to the woes of electricity distribution companies (discoms) and power generators. At 21.04% transmission and distribution (T&D) losses - among the highest in the world - discoms lost Rs 33,365 crore in FY18.
In a report tabled in Parliament in December, 2019 on Indian Railways, national auditor CAG said that almost 95 per cent of the profit from freight traffic was utilised to compensate the loss of Rs 37,936.84 crore on operation of passenger and other coaching services of the Railways in FY17.
High cost apart, manufacturers have to deal with a myriad of frustrating regulatory clearances. While the government has accorded top priority to cutting procedural delays and come out with various corrective measures, a visible change on the ground is yet to be seen.
"While continuing with the exercise of Ease of Doing Business, much more focus has to be on state level. Therefore, it is important to rank the states on the basis of investor perception so that the reality comes out on how business environment is there," Nitti Aayog Vice Chairman Rajiv Kumar told BusinessToday.In.
He said that domestic manufacturers should be asked about the kind of regulatory and compliance hurdles they face and efforts be made to remove them.
On attracting foreign companies into manufacturing sector, Niti Aayog Chief said that there is need to take focussed and targeted approach.
"We need to identify particular companies, maybe 15-20 in number, and then go about it in mission mode to bring them into India. So far, we have not been adopting this targeted approach," Kumar said.
In its bid to make Indian manufacturing globally competitive, the Centre last year slashed effective corporate tax to 25.17% while those for new manufacturer it was brought down to 17.01%. The roll-out of goods and services tax (GST) has replaced multi-layered, complex indirect tax structure with a transparent and technology-driven tax regime.
"Income tax rate of around 17% for manufacturers is among the lowest across the globe, leave alone Asia. As far as GST is concerned, the mean rate is about 15 per cent which is also very low. With GST coming there is no uncertainty regarding indirect tax," said Vivek Jalan, Partner, Tax Connect Advisory Services.
He, however, noted that inclusion of petroleum products and real estate in GST would be seen very positively by the investors.
Modi government has promoted India as a manufacturing hub ever since he came to power in May, 2014 by launching the flagship Make in India initiative but it has met with very limited success. Even as a trade war has ensued between US and China, no major production shifts have happened towards India. But with changing global equations in the wake of coronavirus, political leaders and economists believe India will benefit.
Japan's announcement that it will help its firms in shifting their production units from China has added to the expectations. Ruling BJP's National Spokesperson (Economic Affairs) Gopal Krishna Agarwal is hopeful that companies looking to shift production base from China would find India attractive but suggested that government needed to address the two key issues of high land cost and contract enforcement.
"These two issues need to be immediately addressed to give boost to the industry," Agarwal said.
Meanwhile, the government has reiterated that it will continue to focus on import substitution and go whole hog in promoting local manufacturing.
In an interaction with entrepreneurs last week, Minister for Road Transport & Highways and MSMEs Nitin Gadkari urged them to encash on the current situation and work towards reducing country's import dependence.
Noting that various costs of production were high in the country, Gadkari said that one way to reduce this was by raising the volume without compromising on production.
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