I am very passionate about manufacturing. I come from IIM Bangalore, which is one of the most prestigious institutions in India. I am one from a batch of 140 students.
More than 100 of these are engineers, most of them from IITs. In the 25th year reunion of our batch recently, I started asking around as to what most of them were doing.
To my surprise, in the batch of 140 students, only five were from the manufacturing sector. Of those five, three including me happened to be in manufacturing because they have inherited a manufacturing enterprise.
It is a shameful misuse of talent available in the country. It led me to look at what ails our manufacturing.
For many years, the manufacturing sector was highly taxed. In fact, 20 per cent of the economy used to pay up to 80 per cent of the taxes. The manufacturing sector is easy to tax as there are some underlying goods.Further, factories are a concentrated source of tax.
Even today manufacturing (16 per cent of GDP ) pays more excise duty than services (60 per cent of GDP) pays service taxes. In addition, manufactured goods suffer taxes such as sales tax, octroi, entry tax, etc. Any sector which is taxed will not attract any resources including human resources.
Unfortunately, the story does not end here. In addition to the high taxation there is a huge burden put on manufacturing for all sorts of subsidies which the government wants to give. The prime example is electricity.
Electricity is the most important utility for manufacturing. There is 60 per cent additional charge put on industry so that farmers can get free power for agriculture.
Industry is definitely not against any form of subsidy, which is required in a developing economy. However, the burden of this subsidy should not fall on industry.
Electricity for manufacturing is like blood to a human body. Manufacturing cannot survive without reliable, good quality, reasonably priced electricity. We have a situation where consumers cannot get electricity at Rs 6 per unit and producers cannot sell electricity at Rs 3 a unit.
If we look at freight, it is more expensive to send material from Hyderabad to Delhi than sending it from Shanghai to New York. Once again, one of the major factors in this sector is cross-subsidy.
The railways want to subsidise passenger freight by more than 50 per cent. Unfortunately, the entire burden falls on freight traffic, which negatively impacts the industrial sector.
If we look at other sectors like water, land or even interest rates, just in order to fulfill some other objectives of the government we find that the industries are being unfairly treated. Unless all these anomalies are removed we cannot compete in the local market, leave alone go and conquer the global market.
Unfortunately, in the face of such heavy taxation, the only solution the government thinks is to give subsidy to industry.
Today, if any subsidy is to be collected from the government, an entrepreneur has to spend a lot of time and energy and expense to collect the money. A case in point is the incentives of the Andhra Pradesh government.
Most incentives are overdue for three to four years. Instead of giving any incentives or subsidies it is far better to reduce taxation in one of the sectors mentioned above.
In February, at the time of bifurcation, a special package was announced for Andhra Pradesh. Unfortunately, there are a lot of rumors as what exactly this package will entail.
The Andhra Pradesh government believes that it will get an excise duty waiver for all new units set up in the state. An excise duty benefit will make any new unit set up elsewhere uncompetitive.
Hence, all investors are awaiting clarification before making an investment decision and all investment decisions are frozen. If any single unit decides to delay an investment it does not impact the economy. However, today a whole host of industries are in a wait-and-watch mode and this can have a very negative impact on overall growth.
The Union government needs to immediately get this uncertainty out of the way so that people can decide to put up their investments either in Andhra Pradesh or elsewhere depending on the viability of the package. This is most important to unleash fresh investments in the economy.
I am an eternal optimist and I see great days ahead for manufacturing. The essential ingredients are all there, probably at the best combination in the last 70 years. Today, we have the potential for a huge demand simply because our base is very low. If we take any manufactured product, our production and consumption is one-eighth that of China.
If we assume that we will reach where China is today in 20 years we require a compound growth rate of 11 per cent per annum. Secondly, we have the human resources to fulfill this requirement.
The availability of skilled manpower at a relatively low cost is a competitive benefit which will last for at least two decades, long enough to fulfill our manufacturing potential. We can fulfill our prime minister's dream of Made in India a reality if we can do a few minor course corrections.
(Devendra Surana is Managing Director of Bhagyanagar India, a Rs 250 crore company that makes telephone cables and copper products. He is a member of the FICCI national executive committee and a former president of the Andhra Pradesh Chambers of Commerce and Industries.)
The author's twitter handle is @deven1965