The Prime Minister's first major address on economy to India Inc. at the Confederation of Indian Industry's (CII) annual session recently exudes confidence in the country's ability to get its growth back on track.
He urged the Indian industry to invest in robust local supply chains. Championing the call for 'Made in India, made for the World', the prime minister stressed on "sector-wise structural reforms" to revive growth.
In this regard, there is an urgent need to address some major challenges like the high logistics cost (double of international average), low R&D expenditure, skill mapping as well as quality and cost of power for the manufacturing industry. Further, PM Modi envisioned a bold list of five 'I's - Intent, Inclusion, Investment, Infrastructure, Innovation as key pillars for the revival of economic growth.
The COVID-19 shock comes at a time when we have been experiencing an economic slowdown. GDP growth in January-March 2020 quarter slowed to 3.1% leading to a full year FY20 GDP growth of 4.2%, an eleven-year low.
Three consecutive quarters of contraction in the manufacturing sector coupled with de-growth in the past two quarters in the construction sector have primarily contributed to lower employment generation.
These sectors have strong backward and forward linkages (2-3 times) with other sectors in the economy, thus the extent of their slowdown has broader implications and amplifications for the rest of the economy.
The 'Atma Nirbhar' economic stimulus package, to the tune of 10% of the GDP (Rs 21 lakh crores) cushions the economy to a certain extent, but certainly there is more than can and should be done until the structural reforms are implemented.
Therefore, in addition to the five 'I's the prime minister has outlined, a critical 'I' that needs to be factored in is to 'I'dentify reforms that could be 'I'mmediately undertaken.
This is particularly critical in the current global context. A World Trade Organization (WTO) report published in December 2019 found that trade-restrictive measures have been rising for the past two years as the US-China trade war escalated and are currently at historically high levels.
In a post-COVID-19 world, this is expected to rise further as governments deal with massive unemployment in the wake of this unprecedented crisis across the globe.
These immediate action points will complement some of the measures that the authors had highlighted in a previous article.
First, to raise the domestic competitiveness of our industries' pricing factors that make them uncompetitive with respect to the foreign players should be identified and corrected. For example - for sectors like steel and aluminum, taxes and levies in the form of electricity duty, taxes on fuel, clean energy cess, royalty, renewable purchase obligation (RPO), raise the cost of production in the range of 15-20% giving imports an edge over local producers.
These non-creditable taxes result in an increase in the cost of production of domestic goods, placing them on an unequal footing vis-a-vis imports also rendering our exports uncompetitive. To mitigate this, a border adjustment tax (BAT) on imports can be levied to offset the impact of these internal taxes on domestic producers.
Second, export promotion schemes like the Export from India Scheme (MEIS) are expected to be replaced by the Remission of Duties and Taxes on Exported Products (RoDTEP). At present, GST taxes and import/customs duties for inputs for exports are either exempted or refunded.
However, certain taxes/duties/levies outside the ambit of GST are not refunded such as VAT on fuel used in transportation, mandi tax, duty on electricity used during manufacturing, etc. These would be covered for reimbursement under the RoDTEP Scheme.
The refunds under the RoDTEP scheme would be a step towards the "zero-rating" of exports. The Cabinet Committee on Economic Affairs (CCEA), chaired by PM Modi, has given its approval to introduce the scheme.
This scheme is going to give a boost to the domestic industry and Indian exports, providing a level playing field to Indian producers in the International market so that domestic taxes/duties are not exported.
In order for the impact to be revenue-neutral, the government could use the receivables from the BAT for RoDTEP scheme. The implementation of RoDTEP needs to be expedited.
Third, another contentious issue is India's use of lesser duty rule (LDR) in the anti-dumping investigation. Commerce & Industry Minister Piyush Goyal has himself highlighted at various public platforms that this voluntary WTO measure should be removed from India's anti-dumping law.
As per LDR, if post-investigation the applicable injury margin (duty) comes out to be less than the dumping margin and is adequate enough to remove the injury to the domestic industry then the government will impose the injury margin instead of full dumping margin.
Countries like the US, China, and EU don't follow the lesser duty rule and impose the full dumping margin instead. This has proven to be detrimental for our domestic industry which faces stricter trade barriers compared to what foreign players face in India. Thus, it is time to review the LDR and consider removing it from our anti-dumping law.
Fourth, advocating self-reliance doesn't mean that we cut off from the world and become anti-free trade. It simply means that we identify a few key sectors where the country has the potential and capability to scale up and be globally competitive.
The idea is to build the entire value chain of that sector such that we are not dependent on others from raw material to semi-finished to finished goods. In these sectors, we promote exports as well.
In this regard, the Department for Promotion of Industry and Internal Trade (DPIIT) has already identified champion sectors to provide hand-holding to manufacturers in terms of policy announcements to boost competitiveness, simplification of procedures, encourage investment, etc.
Challenges related to these sectors have been identified and relevant solutions are being looked into. For other sectors where domestic capability is limited or cannot be scaled up, we should endeavor to forge strategic alliances with countries in the form of comprehensive bilateral free trade agreements (FTAs) keeping in mind complementarity of trade flows.
Research suggests that comprehensive trade agreements (not just goods but intellectual property rights, services, etc.) increase domestic and foreign value addition of intermediate goods and services exports by 0.48% and 0.38%, respectively. This, therefore, will also lead to higher global value chain integration.
Fifth, the simplest yet hardest part is to expedite the reforms announced recently on mining, MSMEs, and the real estate sector and ensure beneficiaries are quickly identified and bureaucratic hassles are minimised.
While the government needs to initially handhold the domestic industry towards self-reliance, the industry also needs to complement the government's efforts. This is the perfect time to rethink our new innovative product portfolio as consumer behavior is set to change in the post-COVID-19 world.
Post-COVID-19 consumers will be more willing to pay for safety features in products. For example- Amazon's 'Just Walk Out' technology to bill customers without queuing at the bill desk, masks with anti-viral coating, hands-free door openers, disinfectant machines for phones, and laptops are few examples of technological innovations in the face of a crisis.
Also, an innovative pricing strategy could also help firms tide through the recession. An excellent example is a policy of financing white goods (for ex-household appliances) introduced by General Electric post the Great Depression of 2008-09. The post-COVID-19 world would also see market consolidation and many companies selling off their non-core businesses to focus only on core areas.
The post-COVID-19 world is expected to be more inward-looking in the short run and the immediate priority will be to handhold the domestic industry. Polices are expected to be more reactive and vigilant to measures undertaken by different countries.
Thus, it is the perfect time for India to identify its own manufacturing capabilities and use this crisis as an opportunity to scale up and become a manufacturing hub. All in all, the post-COVID-19 world will be business as usual, neither for the industry nor for the government.
(V.K. Saraswat is Member, NITI AAYOG, Prachi Priya is a Mumbai-based economist, and Aniruddha Ghosh is a Ph.D. student at Johns Hopkins University. Views are personal.)
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