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Manufacturing: How the Budget could provide a boost to growth

With the new economic reforms and various initiatives launched by the government, the industry has higher expectations from the Union Budget this year than ever before.

S.V. Sukumar and Rajeev Singh         Last Updated: February 17, 2016  | 13:39 IST

Rajeev Singh, Partner, Strategy and Operations, KPMG in India
S.V. Sukumar, Partner, Strategy and Operations, KPMG in India
With the new economic reforms and various initiatives launched by the government, the industry has higher expectations from the Union Budget this year than ever before. However, the general mood in the manufacturing sector is certainly low, if not completely down. The sector was comparatively more enthusiastic last year on account of several encouraging policy announcements, than this year. They were directionally poised towards greater reforms. The 'Make in India' campaign was seen as a big booster to the manufacturing industries, aiming to increase the contribution from manufacturing sectors from 15 per cent to 25 per cent of GDP.

One year down the line, there is hardly any noticeable improvement in the business environment for the manufacturing sector. In fact, the uncertainties and ambiguities have significantly increased.

Though the reported GDP figures are comparatively better, the more direct indicators such as unutilised capacities as well as the non-performing assets (NPAs) of quite a few state-run and private banks, many of which are assets in manufacturing industries, paint a completely different picture.

While the softening commodity prices have helped a few industries control their input cost, for many others, any gains out of this is more than negated by the falling prices of their output. Fierce competition on the price front, not just from domestic competitors but also from other foreign countries, specifically from China has only been making things worse.

The expectations of the manufacturing sector from Union Budget 2016 are primarily based on this backdrop.

Despite several challenges, with the roll out of various initiatives like 'Make in India', 'Start up India Stand up India', 'Digital India', etc, the expectations are high, even globally.

Hence, in this Budget, the government should create an advantage for the manufacturing sector from a long-term perspective, while subsequently addressing the short-term challenges.

Incentivise investment from domestic players
The government appears to be making persistent efforts to attract investments from international players, by relaxing the FDI policy and norms. However, it is important that due attention is also paid on domestic investors who seem be drifting away. The government should introduce lucrative policies to generate interest in domestic players as well.

Create common facilities for enabling industry cluster
There is merit in the government investing to create common facilities such as utilities, effluent treatment plants, etc. thereby helping all those who use such facilities to achieve economies of scale.

Accelerate the pace of creating infrastructure facilities
Despite the growing investments in building better infrastructure like roads, ports, etc. it continues to be one of the biggest bottlenecks for the manufacturing sector, even in a subdued business environment. The government should draft some more innovative ideas to attract Public-Private-Partnership (PPP) to accelerate the pace of creation. Apart from policies aiming at 'ease of doing business', this aspect may become one of the most critical bottlenecks.

Enabling manufacturing industries to remain competitive
It is important for the government to facilitate the Indian manufacturing sector to remain competitive in the face of fierce international competition, owing to a global slowdown and resultant excess capacities in other countries. However, it shall be a fine balancing act as the falling prices also help downstream industries to keep their cost low.

Incentivising innovation in manufacturing
It is important to realise that India cannot aim to be a manufacturing hub with the benign labour cost as it's the only advantage. India should be perceived as a 'value adding manufacturing hub' for the world. Some policy to propel government and private investment in innovation and R&D is a must.

Fast track reforms
The government should fast track the already initiated reforms like Constitution Amendment Bill Goods and Services Tax (GST) labour reforms, etc. so that they can help attract new investments and also current domestic and foreign players to be more efficient and productive.

(The authors are both Partners, Strategy and Operations, KPMG in India. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.)


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