Economic growth in India over the years has been propelled by growth in the services sector. Today, the sector contributes the highest to India's GDP. In contrast, the manufacturing sector, despite its higher multiplier effect on employment and growth, has not been able to serve as a powerhouse for the country's growth engines.
The sector has faced several headwinds in the past which have stifled its growth and contribution to GDP. Regulatory burden, limited access to low-cost finance, under-developed skill set of the workforce, and digital and physical infrastructure woes have masked India's true manufacturing potential.
Recent government policies and initiatives such as the National Manufacturing Policy, Make in India Programme, Skill India, and the more recent Atmanirbhar Bharat initiative and Production Linked Incentives (PLIs) have positioned the manufacturing sector in the limelight and are at the forefront of some of the major reforms introduced.
The upcoming budget provides an opportunity to harness the capabilities required to implement transformative reforms and build upon the foundations integral for the manufacturing sector to contribute to 25% of the country's GDP by 2025.
The year gone by has exposed the vulnerabilities and fragilities of the supply chains of organisations all over the globe. Manufacturing companies have revisited their near-term and long-term growth strategies in an attempt to become leaner and more flexible in their operations and digitally transform their future roadmap.
The COVID-19 pandemic has presented an opportunity which the sector must capitalise on in order to incentivise global companies deliberating on India as a key geography in their manufacturing footprint. The government, as part of its economic stimulus packages, has provided a much-needed thrust through the Production-Linked Incentive Schemes (PLIs) worth Rs 1.45 lakh crore for 10 sectors. Announcements on the inclusion of additional sectors or allocation of more funds for the scheme can be expected in the budget in the backdrop of the recent success of the PLI for Large Scale Electronics Manufacturing. Moreover, the recently released IIP data suggests that industrial output contracted by 1.9% in November 2020 despite an increase in both September and October 2020. A slow recovery in industrial output may further lead to the expansion of the PLIs in the budget.
Addressing short-term challenges and sector-specific issues
As the manufacturing sector stages its recovery from the pandemic, certain sectors are looking forward to incentives in the upcoming budget. The automobile industry has faced lacklustre growth due to the pandemic, shrinking liquidity of NBFCs, and weak consumer sentiments. A reduction in current GST levels to offset the price increase on BS-6 vehicles is expected to drive growth.
The industry also expects announcements around the scrappage policy, which will mandate people to replace old vehicles with new compliant ones, resulting in cleaner air and demand for new vehicles. The metals industry on the other hand awaits a reduction in customs duty on the purchase of integral raw materials such as metallurgical coal, graphite electrodes, and coking coal, most of which the steel industry is dependent on imports.
The energy sector, which is seeing an increasing emphasis on renewable energy (RE) in the overall energy mix, expects announcements on support for building transmission infrastructure, long-term capital availability for RE projects, and privatisation of stressed discoms during the budget.
The MSME sector also awaits reforms such as simplification and automation of GST and other regulatory norms, access to IT/ITES at affordable costs, availability of low-cost long-term loans, and immediate short-term liquidity. Initiatives such as subsidised or free immunisation against COVID-19 for staff and workmen could help revive productivity and capacity utilisation.
Ensuring long-term competitiveness of the manufacturing sector
The manufacturing sector should also consider the current scenario as an opportunity to deploy practices to achieve long-term growth and competitiveness. Some of the key areas that could be incentivised from a long-term perspective through the budget include:
1. Indigenous R&D capabilities: To reduce dependency on imported technology, organisations setting up indigenous R&D facilities should be provided tax incentives on capital expenditure utilised for R&D purposes.
2. Ease of doing business: Simplification of land and labor laws and expansion of commercial dispute resolution institutions will help ease in doing business for corporations.
3. Manpower skilling: Advances in technology necessitate an increase in demand for skilled labor and productivity-enhancing reforms. To meet the needs of up-skilling and re-skilling of our workforce, a sustained increase in allocation towards various schemes under the Skill India Campaign such as Pradhan Mantri Kaushal Vikas Yojana (PMKVY) could be expected from the budget. Such skilling reforms will help increase productivity and enable the supply of a technically qualified workforce to handle the complexities of a technologically driven future of manufacturing.
4. Digitisation of manufacturing: Incentivise organisations to increase the adoption and deployment of smart manufacturing solutions. Organisations should also be incentivised for deploying sustainable practices and solutions
The manufacturing sector optimistically awaits the announcements in what is deemed to be a "budget like never before."
(Shridhar Kamath, Partner, Deloitte India, Avinash Singh, Director, Deloitte India and Mohit Bindal, Associate Director, Deloitte India.)