Make in India: Rhetoric vs reality

Rajeev Jayaswal

INDIA'S trade deficit soared to a three-year high in December. The deficit, a staggering $115 billion in first nine months of the current financial year, is alarming. Undoubtedly; India is importing more than its exports. The reason is simple — 'Made in India' products are unable to compete in the global market. More worrisome is the fact that these products are losing the domestic market mainly because of Chinese competition. India is the world’s 40th most competitive economy according to the World Economic Forum’s (WEF) Global Competitiveness Report, down by a notch compared to the previous year. There are innumerable reasons for the lack of India’s competitiveness, but the top three are — unpredictable policy regime, inspector raj and innovation deficit. 

Unable to compete, Indian manufacturers are fast becoming traders. They are making easy and quick money by selling imported Chinese goods. This also saves them from the hassles of manufacturing, which is plagued by corruption. Therefore, ‘Make in India’ remains a political slogan of the current disposition. Moreover, inflexible approach and impulsive economic policies have resulted in needless disruptions. Demonetisation and hasty implementation of the GST also slowed the growth momentum. Consequently, economic growth in the current financial year is estimated at 6.5 per cent, a four-year low. 

Although, the latest official data has shown that the industry is in the revival mode, there are certain pockets of concerns. The Index of Industrial Production (IIP) grew by 8.4 per cent in November, which is a big shot in the arm for Finance Minister Arun Jaitley, who can now present the Budget with some positive numbers.  A closer look of the same IIP numbers is, however, disturbing. 

Cumulatively, the growth is only 3.2 per cent in the first eight months of the current financial year. Certain important industry groups such as jewellery, hand tools, plastic products, electric heaters, electrical apparatus and readymade garments have registered high negative growth. While mostly labour intensive, some of these are crucial for India’s exports. No doubt, the manufacturing sector needs special focus in this Budget.   

The booster dose 

There is an urgent need to infuse private investment in the economy to boost growth. The twin disruptions have, however, made the private investor wary. They will not take risk unless they are convinced about the predictability of the policy regime and robustness of the economy. Therefore, the government has to take the lead and announce a 'stimulus package' for the economy. It will require additional resources, which may force the government to borrow more. Possibly, the government may not contain the fiscal deficit within the earmarked 3 per cent for FY-19. But, the productive use of borrowed money is always prudent, provided the government controls expenditure and desist from announcing largesse in the light of the 2019 General Election. 

The infra push 

The infrastructural development is the safest area for gainful public expenditure. FM Jaitley has been allocating significant budget for infrastructure development. The transportation sector — rail, road and shipping — had been allocated a budget of Rs 2,41,387 crore in the previous Budget. 

India has an impressive project portfolio — $100 billion investment in the Delhi-Mumbai industrial and freight corridors; over 400 projects under the Sagarmala initiative and the ambitious target to make 100 smart cities. The status of these mega announcements is, however, not very clear. Ideally these infrastructure projects would not have allowed the economy to slow down. The reality is, however, obvious. Demonetisation and the hasty implementation of the GST are the chief culprits. But these two disruptions can’t be blamed for all our economic woes. It is possible that a large part of this budgeted amount is still unused. Traditionally, government departments go on a spending spree only in the fourth quarter of every financial year. This defeats the very purpose of public expenditure. The task of the Finance Minister should not be confined to merely allocating annual budgets to various sectors. He should also be responsible for the effective use of the allocated amount. The Finance Minister must ensure that budgeted amount is spent as per the plan on the proposed projects. 

The government alone cannot ensure completion of mega infrastructure projects. It also needs private participation. Certainly, the government's direct involvement in such projects would boost private investors' confidence, but that alone would not motivate them to commit huge investments. The Rs 5,35,000 crore Bharatmala project would require private partners to invest over Rs 1,00,000 crore. The success of public-private participation (PPP) in mega projects would depend on greater understanding. The government agencies, executing such projects, must treat private companies as equal partners and not like vendors. A policy framework in this direction has already been suggested by the Kelkar committee on 'Revisiting & Revitalising the PPP model of Infrastructure Development'. The committee has suggested that PPP projects should focus more on service delivery rather than fiscal benefits. 

Good and smart tax

The Budget is an opportunity for the Central government to lay a comprehensive blueprint of the indirect tax reforms. There is an urgent need to completely overhaul the newly-introduced Goods & Services Tax to make it uncomplicated and contemporary. The GST rates need recalibration with two or three slabs. Although, the GST is outside the purview of the Budget, the Finance Minister can always make the government's intent clear on February 1 to uplift the mood of the industry, and later, he can convince the members of the GST Council. Low GST rates will increase the tax base and easier compliance will encourage businessmen to work within the GST system. This will certainly improve the GST collection.

The Budget also provides an opportunity to the Finance Minister to express his intent to remove the GST-related anomalies, which have become impediments in infrastructural growth. For example, in August last year the GST Council had reduced tax on specified works contract for roads, bridges and tunnels from 18 per cent to 12 per cent. The rate for works contract for ports, airports and metros, however, remained at 18 per cent. This is not only confusing, but also discriminatory. The FM must address such anomalies with a promise to rectify them in a time-bound manner.   

The industry's exclusive chambers have already started lobbying for their members. They focus more on trimming of taxes and tinkering of policies to maximise benefits for their patrons rather than worrying about the declining competitiveness of the Indian manufacturing sector as a whole.  

People in general are waiting for the FM to take some bold decisions  this time around.