National Capital Goods Policy 2016 unveiled

The National Manufacturing Policy envisaged manufacturing to contribute 25% to GDP and create 100 million jobs. In contrast, till date, manufacturing activity contributes to 17% of India's GDP and only 4 million jobs are estimated to have been created in the sector since 2010. The gap to stated aspiration is large. The Capital Goods sector is a critical element to boost manufacturing activity by providing critical inputs, that is, machinery and equipment.

Hence Government has come out with 1st ever policy for the country's capital goods sector. It envisages carving out a roadmap to boost manufacturing in Capital Goods (CG) sector so that it becomes a part of global value chains apart from mere supply chains.

Brief About Policy:

Vision:  The National Capital Goods Policy is formulated with the vision to increase the share of capital 24 goods contribution from present 12% to 20% of total manufacturing activity by 2025.

Objectives of the Policy:

The objectives of the National Capital Goods Policy are to:

• Increase total production: To create an ecosystem for a globally competitive capital goods sector to achieve total production in excess of ~Rs. 750,000 Cr by 2025 from the current ~Rs. 230,000 Cr.

• Increase employment: Raising direct and indirect employment from the current 8.4 million to ~30 million by 2025.

• Increase domestic market share: To increase the share of domestic production in India's capital goods demand from 60% to 80% by 2025 and in the process improve domestic capacity utilization to 80-90%.

• Increase exports: To increase exports to 40% of total production (from Rs 61,000 Cr to Rs 300,000 Cr) by 2025 from current 27%, enabling India's share of global exports in capital goods to increase to ~2.5% and making India a net exporter of capital goods.

• The policy also aims to facilitate improvement in technology depth across sub-sectors (increasing research intensity in India from 0.9% to at least 2.8% of GDP), increase skill availability (training ~50 lakh people by 2025), ensure mandatory standards and promote growth and capacity building of MSMEs

Significance & Current Status of Indian Capital Goods Industry:

Capital goods Industry is a large sector with a market size of ~ Rs. 2,82,000 Cr and total production of ~Rs. 2,30,000 Cr in 2014-15.The sector also provides direct employment to ~1.4 million people, the sector provides indirect employment to ~7 million people and impacts users of capital goods estimated to be 50 times of the direct employment. However, the growth of the sector has been lagging, with domestic market size de-growing at 3.6% per annum and total production increasing by only 1.1% per annum over the last 3 years respectively compared to the Planning Commission targeted growth rate of 16.8% p.a. for production of capital goods during the 12th Five Year Plan period.

Capital goods imports have been growing at a rate of 9.8% p.a. over the last 5 years. The share of imports in the Indian capital goods market has increased from 34% in 2009-10 to 40% in 2014-2015, indicating a looming threat to India's self-reliance and national security. At the same time, the capacity utilization of domestic manufacturers is only about 60-70% across sub-sectors. India's share of global capital goods exports is still significantly sub-scale at ~0.8% only.

Issues & Challenges of Indian Capital Goods Industry:

A wide range of issues has negatively impacted the growth of capital goods production in India. Major issues & challenges are described below. 

Issues affecting domestic demand creation: The lack of positive bias towards domestic value addition in public procurement policies, difficult contract conditions, persistent import and use of second-hand machinery with no incentive for replacement, zero duty import under 'Project Imports' and delays in project implementation are the key factors limiting domestic demand.

Issues affecting exports: Key challenges include the inadequate availability of competitive short and long-term financing, non-tariff barriers in export markets denying market access and limited understanding of international market requirements especially by smaller players. India also needs to align its trade policy to the shift in India's export map towards developing regions. More trade agreements are needed with developing countries where India has a comparative advantage.

Issues affecting technology depth: Significant challenges and gaps exist in high-end, heavy-duty, high-productivity and high precision technologies across sub-sectors. Contributors to these gaps include low end user acceptance of new Indian technology, lack of skill availability, weak support infrastructure and low Indian participation in developing international standards. Further, patent processing takes very long and fiscal incentives for R&D are still inadequate.

Issues affecting cost competitiveness: Indian manufacturers are still challenged with respect to cost competitiveness compared to their global peers due to a skewed and state-wise variation in tax and duty structure, prevalence of inverted duty structure for several products and high infrastructure and logistics cost.

Issues related to SMEs: SMEs still face challenges in developing new products and processes due to their smaller scale and inadequate institutional mechanisms, limited access to capital and low awareness and compliance with international standards. 

In addition, there are several sub-sector specific challenges. Achieving high growth would need focused collective efforts by all concerned stakeholders - government, industry, end user segments alike; supported by an enabling policy for the capital goods industry.

Key Policy recommendation & way forward:

• To integrate major capital goods sub-sectors like machine tools, textile machinery, earthmoving and mining machinery, heavy electrical equipment, food processing machinery etc as priority sectors under 'Make in India' initiative. 

• To create an enabling scheme as a pilot for 'Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)' with a view to enhance the export of Indian made capital goods.

• Strengthen existing capital goods scheme through increasing the budgetry allocation & increasing scope of the present 'Scheme on Enhancement of Competitiveness of Capital Goods' which include setting up of Centers of Excellence, Common Engineering Facility Centers, Integrated Industrial Infrastructure Park and Technology Acquisition Fund Programme, by adding a set of components including technology, skills & capacity building, user promotional activities, green engineering and energy, advanced manufacturing and cluster development .

• To launch a Technology Development Fund under PPP model to fund technology acquisition, transfer of technology, purchase of IPRs, designs & drawings as well as for commercialization of such technologies of capital goods.

• To create a 'Start-up Center for Capital Goods Sector' shared by Department of Heavy Industry (DHI) and Capital Goods industry (CG) association in 80:20 ratio to provide an array of technical, business and financial support resources and services to promising start-ups in both the manufacturing and services space. These services should focus on Pre-incubation, Incubation and Post-Incubation phases of a start-up's growth to ensure that a robust foundation is established. 

• Mandatory Standardization which includes, inter alia, defining minimum acceptable standards for the industry and adoption of International Organization for Standardization (ISO) standards in the absence of other standards, to institute formal development program for promoting and framing Standards with Standards Developing Organizations (SDOs) including Bureau of Indian Standards (BIS), international standard bodies, test / research institutions and concerned industry/ industry associations.

• To upgrade development, testing and certification infrastructure such as Central Power Research Institute (CPRI), and set up 10 more CMTI like institutes to meet the requirements of all sub-sectors of capital goods. 

• To develop a comprehensive skill development plan/scheme with Capital Goods Skill Council and to upgrade existing training centers and set up 5 regional State-of-the-Art Greenfield Centers of Excellence for skill development of CG sector. 

• To provide schemes for enhancing competitiveness through a cluster approach, especially for CG manufacturing SMEs. Thrust to be on critical components of competitiveness such as Quality management, Plant maintenance management, Energy management, Cost management, Human Resource management and prevention of corrosion with the Government support to the extent of 80% of the cost. 

The National Capital Goods Policy is a major step to unleash the potential of this promising sector and is envisaged to contribute significantly to achieving the overall vision for manufacturing and Make in India. The smooth implementation and effectiveness of the policy will require alignment and joint action of several ministries and departments and have implications on multiple stakeholders and user industries.