Focused On Creating Clusters Of Skill Intensive Manufacturing Sectors With Significant India Advantage (E.G. In Textiles)

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  • 1. ACHIEVING 12% INDUSTRIAL GROWTH RATE - RECOMMENDATIONS
  • 2. PREAMBLE FOCUS AREAS SOME SPECIFIC EXAMPLES KEY ENABLERS CONTENTS DESIRED ECO-SYSTEM 1 2 3 4 5
  • 3. India has to emerge as a competitive economy, with inclusive and sustainable development as the cornerstone in this Mission. Objectives
      • Produce globally competitive goods and services;
      • Provide a decent quality and standard of life for all its citizens
      • Build a secure, sustainable and innovative environment for growth
    Preamble CII PERSPECTIVE 1
  • 4. It cannot happen at the cost of our thrust on agriculture, which still employs the largest section of our population; or services, which forms the largest segment of the GDP. Our key premises are: Services must grow at 12% Agriculture must reach a growth of 4% plus This will ensure that no part of the population is marginalised. A 12% Industry growth cannot happen in isolation CII PERSPECTIVE 1
  • 5.
    • Estimated impact on industrial GDP growth rate
    De-regulate key sectors Stimulate demand
      • Energy
      • Mining
      • Food products
      • Rationalize indirect taxes
      • Accelerate organized retail growth
      • Labour reforms and development of skilled labour
      • Enhance transportation infrastructure and improve logistics
      • Create sector-focused Clusters
      • Strengthen key on-going reforms
        • SSI de-reservation
        • Import duties rationalization
        • Remove Key Barriers in SEZ policy
    Put in place key enablers 4 5 1 2 3 6 7 8 9 THREE SETS OF ACTIONS NEEDED TO ACCELERATE INDUSTRIAL GROWTH CII PERSPECTIVE 1.5 – 2.0% 1.5 – 2.0% 2
  • 6. SUMMARY OF RECOMMENDATIONS TO ACCELERATE INDUSTRIAL GROWTH (1/3) Recommendations Category De-regulate key sectors 2 3
    • Energy:
      • Create an Energy Commission for developing and implementing an integrated energy policy covering power, coal, oil, natural gas, non-conventional and nuclear energies
      • Create competitive and vibrant wholesale power market by implementing multiple measures spanning the entire electricity value chain
      • Increase role of and guidance from the Centre through stronger incentives for states to expedite reform, and increasing CERC’s mandate over SERCs
    • Food: Accelerate multiple agriculture and food sector reforms*
      • Enable innovation by introducing the re-drafted Unified food law immediately
      • In specific sectors (poultry, value added foods), catalyse growth of quality by rationalising taxes for value added/ processed/branded food
      • Create ‘vibrant’’, national agri-markets by crafting standardised agri policy across states for market access, risk hedging, price transparency
      • De-risk farmers by catalysing creation of an effective extension service network (across crops), creating mechanisms for price, yield and risk management (e.g., financial instruments, buyers of last resort, etc)
    • Deregulate mining (for coal especially, but other minerals also)
      • Enable substantial private and merchant participation (particularly in coal)
      • Define a clear criteria for lease allocation to rapidly increase competition
      • Increase royalties and change the basis of royalty payments to states
      • Remove hurdles in obtaining approvals
      • Establish independent regulators
    * Details being developed through CII-McKinsey work on Bharat Nirmaan CII PERSPECTIVE 1 2
  • 7. SUMMARY OF RECOMMENDATIONS TO ACCELERATE INDUSTRIAL GROWTH (2/3) Recommendations Category 6 7
    • Accelerate labour reforms and develop skilled labour
      • Allow use of contract labour on a long-term basis, especially for core seasonal activities
      • Enable PPPs for accelerated development of skilled labour
      • Make skills bankable --- banks should give loans for skill training
    • Selectively accelerate expansion of transportation infrastructure
      • Make targeted small investments and productivity improvements to enhance existing infrastructure (e.g., better utilization of rail track, access roads for national highways, productivity of ports, etc.)
      • Build additional port capacity to meet growing demand from container export traffic
    Stimulate demand 4 5 Expedite the rationalization of indirect tax structure and lower the level – move to a uniform value-added GST (< 15% of retail price) by 2008
    • Accelerate the development of organized retail
      • Intensify competition and accelerate infusion of best practices
      • Unlock land/real estate availability through improved records and lower stamp duties
      • Rationalise product taxes to ensure level playing field for organised retail
    Put in place key enablers CII PERSPECTIVE 2
  • 8. SUMMARY OF RECOMMENDATIONS TO ACCELERATE INDUSTRIAL GROWTH (3/3) Recommendations Category Put in place key enablers (contd.) 8
    • Create islands of excellence in the form of Clusters, as Special Economic Regions that focus on overall economic development rather than just exports
      • Large in size (e.g., whole districts) with world class infrastructure
      • Focused on creating clusters of skill-intensive manufacturing sectors with significant India advantage (e.g. in textiles, pharma, specialty chemicals, electronics, auto components)
      • Build shared services and sector specific infrastructure (e.g., training institutes, testing facilities)
      • Experiment with reforms in labour policies, faster approvals, etc.
    • Strengthen key on-going reforms
      • Expedite the removal of all the remaining SSI restrictions
      • Simplify import-export procedures that bottleneck supply chains
      • Rationalise import duties
      • Remove barriers that are in the way of SEZs becoming critical growth engines
    9 CII PERSPECTIVE 2
  • 9. A MULTI-PRONGED APPROACH REQUIRED TO RESOLVE THE PERSISTENT POWER CRISIS IN A SUSTAINABLE MANNER
      • Create an environment for greater power generation be it by the public or the private sector
      • Ensure bulk buyers and suppliers can cost-effectively and easily transact
        • Simplify and standardise (for intra-state and inter-state) the rules of short-term and long-term access
        • Establish a concrete timeline for phased reduction of cross-subsidy surcharge on transmission
        • Expedite addition of new transmission capacity (e.g., by inviting private participation) to eliminate all grid bottlenecks
      • Establish day-ahead power pools (e.g., one in each region) on the lines of Nordpool (and similar pools in UK, US) for enabling short-term ‘physical’ transactions between bulk buyers and suppliers
      • Accelerate operating and financial performance improvement of state-owned Discoms (Delhi-type PPP is one of the options)
    • Enhance Center’s role to expedite reforms across states
      • Make SERCs truly subordinate to CERC (this will also ensure their independence from state governments)
      • Setup incentives for the state governments to expedite reforms
      • Upgrade the quality of appointed regulators (e.g., make prior experience of the sector mandatory)
    Create a competitive and vibrant wholesale market SOME SPECIFIC EXAMPLES…. CII PERSPECTIVE Generation 1 Transmission 2 Distribution 3 3
  • 10. IMPROVE EFFECTIVENESS OF CURRENT POLICY FRAMEWORK IN MINING Four mineral policy objectives Ensure environmentally and socially sustainable business models Ensure maximum extraction from existing identified reserves Increase extent of exploration activity to enhance reserves Maximise related invest-ments in infrastructure for spurring industrial growth Key changes to the current policy framework Modify approach for allocation of resources to create level playing field (e.g., use of competitive bidding, clear qualification criteria upfront) Create a transparent and much more efficient mining approval and lease management process (e.g., an effective single window clearance mechanism, adherence to lease conditions ) Make mining more attractive to states by changing the royalty basis to ad valorem, and setting these rates based on global benchmarks Create a world-class regulatory and technical body
      • One of the highest investments in mining
      • Full exploration of national resources/ reserves
      • Strong multiplier effects for downstream industries
    Benefits to the economy SOME SPECIFIC EXAMPLES…. CII PERSPECTIVE 1 2 3 4 1 2 3 4 3
  • 11. COAL REQUIRES MORE RADICAL STEPS TO UNLOCK GROWTH Underlying principles
    • India should be self-reliant in terms of future coal demand
    • Create an industry sector which is competitively vibrant (especially market determined pricing) – beneficial for consumers
    • If deregulated, user industries should be protected from unfairly high prices and volatility in the near-to-medium term
    • Retaining CIL’s strengths as much as possible
    Specific actions required
    • Free up entry into the sector for private Indian and foreign miners (captive and merchant) , proactively market for inward investment and define a transparent mechanism for allocation of coal blocks
    • Accelerate formation of entities that compete with each other by allowing CIL subsidiaries to compete with each other and developing CIL’s unexploited coal blocks in JVs with private entities
    • Launch a comprehensive transformation effort to improve CIL's productivity (including de-bottleneck mining capacity in the short term by 15-25%), competitiveness and accountability
    • Reduce gestation periods for development of new coal blocks by expediting government clearances (&quot;single-window&quot; clearance mechanism to accelerate mining approvals from MoEF, Ministry of Coal and Mines, district administrations, state PCBs and other agencies)
    • Establish a strong, qualified, and independent regulator to manage prices (and their volatility) during the transition to increased competition
    SOME SPECIFIC EXAMPLES…. CII PERSPECTIVE 3
  • 12. GOVERNMENT SHOULD ADDRESS FOUR BROAD AREAS TO UNLOCK FOOD SECTOR POTENTIAL Current status Description of further reforms needed * Details being developed through CII-McKinsey work on Bharat Nirmaan SOME SPECIFIC EXAMPLES…. CII PERSPECTIVE National agri-markets
      • Model APMC Act framed, provides a framework for direct sourcing from farmers, contact farming and private yards outside of mandis
      • 16 states have confirmed to implement model APMC Act
      • Accelerate adoption of model APMC Act in all states
      • Gradually transfer authority to license/ de-license players in a state from the mandi board to an independent regulator
    Taxation
      • Variation in tax rates and level of administration in different states
      • 4 per cent tax makes it difficult to compete for organised players with smaller players who can evade tax more easily
      • In specific sectors, catalyse growth of quality by rationalizing taxes for value added/ processed/ branded food
    Food laws
      • “ Integrated food law” introduced as food safety and standards bill
      • Introduce the re-drafted Unified Food Law immediately to enable innovation by moving away from recipe based food law
    Risk management for farmers
      • Futures trading in agriculture permitted
      • Yield and weather risk management products introduced
      • De-risk farmers by catalysing creation of an effective extension service network
      • Create mechanisms for price, yield and risk management
    3
  • 13. CREATE SECTOR-FOCUSED ISLANDS OF EXCELLENCE IN THE FORM OF SPECIAL ECONOMIC REGIONS (SERs) Why Clusters (Special Economic Regions)?
      • Provide sufficient scale to develop overall infrastructure, which is important for supporting truly competitive units
        • Hard infrastructure such as rail-lines, expressways, power supply and so on
        • Soft/ social infrastructure such as good schools and hospitals, which will help attract strong talent
      • Allow experimentation with friendly labour policies, faster approvals, etc., which may be difficult to implement in the entire country, but play a key role in competitiveness of units
      • Promote overall economic development (including domestic) rather than just exports
      • Developers could derive significant value from such a region, therefore promoting private investment. There are already examples of investors who might be interested in this type of scale
      • Provide greater incentive for states to allocate large areas of land
    What are Clusters (SERs)? Clusters (Special Economic Regions) are large size* areas meant to promote economic development mainly through better infrastructure and more friendly policies** * E.g., minimum size of 2500 acres has been recommended in the proposal shared ** Fiscal benefits may or may not be there, but do not form the main purpose of the Clusters (SER) SOME SPECIFIC EXAMPLES…. 3 CII PERSPECTIVE
  • 14. Illustrative sectors Consumption, 2002 LCC imports to consum - ption, (%) • Ship and rail coaches/engines • Building material • Iron and Steel • Aluminium • Auto components • Pharmaceuticals • Computer hardware • Consumer electronics • Apparel • Footwear Low Ability to offshore to LCC 400 1,200 1,750 250 280 Low potential Raw material/ capital - intensive Skill - intensive (second wave) Skill - intensive (first wave) Labor - intensive 10 20 30 40 Medium High Very high Source: Bureau of Economic Analysis; World Trades Database; U.S. Government Census, CII McKinsey report - “Made in India: The next big manufacturing export story” - ” $ bn U.S. EXAMPLE GROWTH POTENTIAL FOR SKILL INTENSIVE MANUFACTURING EXPORTS SOME SPECIFIC EXAMPLES…. THE CLUSTERS CAN BE FOCUSSED ON SKILL INTENSIVE SECTORS WHICH WOULD FORM THE NEXT BIG WAVE OF MANUFACTURING OFF-SHORING/ EXPORTS 3 CII PERSPECTIVE
  • 15. Highly sub-scale operations
    • Average size of plastic processing unit tonnes p.a.)
    150 600 660 1,500 1,750
    • India
    • Brazil
    • USA
    • China
    • Germany
    EXPEDITING REMOVAL OF SSI RESTRICTIONS – PLASTICS EXAMPLE Structure of Indian plastics industry
      • 25,000 firms employ 400,000 employees (~16 employees per firm)
      • Highly fragmented – top 100 players have less than 20% share of industry turnover
      • Average size of an Indian plastic processing firm is 2 machines
      • More than 85% of the conversion cost is of fixed nature (therefore bigger size is actually quite desirable)
    150 Performance
      • ROCE of companies in the industry is between 8 and 10%
      • India’s share of exports is ~0.5%
      • Net exports reduced from Rs. 905 crore in FY’03 to Rs. 830 crore in FY’04
      • Export realisation dipped sharply to Rs. 67/kg in FY’04 from Rs. 76 in FY’03 and FY’02
    SOME SPECIFIC EXAMPLES…. 3 CII PERSPECTIVE
  • 16. SEVERAL BARRIERS IN OUR CURRENT SEZ POLICY Myths Reality Key initiatives needed
      • Increase access to DTA post payment of duties on imported inputs and domestic sales taxes
      • Allow use of contract labor – well established international practice
      • Simplify administrative & customs procedures
        • Automation
        • ‘ Gold card’ check system and privileged clearance for units with unblemished track record
      • Extend SEZ-like benefts to existing clusters (e,g, Tirupur, Ludhiana – apparel; Pune, Chennai – auto components)
    SOME SPECIFIC EXAMPLES…. CII PERSPECTIVE Income tax benefits are a big draw 1 DTA access is not important 2 Developers will find the current economics attractive 3 Administrative procedures suggested are benchmark 4 A lot has been done on labour laws 5 SEZs need to cover all industries 6 SEZs have to be greenfield 7 Far less important in the hierarchy of benefits DTA access most crucial to investors No serious bidders will bid with current economics Still fall far short of international benchmarks, e.g., China All the major issues remain un-addressed Sector-focused SEZs will be a good start Brownfield SEZs may be a real possibility for India 3
  • 17. 1. Address the Emerging Resource Gap 1. [a] Skilled Resource 1. [b] Natural Resource
      • Prompt banks to make it possible for students in technical/vocational training to avail of bank loans to pay fees for their curriculum. This would also contribute to the resource starved ITI s and vocational institutes.
      • Infrastructure of training that is currently being run by government, needs to be supplemented by Industry. Incentivise private sector participation in opening new technical/ vocational training institutes.
      • It is important for a whole new set of skills to be listed by the government, in consultation with industry.
      • Section 3 - Highlights of key points:
      • Modify approach for allocation of resources to create level playing field;
      • Create a transparent and more efficient mining approval and lease management process
      • Make mining more attractive to states by changing the royalty basis to ad valorem, rates based on global benchmarks
      • Create world-class regulatory and technical body
      • Special attention to coal
    CII PERSPECTIVE KEY ENABLERS 4
  • 18. 2. Boost Physical Infrastructure
      • Incentivising investment in the infrastructure sector by a mix of fiscal support, tax concessions and enhanced credit guarantee; As also well directed resource allocation like levying of road cess, etc.
      • The MoF also needs to persuade/incentivise states to find innovative modes of raising resources for basic infrastructure;
      • In the absence of a clear indicator of magnitude of investments in infrastructure, Gross Capital Formation in the Economy can be taken as an indicator;
      • There should be an incremental target for investments into infrastructure from the budget outlay of each year. 5 – 9% of GDP should be the target over the next five years, There are certain basic infrastructure that Government can provide and the private sector will “crowd in” with the other types of infrastructure.
      • Resource Generation for Infrastructure:
      • Rationalise our subsidy regime by proper delineation of merit and non-merit subsidies, keeping in mind the interest of the economically backward (e.g. by introducing schemes like food stamps, kerosene smart cards, etc);
      • Tap the corporate debt market (particularly the long term one). This market therefore, needs immediate attention so that it can be revived.
      • Think of schemes like “Bharat Nirman Bond”, etc in the lines of the Resurgent India Bond scheme, which met with success.
    CII PERSPECTIVE KEY ENABLERS 4
  • 19. 3. Develop Logistics Reduce Logistics Cost - Currently 15% to 16% of Cost of Sales (compared to 8% - 9% in other countries) Lack of Logistic Park, Warehouse, transshipment Infrastructure and Processes (State specific RTO rules and ST documents) - high vehicle dwell time, High transaction cost, Error prone, requires expertise; Breaking the interstate barriers - Simplification and elimination of procedures at the state entry points for speedy clearance. Common IT platform -One IT platform at all ports of entry and state borders. Also, Inbound and outbound controls to be electronically connected for speedy clearance. CII PERSPECTIVE KEY ENABLERS 4
  • 20. 4. Give a Boost to Demand in the Economy
    • In addition to the points made in section 3, we suggest:
    • Allow farmers to trade risks. This can be done through development of derivative trades, contract farming, insurance, etc;
    • Speedy Implementation of “Bharat Nirman”, which would give the necessary thrust to Rural India, and bolster its economy in all aspects;
    • As mentioned in section 3, we would like to highlight once more that there is need to give a boost to the development of organised retail.
    5. Rationalisation of Indirect Taxes
    • As already highlighted in section 3, Indian industry suffers from a tax disability…
    • The overall objective should be to have the total incidence of tax to be less than 15% of the retail price of a manufactured product over a period of time, which would end the long period of tax disability that Indian Industry has suffered.
    • - Need to move to a uniform value-added GST (< 15% of retail price) by 2008 at the latest. In this year’s budget, the FM has announced that the target year is 2010, but if we have to get to a 12% industry growth, then this timeline has to be re-looked at.
    CII PERSPECTIVE KEY ENABLERS 4
  • 21. 6. Direct Taxes
    • In addition to the points made in section 3, we suggest:
    • If we go by the experience of how personal income tax collections have increased with the rate of tax having come down over a period of time, we can see that there is need to reduce corporate taxes over a period of time and ensure higher revenue through greater compliance and collection.
    • Particularly the surcharges need to be eliminated
    • If this is done, then, Indian Industry might find itself in a position of tax advantage compared to some of the competing countries
    7. Encourage Innovation in Indian Industry
    • Incentivise innovation in the private domain by boosting corporate expenditure through provision of fiscal benefit in the form of 150% weighted allowance for in-house R&D and also for commissioned research in academic institutions and public sector laboratories;
    • There is need to build Centre/s of Excellence for Innovation to focus on significant innovation, while providing knowledge, resources and leadership for developing, applying, integrating and deploying innovation as a discipline. Academic institutions must be encouraged to work with industry and business to develop and design new products and processes. The MoF could finance setting up of such Centres within academic and research institutions.
    CII PERSPECTIVE KEY ENABLERS 4
  • 22. 8. Level Playing Field In addition to the points made in section 3, we suggest: The continuation of 10% purchase preference to Public Sector Enterprises (PSEs) in today’s liberalized economy is out of place. This gives an unfair advantage to foreign bidders 9. Free Trade Agreements
    • In the area of FTA, uniform rules of origin need to be put in place for all FTAs;
    • Requirement for addressing inverted duty structure is imminent and ;
    • Need for detailed analysis of relative competitive strengths of partner countries product wise is important before negotiating the agreement
    CII PERSPECTIVE KEY ENABLERS 4
  • 23. 10. Unshackling the SMEs
    • In addition to the points made in section 3, we:
    • Need to strengthen the SME units by encouraging FDI inflows;
    • Enactment of the Limited Partnership Act;
    • Dereservation from the list of reserved items;
    • Enablers need to be in place for technology upgradation by SMEs;
    11. Sector Specific Initiatives There are need for sector specific initiatives, where India has a competitive advantage, but is facing a reversal owing to certain specific policy constraints. Case in point is the Machine Tool Industry. CII would be happy to provide detailed sector specific inputs to reinvigorate such industries, where what the sectors need are not protection, but policy enablers CII PERSPECTIVE KEY ENABLERS 4
  • 24.
    • A 12% industrial growth must translate that into an inclusive phenomenon. For that, a sustainable high growth eco-system needs to be put in place, which should encompass significant developments in 9 critical areas:
    • Energy , which would include a comprehensive strategy covering power, coal, oil, natural gas, non-conventional and nuclear energies;
    • Water , which has to be well conserved and optimally utilized, as a national resource;
    • Health , for all, should be a national goal, which would include adoption of uniform standards, health education in schools, developing suitable models for reaching healthcare to remote areas, etc;
    • Food , is an area, where the country must feel secure as well as in a position to be provider for the world outside;
    • High Technology , to include ICT, which would have to fuel India’s competitive leadership;
    • Innovation , which should help India leapfrog into the next stage of competitive leadership;
    • Disaster Management ; is an area, where we need ready actions plans to automatically kick in whenever common natural disasters, like earthquake, floods, etc occur;
    • Logistics , is an area, where India can be a leader, even while there is huge scope for bringing down our logistics costs. Multi-modal transport policy, etc are critical elements of a comprehensive logistics policy
    • Employment opportunity matched with skilled workforce , such that there is a direct correlation between skilled manpower that are produced by our system and the demand of industry;
    STRATEGY FOR A SUSTAINABLE HIGH GROWTH ECO-SYSTEM CII PERSPECTIVE 5