Making India

The small window of opportunity for the country requires every possible effort to make the most of the supporting environment to push the Make in India campaign and the Indian growth story.

Announcing the strategic decision to set up a world-class manufacturing facility at Chakan near Pune, Swedish industrial group Sandvik, that has been present in India since 1960, is expected to make phased investments spread over five years in the proposed plant primarily to produce equipment used in mining, metal cutting and construction sectors. In the first tranche, the company will invest $45 million (Rs 270 crore) to start development of the site by mid-2015. The facility is expected to become operational by 2016. Sandvik was one of the first Swedish companies to set up a subsidiary with a manufacturing footprint.

Olof Faxander, President and CEO, Sandvik AB says that this proposed development will help the organisation to further innovate and create solutions for "India’s emerging needs under the visionary ‘Make In India’ initiative". Citing India as an important destination in Sandvik’s emerging market footprint Faxander adds that it’s tough getting approvals in India. "India is one of the tougher markets on a global scale compared to other countries when it comes to approval processes and general bureaucracy in the country. It’s necessary to make processes more streamlined and simpler to get approvals if you have decided to make investments." And of course, corruption, that old bugbear, is the nation’s biggest problem. "India is quite high on the corruption index, so the continuous fight against corruption is very important in the country as well and we want to participate in that as much as we can," says Faxander.

Danfoss India, the Indian subsidiary of Danfoss Global, a player in the climate and energy space, recently inaugurated its new manufacturing, Research and Development (R&D) and administrative campus in Oragadam, Chennai. The plant also includes a solar power plant which will generate 1 MW of electricity, sufficient to power 10 per cent of electricity requirements of the campus. Taking forward the national appeal to ‘Make in India’, Danfoss, through its focus on local manufacturing and R&D in the new campus, plans on making India a manufacturing-cum-export hub for its regional subsidiaries. Danfoss will also be sourcing products from local suppliers, thereby creating ancillary jobs.

"India being a high-growth market for us, we kick-started our ‘Make in India’ initiative two years ago having assessed the tremendous potential for growth in the Indian manufacturing sector. We are pleased to commence our manufacturing at the right place and at the right time and believe this will enable Danfoss India operations to become the export hub for Asia-Pacific markets," says Niels B Christiansen, President and Chief Executive Officer, Danfoss Global.

Though PM Modi has promised to replace red tape with the red carpet, the perceptions will take a while to undergo a change. Though some investment activity has been observed, orders have not really flown in from foreign players as most of them are still in the wait-and-watch mode.

It’s evident that though PM Modi’s pitch for the ‘Make in India’ campaign has set the mood, the actual work still needs to be done. "Growth in India is expected to rise to 5.6 per cent in 2014 and pick up further to 6.4 per cent in 2015 as both exports and investment increase," the International Monetary Fund has said in its latest World Economic Outlook (WEO) report. While leadership and direction has emerged clearly with the new regime, investor confidence is picking up, albeit at a slow pace. The government has announced labour reforms and quicker approvals for businesses to boost manufacturing and raised foreign direct investment (FDI) limits in defence, real estate and railways and freed diesel prices in a bid to revive the economy. "Currently the manufacturing sector is grappling with lack of good infrastructure facility in terms of road, rail connectivity from industrial hub to consumption centres and gateways such as airport and ports. While the Centre and some States have realised the importance and started working on this, lots of focus is required in developing world class infrastructure to make the manufacturing competitive internationally," says Vikash Kumar Sharda, Associate Director- Capital Projects & Infrastructure (CP&I), PwC. According to an HSBC survey, India’s manufacturing sector output picked up modestly during October, driven by strong demand conditions and rise in new order flows particularly from overseas clients. Amid reports of stronger demand, production at Indian manufacturers rose for the twelfth successive month in October to 51.6.

Smartphone maker Lava too will soon be shifting its manufacturing base from China to India, giving further boost to the Make in India campaign. It’s significant as most handset companies have shunned India as a manufacturing base until now, citing the unavailability of components and other issues. While the manufacturing sector picks up modest pace, India’s annual infrastructure output growth slowed to 1.9 per cent in September, according to government data, hit by a fall in crude oil and gas production. Output expanded 5.8 per cent year-on-year in August. The sector, which comprises coal, crude oil, oil refining, natural gas, steel, cement, electricity and fertilisers, accounts for 37.9 percent of India’s industrial output. CII expects infrastructure investment to go up from around Rs 24 lakh crore ($500 billion) at current market prices in the Eleventh Plan to Rs 64.3 lakh crore ($1.07 trillion) during 2014/15-2018/19. In the Twelfth Plan, the Planning Commission estimated this figure to be around Rs 55.8 lakh crore ($1.0 trillion).

Issues-a-plenty

Current hubs of manufacturing are constrained due to land availability and infrastructure bottlenecks, feels Sudhir Hoshing, CEO, Road Business, Reliance Infra. "If infrastructure in terms of roads and ports can improve in other non-developed industrial areas, it will lead to equitable growth in the country and attract investment into manufacturing sector which is infrastructure constrained. However, infrastructure development in low development regions will be difficult from private sector on PPP basis. Hence innovative financing is the key for such projects. How can the government make contract structures attractive to investors is the key question to be answered," adds Hoshing.

Amrit Pandurangi, Senior Director at Deloitte Touche Tohmatsu Pvt Ltd., India, says that for the campaign to succeed, thrust on infrastructure is important. "When we talk about infrastructure in manufacturing, it’s about availability (of power, water, connectivity to ports and markets), reliability (whether there will be disruptions quality-wise or quantity-wise) and about the cost of getting the infrastructure and the Make in India campaign should lay special emphasis on this. In India, availability is a problem, reliability is even a bigger problem and cost over the years has become a big issue too and we are becoming a high-cost infrastructure society with low-quality of life associated," adds Pandurangi.

Creation of Industrial parks (China will be building one each in Maharashtra and Gujarat with an investment of $20 billion) will spruce the growth. The Make in India campaign needs to have a fresh look on the state of SEZs – The dismal state of SEZs has put a major roadblock in the Indian growth story. India is also looking to get China to invest in its SEZs. The SEZs offer 100 per cent income tax exemption on export income for the first five years, 50 per cent for the next five years thereafter and 50 per cent of the ploughed back export profit for the next five years. Of 566 formally approved SEZs, only 192 are operational. Of the total zones which are in operations, about 100 are into IT/ITeS related activities. Exports from these zones increased from Rs 22,840 crore in 2005-06 to Rs 4.94 lakh crore in 2013-14.

"Instead of declaring new SEZs, it may be advisable to give tax benefits to sectors like infrastructure which requires tax incentives to get back interest of private investors. For example, MAT means infra sector gets a tax concession in the name of tax holiday. With good infrastructure in place, there would be ease of doing business and give impetus to the India growth story. The "Make in India" programme requires making business easy to do by reducing bureaucratic red-tapism and improve transport infrastructure," feels Hoshing.

Sharda adds that States need to also play an equally important role to bring in reforms. "States should aim at creating real single window system, IT-based application tracking system for applicants, strengthening of District Industry Centres (DIC) and Industrial Development Agencies etc," says Sharda.

Ease of doing business is essential to attract global investments. India dropped two places to rank 142nd (of the 189 countries featured) in the World Bank’s latest Ease of Doing Business report, putting a daunting task ahead of Prime Minister Narendra Modi who aims to lift the nation to the top 50 to attract investors. Apart from this, the government faces the difficult task of re-igniting investor interest in the manufacturing sector, which is plagued by issues related to land acquisition, taxation and labour. While there are talks about providing single-window clearance, this will primarily be at the Central level. There are huge issues with the States and even to expand existing operations and get incentives or approvals from local authorities and State governments is a huge challenge.

Global cues

Established infrastructure, supply chain and favourable tax regimes in many south-east Asian countries gives them a cost advantage over India. And that is where India needs to develop to attract global players. Hoshing shares how China and Mexico are two countries that have seen massive road development. Building expressways at a breakneck speed, China today boasts of 85,000 km of expressway network, the second largest in the world, compared to a mere 147 km in 1989. Projects have been completed ahead of schedule. "There are learning and best practices we should learn and incorporate where possible in our system. Though China has a predominantly government-funded ambitious program, PPP has played a key role in National Trunk Highway System (NTHS)," adds Hoshing. Mexico too achieved breakneck progress in five-year plans of 1990s and in 2007-2012. However, there are massive financial failures and NPAs in the older programme which has key learning for points for us. Mexico’s $13.3 bn 1989-94 toll road programme amassed $5.5 bn in non-performing non-recourse loans. That is because the economic development did not take place as assumed.

While China has had the traditional advantages over India in the manufacturing space, recent data suggests an opportunity for ‘Make in India’ to tap and take advantage of China losing the status of being the largest trade surplus economy in the world. Apart from having lowest labour costs across the world, India boasts a nearly 500-million-strong labour force. However, the lack of skills in the workforce is another disadvantage that has been hurting the growth trajectory in the country. Jebel Ali Free Zone (Jafza), the flagship Free Zone of Dubai and trade and logistics hub of the Middle East region, Singapore and Rotterdam are few other examples that India can take a cue from and focus on developing its own Free Trade Warehousing Zones (FTWZ).

Through the maze

There are complex labour laws, which tie the hands of manufacturers and are required to be simplified along with resolving all the tax issues which are giving the country a poor reputation. Madhya Pradesh recently provided exemption from some labour laws for the micro, small and medium enterprises (MSME) sector. The recent labour law reforms have been hailed as a positive move by the industry. However, there are certain recent instances that have marred the image of the country in the business domain. The closure of the Nokia unit in Chennai, where there is no hope of an early resolution of the dispute since India’s tax settlement mechanism is notoriously slow and time-consuming. The closure of the factory has sent a bad signal for the investment climate in the country.

The government taking note of the scenario has set up a committee to frame bankruptcy law to enable entrepreneurs to close down unviable businesses. Industry experts also suggest opening up new non-bank funding sources for infrastructure and resolving contractual issues in public-private partnerships, is essential to rebuild the creaky transportation and urban infrastructure

It is widely believed that the focus of the campaign should not be restricted only to industrial infrastructure alone. What is also important is to consider that if there is a high cost in making a particular infrastructure in a region, whether it’s feasible to go ahead with that project at all. "For instance in western Rajasthan it’s impossible to get water unless you spend huge amounts there.

So there is no point in promoting a power plant there. So that amount of planning has to be done in basic resources to have cost competitiveness," quips Pandurangi. So while reforms are getting into place, turning the tide towards India and unfolding the growth story, it will take some time before the world starts to infuse the Indian economy with much-needed investments and create business opportunities. Modi will have to walk the talk and back his reforms with results for the buoyancy to return to the Indian economy.

Jebel Ali Free Zone (Jafza), the flagship Free Zone of Dubai and trade and logistics hub of the Middle East region offers:

• 100% foreign ownership.
• 0% corporate tax for 50 years (a concession that is renewable).
• No restriction on capital repatriation.
• 0% import or re-export duties.
• 0% personal income tax.
• No currency restrictions.
• No restriction on foreign talent or employees.
• Ability to mortgage your premises to a bank or financing company.
• Onsite Customs.

Apart from these, one can also find the right set-up for your needs including plots of land, warehouses, showrooms, customised development solutions, offices, retail outlets, a business park and even on-site residences making it a preferred business destination. Can India take a cue?

Ease of doing business: Recommendations

The issues arise at every step, beginning from starting a business, land acquisition, labour, and taxes. Some recommendations that could help include:

• Setup large designated industrial zones with pre-clearances and is ready to move in Single window registration and mutation process
• Move from deed-based registration to title-based registration
• Streamlined process for land-use conversion
• Labour reforms
• Continous skill development
• Access to funds for MSME
• Implementation of GST
• Efficient, effective and time-bound taxation related dispute resolution
• A market-based pricing system where price is determined by an independent body
• Reduce approval turnaround by making the e-biz portal more effective

Source: KPMG-CII Ease of doing Business in India

– Garima Pant