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IAS Exam : New National Capital Goods Policy: An Analysis

Jul 1, 2016 18:05 IST

    The National Capital Goods Policy seeks to reduce the reliance on imported equipment by incentivising domestic production and in the process creating crores of jobs. The policy also aims to facilitate improvement in technology depth across sub-sectors, increase skill availability, ensure mandatory standards and promote growth and capacity building of MSMEs.

    The Policy will also help in realizing the vision of ‘Building India as the World class hub for Capital Goods’. It will also play a pivotal role in overall manufacturing as the pillar of strength to the vision of ‘Make in India’.

    Capital goods consist of plant machinery, equipment and accessories required, either directly or indirectly, for manufacture or production of goods or for rendering services, including those required for replacement, modernization, technological upgradation and expansion of manufacturing facilities.

    Need of the New Capital Goods Policy

    The Government of India announced the 'National Manufacturing Policy' in 2011 with the vision to increase the share of manufacturing in Gross Value Added (GVA) to 25% and create 100 million jobs. The Capital Goods industry is one of the key contributors to value added manufacturing and is significant for overall economic development of India.

    In this regard, the Prime Minister‟s Group constituted under the Chairman of the National Manufacturing Competitiveness Council (NMCC) identified Capital Goods as one of the strategic sectors for strengthening national capabilities in the long-term.Capital goods sector is a key contributor to manufacturing and currently contributing approximately 12% of overall manufacturing.

    Moreover, the sector has a significant multiplier effect on overall economic growth as it provides the foundational building blocks for a large number of user industries by providing critical inputs, that is, machinery and equipment, necessary for manufacturing. Further, the development of domestic capabilities in capital goods sector is essential to ensure national self reliance, as the sector directly or indirectly influences core infrastructure development within India.

    Moreover, a globally competitive and dynamic capital goods sector will induce the same characteristics into Indian manufacturing. The amelioration of capital goods policy also has potential to provide immense employment and export enhancement to India.

    However, there has not been a fast catch up with the development of capital goods industries in India off lately. This sector still faces varieties of challenges and issues. These need to be rectified and presenting the new policy can very well address all such issues presented above.

    Indian Economy Study Material for IAS Prelims Exam

    Indian Economy and New Capital Goods Policy

    In order to address the above mentioned aspects, The National Capital Goods Policy has been envisioned to have following effects on Macroeconomics of India:

    • It envisages to increase the production of capital goods from Rs.2,30,000 crore in 2014-15 to Rs.7,50,000 crore in 2025
    • It should raise direct and indirect employment from the current 8.4 million to 30 million
    • The policy envisages increasing exports from the current 27 percent to 40 percent of production.
    • It will increase the share of domestic production in India’s demand from 60 percent to 80 percent thus making India a net exporter of capital goods.
    • The policy also aims to facilitate improvement in technology depth across sub-sectors, increase skill availability, ensure mandatory standards and promote growth and capacity building of MSMEs.

    New Capital Goods Policy and Manufacturing

    The National Capital Goods Policy  has been envisaged to be a game changer for the manufacturing sector, promotion of exports, curtailing inflation, creating employment opportunities, developing human resources, enhancing the technological capabilities of India and so on. Sector wise interaction of the National Capital Goods Policy can be observed through following paragraphs.

    Capital goods sector is a key contributor to manufacturing. This currently contributes approximately 12% of the manufacturing sector, which translates to approximately 2% of GDP in overall terms. Moreover, the capital goods sector has a significant multiplier effect on overall economic growth as the foundational building blocks for a large number of user industries are provided  by this with the help of providing critical inputs, that is, machinery and equipment, necessary for manufacturing.

    This policy therefore, aspires to create an ecosystem for a globally competitive capital goods sector to achieve total production in excess of Rs. 500,000 Cr by 2025 from the current Rs. 220,000 Cr. The new policy envisages to contribute 20% of the manufacturing sector from current 12%.

    New Capital Goods Policy and Employment

    Capital Goods sector is also a major employment enabler, with almost 15,00,000 people as directly employed across various sub-sectors. It also creates indirect employment for a large number of people in a variety of user industries. A strong capital goods sector has the potential to generate significant employment opportunities across a variety of sub-sectors and user industries.

    The new policy aspires to train 50 lakh people by 2025, and create institutions to deliver the human resources with the skills, knowledge and capabilities to fuel growth and profitability. In totality, this new policy has the potential to enhance the total employment up to 30 million.

    Due to several loopholes in the current practices of Capital goods industries, cost-push inflation is prevalent. National Capital Goods Policy has been envisaged to break the deficiency in the production of capital goods in the country. With improvement in the technologies, enhancement in the skills and capacity building, capital goods production will surely surge diminishing the effect of cost push inflation in medium and long term.

    New Capital Goods Policy and Inflation

    However, increment in the employment and export promotion may lead to increase in the demand pull inflation, but this will be for short term and will be taken care of, in subsequent times because of the robust decline in cost push inflation.

    Benefits of Capital Good Policy

    National Capital Goods Policy can be a game changer for the Indian domestic industries. From employment to technological upgradation, from skill development to containment of the inflation and from export surge to enhancing manufacturing capabilities; all are set to have immense benefits from this disruptive policy. Following can be the various benefits of this policy for the end users, however the list is not exhaustive:

    • It would enhance the export of Indian made capital goods, by Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)
    • It will 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.
    • This policy will create 'start up center' for capital goods sector to provide various technical, business and financial sources and services in the sector of manufacturing and services.
    • It will enhance the skills of countrymen to reap the benefits of demographic dividend by comprehensive skill development plan/scheme with Capital Goods Skill Council and by upgrading existing training centers
    • It will cause the massive direct as well as indirect employment creation
    • It will lead in dilution of the inflation in long term
    • The policy will also help in ameliorating the manufacturing capabilities of the country.

    Limitations of the Capital Goods Policy

    In spite of the endeavors taken up by the government, National Capital Goods Policy has not dealt with all the issues in capital goods. Some of the loop holes are evident from the following:

    • Domestic productions are inhibited by the contractual clauses in public procurement policies. Hence these have only limited favor for the domestic value addition. These have not been addressed properly in this national policy.
    • Domestic productions are also hurt by the permission to import second hand machinery
    • Domestic producers remain at disadvantageous positions further because of zero import duty concession for several items imported under the 'project imports' category.
    • India has had trade agreements with many countries, which have comparative advantage over it in capital goods production.

    This surely acts as a dampener in domestic capital goods production.

    Comparative Analysis

    Many countries across the globe have had successful policies to encourage the domestic goods industries and have been benefited immensely. Some of these policies have been highlighted as follows:

    Capital Goods in Australia

    • Commonwealth Procurement Rules (2012): According to this rule, the Australian Government is committed to non-corporate Commonwealth entities sourcing at least 10 per cent of procurement by value from SMEs.
    • Indigenous Procurement Policy (2015): As per this policy, Commonwealth entities are required to award 3% of Commonwealth contracts to indigenous businesses by 2020, and the interim targets will be applied each year from 2015-16.

    Capital Goods in China

    Chinese Government Procurement Law (2002): This law directs the government to procure domestic goods, construction and services, except in one of the following situations:

    a.    where the goods, construction or services needed are not available within the territory of the People's Republic of China
    b.    where the items to be procured are for abroad use; and
    c.    where otherwise provided for by other laws and administrative regulations.

    Capital Goods in Malaysia

    As per the Malaysia's policy, the international tenders will be invited for supplies and services only if there are no locally produced supplies or services available. If local contractors do not have the expertise and capability for specific works, tenders may be called on a joint venture basis between local and foreign contractors to encourage the transfer of technology. International tenders for works would only be called when local contractors do not have the expertise and capability, and also a joint venture is not possible.

    Capital Goods in Germany

    • Fraunhofer Society: It was started in 1973. Fraunhofer is an integrated network of intermediate research institutions in Germany which supports industry and technology transfer as part of a national innovation ecosystem. Fraunhofer Institutes develop and exploit new technologies by creating an infrastructure bridging the needs of applied research with those of technology commercialization.
    • Steinbeis Foundation: It was started in 1971. It is an institute set up for know-how sharing and technology transfer of academic research.

    Capital Goods in Korea

    • Korea Research & Innovation Center: started in 2013 as a collaboration between EU and Korea, It has been established to support Korea – EU Research & Innovation (R&I) collaboration, develop suitable policies and provide consulting to Korean start ups and entrepreneurs to enter the European market etc.
    • Korea Institute of Industrial Technology: It was started in 1989 as a government research institute that helps to develop technologies for domestic industry, with a focus on SMEs.

    Conclusions

    The importance of the Capital Goods sector as a key contributor to the manufacturing sector in India is well understood. However, due to plethora of issues and problems, the growth of this sector has been lagging in recent years which in turn is impacting the growth of manufacturing sector as well.

    The National Capital Goods Policy has been brought in to proactively facilitate growth and development of the sector by immediately addressing the needs of the sector. The policy has laid out a vision and mission for the sector for the coming times, which would enable the achievement of the objectives of National Capital Goods Policy by following a comprehensive set of policy actions.

    However, this national policy need to be reviewed and provided with appropriate feedbacks at regular interval as the capital goods sector operates in a dynamic local and global environment.

    Therefore, the National Capital Goods Policy is slated to be reviewed and revised every five years to address the needs of the hour and to adopt the best international practices. Amidst the "Make in India", "New Manufacturing Polices" etc., the National Capital Goods Policy is surely a major step to unleash the potential of manufacturing sector and this will surely boost up the prospects of Indian manufacturing sector.

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