GS-3, Indian Economy, Uncategorized

Government approves capital goods sector policy

The Hindu

News

  • First -ever policy for the capital goods sector approved by the Cabinet .

Key points of the policy

  • It aims to triple the value of production of capital goods to Rs.7.5 lakh crore by 2025 and create more than 21 million jobs.
  • It envisages increasing exports to 40 per cent of production from the present 27 per cent.
  • The share of domestic production in India’s demand will also be increased from 60 per cent to 80 per cent, making India a net exporter of capital goods.
  • It will help in realising 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’.
  • The objectives of the policy will be met by the Department of Heavy Industry in a time-bound manner through obtaining approval for schemes as per the roadmap of policy interventions.

What are ‘Capital Goods’?

  • Capital goods consist of any tangible assets that an organization uses to produce goods or services such as office buildings, equipment and machinery.
  • Consumer goods are the end result of this production process.
  • A capital good is a durable good (one that does not quickly wear out) that is used in the production of goods or services.
  • Capital goods are one of the three types of producer inputs, the other two being land and labor, which are also known collectively as primary factors of production.
Big Picture, GS-2, International Relations, Uncategorized

India US defence cooperation and Make in India Initiative

US defence secretary Aston Carter visited India last week  and discussed ways of enhancing previous  defence initiatives,and  signed new agreements like logistical exchange of memorandum of agreement which  entails the militaries of two nations to share facilities for refuelling, supplies and spares. Various agreements which also promote Make in India initiative were also proposed.

Make in India initiative which aims to transform  India in to a manufacturing hub has identified sectors which needs to be promoted. Defence is one among them. Efforts have been made  on this front through earlier initiatives with US like DTTI  ( Defence technology transfer initiatives) etc. But nothing seem to have taken off the board. There needs to have clarity on this front as to what exactly India wants from such initiatives.

Delay in expediting the initiatives which are already taken is another issue which needs close coordination. We need a focused  approach and consistent follow up action which helps to keep the various initiatives intact. In this aspect US has more role to play than India, who’s procedures are much simpler than US.

India invested nearly 14 billion dollars in last few years as part of is defence procurements, most of which is imported. With new scheme like Make in India we  need  to relook about establishing close synergies among the private players and defence manufacturers who engage in defence production on either side. This is a serious challenge which should not be ignored.

Also India’s  defence manufacturing capabilities need to leap frog from what where we are  right now. Initiatives like DTTI simply manifest the fact that india does not have the kind of technology that it requires. However on a long run efforts should be made to ramp up R and D and improve the situation on this front.

The discourse of india’s defence story should move from Defence co production to production and codevelopment to development. Every possible effort should be made to make  India self reliant. . What is necessary  is a more focused policy on defence issues and efforts to  make a realistic progress on this front. However India should also have all the technology at its disposal in difficult times by what so ever means at the same time it should never be complacent about collaborating on strategic issue like defence.

Editorials, Uncategorized

India’s Start-up Policy

Article Link

As part of a bunch of measures that constitute the action plan for government’s start-up initiative, the centre will shortly be setting up a Fund of Funds that would invest in private venture capital funds.

  • The fund will be set up with the initial corpus of 10,000 crore (about $1.5 billion). However, it will be deployed in tranches of Rs.2,500 crore over a period of four years. India’s venture capitalists are very happy with this announcement.
  • Please note that the idea of a fund of funds isn’t new. Finance minister Arun Jaitley had earmarked Rs.10,000 crore for a fund of funds nearly 18 months ago in the Union Budget 2014-2015. The fund of funds announced as part of start-up action plan is a reiteration, rather a repackaging of the July 2014 budget proposal with some clarity on how it will be structured and managed.

Who can use this fund?

The fund of funds will invest in venture capital funds registered with markets regulator Securities and Exchange Board of India (Sebi).

Why we need this fund?

Presently, the domestic venture capital industry is practically non-existent in the country. The country’s venture capital industry, consisting mostly of foreign firms, currently raise more than 90% of their capital from foreign institutional investors, commonly known as limited partners. Thus, it is necessary to stimulate the growth of the domestic venture capital industry.

Why is it important to encourage the growth of a domestic venture capital industry that is not overwhelmingly dependent on foreign capital?

It is because of the following reasons-

  • Firms backed by foreign capital tend to jump towards start-ups that replicate business models that have been successful in the US, or in other developing markets. Their limited partners are understandably more comfortable with that strategy.
  • The dependence on foreign capital makes firms in India vulnerable to the ups and downs of those markets. While the Indian venture capital market is not currently strapped for capital and India remains an attractive investment destination for global limited partners, even a tremor in the US economy or venture capital market could trigger a major upset here.

The fund of funds aims to address the above mentioned concerns by specifically investing in funds that will, in turn, invest in sectors such as health, education, manufacturing and agriculture.

Challenges before the venture capital industry:

  • According to data compiled by Chennai-based Venture Intelligence, in 2015, venture capital investments in India stood at about $1.8 billion. Therefore, Rs.10,000 crore is not sufficient to spur the growth of this industry.
  • The government has announced that it intends to contribute up to 50% of the stated corpus of a Sebi-registered venture capital fund. However, the problem here is that it is quite difficult for these funds to raise the rest 50%. Added to it, the government contributes 50% only after the Sebi-registered fund has already raised commitments from other investors for the balance 50%.
  • These venture capital funds do not have access to a large pool of domestic institutional capital. Even the banks and insurance companies cannot help them as their investment limits are capped at 10% of the overall corpus of a Sebi-registered venture capital fund.
  • Hence, the only sources of domestic capital currently available to venture capital funds are HNIs (high net-worth individuals) and family offices. However, neither is incentivised enough, through tax concessions, to put meaningful money into play in venture capital funds.
  • This leaves domestic venture capital funds with no option but to raise but to raise capital from overseas investors. Even that is not easy because of a complex regulatory framework.
  • As a result, most domestic venture capital funds have to adopt a dual fund structure (in which capital raised from foreign investors is parked in a separate offshore fund).

Why some people are not happy with the formation of this fund?

Critics argue that it is not prudent, even proper, on the part of the government to invest taxpayers’ money in venture capital funds, which will in turn invest in enterprises that carry a high risk of failure.

Way ahead:

An advisory panel set up by Sebi and led by Infosys founder N.R. Narayana Murthy has just submitted a report suggesting reforms to make the fund-raising environment for venture capital funds more conducive. The government has assured that it will soon address their concerns.

What qualifies a start-up?
startup-India

 

Conclusion:

While it remains unclear whether tech start-ups have anywhere near the potential to create the kind of employment that India needs, the government on its part has done well to give these start-ups the necessary ammunition to get on with value creation with the minimum of government interface. Overall, while the intent is praiseworthy and there are many laudable ideas in the policy, much in the fine print needs attention if its goal is to be realised. However, on the other hand it appears that the launch of the fund of funds at this juncture is more a case of putting the cart before the horse. And, it certainly isn’t the most efficient use of taxpayers’ money.

Big Picture, GS-3, Indian Economy, Uncategorized

Challenges for ‘Make in India’

Watch debate here!

The government launched “Make In India” initiative which aims at promoting India as an investment destination and to establish India as a global hub for manufacturing, design and innovation. The initiative aims to provide favorable environment to the business community so that they can devote their resources, efforts and energy in productive work. A number of steps have been taken by the government to improve the ease of doing business in the country. Rules and procedures have been simplified and a number of products have been taken off licensing requirements.

Under this initiative, the Government intends to provide a robust infrastructure to business through development of various facilities and institutions. Government also aims at developing industrial corridors and smart cities to provide a conducive working environment with state-of-the-art technology. Efforts are being made to provide skilled manpower through a national skill development programme. Innovation is encouraged through better management of patent and trademarks registration.

Government has opened up a number of sectors for FDI. The Policy in defence sector has been liberalized and FDI cap has been raised from 26% to 49%. 100% FDI has been allowed in defence sector for modern & state of the art technology on case to case basis. 100% FDI under automatic route has been permitted in construction, operation and maintenance in Rail Infrastructure projects. Further, liberalization norms for Insurance and Medical Devices has been done. ‘Make in India’ program represents an attitudinal shift in how India relates to investors; not as a permit-issuing authority, but as a true business partner. An Investor Facilitation Cell has been created in ‘Invest India’. A dedicated team of the Investor Facilitation Cell is there to guide and assist first-time investors.

It is time for India to focus on building competitive advantage on global scale in sectors where we have a large domestic market and certain inherent capabilities. Strategy is all about making choices. The top five priority industries are- Defence, electronics hardware, construction, health care and agro-industries. However, for India to become a manufacturing nation, it has to quickly move beyond rhetoric to create a clear strategy and favourable policy environment for manufacturing to take off. The government has chosen to quietly dismantle the sclerotic National Manufacturing Competitiveness Council (NMCC) but it needs to foster a more vibrant think tank in its place. A close dialogue and partnership between government and the private sector, both domestic and foreign, is critical. Indian companies along with Chinese, Japanese, German, American and Swedish companies are all vital partners and we must create an environment that is open and welcoming.

In many of   the Indian industries, people insist for manual skill because they apprehend that adoption of advanced technology will result in redundancy of human resource, which is abundantly available in India. As such they resist the change and introduction of new technology. However, technology driven processes with minimum human intervention will guarantee manufacturing excellence. From technological point of view India is lagging behind the western world, as far as manufacturing is concerned. Experts say, India is still about a decade behind advanced countries, when it comes to usage of technology and manufacturing excellence. But this situation can be turned to our advantage. The country can learn from the mistakes of the western world and try to adopt the best ever technology in the years to come.

Make in India necessarily involves the drive to boost the manufacturing sector. However, the investors are wary of prevalent labor laws and bureaucratic hassles in India and as such, unless conducive atmosphere is created on these fronts the investments will not come as expected and Make in India drive will not accomplish desired results. In order to make this initiative a great success, we need to be at par with the advanced world as far as usage of modern technology is concerned and we need to have more clarity, maturity and intensity on quality aspects of our products.

Creating healthy business environment will be possible only when the administrative machinery is efficient. India has been very stringent when it comes to procedural and regulatory clearances. A business-friendly environment will only be created if India can signal easier approval of projects and set up hasstle-free clearance mechanism. India should also be ready to tackle elements that adversely affect competitiveness of manufacturing. To make the country a manufacturing hub the unfavorable factors must be removed. India should also be ready to give tax concessions to companies who come and set up unit in the country. India’s small and medium-sized industries can play a big role in making the country take the next big leap in manufacturing. India should be more focused towards novelty and innovation for these sectors. The government has to chart out plans to give special sops and privileges to these sectors.

India must also encourage high-tech imports, research and development (R&D) to upgrade ‘Make in India’ give edge-to-edge competition to the Chinese counterpart’s campaign. To do so, India has to be better prepared and motivated to do world class R&D. The government must ensure that it provides platform for such research and development.

India is ranked 132nd out of 185 economies in Doing Business 2013 by the World Bank. India’s restrictions on foreign equity ownership are greater than the average of the countries covered by the Investing Across Sectors indicators in the South Asia region and of the BRIC (Brazil, Russian Federation, India, and China) countries. India imposes restrictions on foreign equity ownership in many sectors, and in particular in the service industries. Sectors such as railway freight transportation and forestry are dominated by public monopolies and are closed to foreign equity participation. With the exception of certain activities specified by law, foreign ownership in the agriculture sector is also not allowed. These restrictions need to be eased for making India better place for doing business.

Infrastructure tops the list of most surveys on doing business in India. In particular, chronic deficiencies in transportation and power impose prohibitive costs and lower business competitiveness. Multiple enterprise surveys have identified electricity as the biggest constraint. Further, India lags behind on every measure of transport connectivity. Though there have been considerable recent successes spurred by private participation, much needs to be done. However, introduction of UDAY scheme is a good step in this regard.

Sound macroeconomic policies are necessary to create a low-inflation, low-interest rate and high-growth environment that is essential for the country’s global manufacturing competitiveness. Given the huge size and vast diversity of the country, a diagnostic for each state may be a more prudent strategy. In any case, instead of big-bang reforms, sustained efforts in multiple directions, which cumulatively generate large effects, are required to relax these constraints so that we can realise the goal of making in India.

GS-3, Public Admin 2, Uncategorized

Delivering on the digital promise

Digital India

Digital India is an ambitious vision that has the potential to be an equaliser for Indians by driving inclusive growth for the economy. Connecting villages with broadband, the initiative brings better, more accessible, governance to the people. It also encompasses many other initiatives — India’s national financial inclusion plan that aims to connect every Indian to a bank account, building 100 Smart Cities, and the Make in India programme designed to spur local manufacturing and job creation.

  • Digital India is not all new. It is an amalgam of three ongoing programmes: the National Optical Fibre Network (NOFN), the National Knowledge Network and the e-governance initiative. What’s different is the ambition and how quickly it is slated to get done. Digital India seeks to provide broadband access to all and deliver all manner of services to the citizen’s doorstep.
  • If Digital India programme is implemented properly, India will enjoy the true benefits of historic economic growth. In fact, an American company has estimated that the adoption of key technologies and policies across sectors spurred by the Digital India initiative could help boost India’s gross domestic product (GDP) by $550 billion, propelling its GDP to $1 trillion by 2025.
  • But, without a sound policy in place this would remain a dream. The programme must be paired with sound policy — the foundation on which innovation, economic growth, and social progress is built.

Challenges before the initiative:

  • 85% of Indians still don’t have access to the Internet, and a majority of them live in rural India. This is far short of the near-universal access and connectivity envisaged by the Digital India mission. There are also significant gaps in last-mile connectivity.
  • FDI in e-commerce sector remains restricted, meaning smaller Indian e-commerce companies cannot seek the capital they need to grow their business and hire more employees.
  • Small- and medium-sized Indian manufacturers, who are vital to the Make in India programme, are held back by their lack of access to broader domestic and international consumer markets.
  • In 2012, the Ministry of Communications and Information Technology issued a compulsory registration order to safeguard consumers from substandard electrical and electronic items. This move is understandable. However, under the order, new equipment cannot be imported into or sold in India unless it is tested and registered with the Bureau of Indian Standards’ approved testing labs in India — even if they have already been certified by international certification organisations. The requirements create another regulatory bottleneck in an already strained system. The cost of complying with these requirements is high, and is ultimately passed on to Indian consumers.

Policy changes required:

  • In the spirit of promoting Digital India and innovation, e-commerce models should enable small- and medium-sized businesses across India to reach national and global consumers.
  • The government should vigorously pursue the expansion of broadband and IT infrastructure throughout the country. Private sector collaboration should also be encouraged by the government.
  • The Department of Industrial Policy and Promotion should allow at least 51% FDI in e-commerce — and ultimately 100%.
  • There is also a need to revamp safety testing requirements for electronic products. The country should also consider aligning itself with international standards by accepting certifications from internationally accredited labs.

Please note that the above mentioned reforms do not require parliamentary action.

Role of private sector:

The true potential of the Digital India programme lies in the private sector’s ability to innovate new technologies that enhance and modernise the way business and civic life are carried out. For India to achieve its full potential, it is necessary to implement Digital India in collaboration with the private sector.

Conclusion:

India is already a technology powerhouse with a $148-billion IT industry. It is ready to become a worldwide magnet for innovation. Digital India is an enterprise for the transformation of India on a scale unmatched in human history. From a policy standpoint, the means to achieving that transformation are challenging but doable. Now is the time for India to remove bureaucratic hurdles that impede entrepreneurship and growth, and enable Digital India to flourish.

Indian Economy, Uncategorized

For Make in India, we must create intellectual property and its jurisprudence

There are two  key pre-requisites. One, India has to support innovation and the creation of intellectual property at multiple levels: of policy, import duty, financial outlays and legal support. Two, Indian entrepreneurs must show ambition to operate on global scales of quality and quantity.

Create Intellectual Property:

It is welcome the government proposes to reduce the tax break for R&D to 100%. This must be supplemented with subsidy to the extent of 100% for valid research, whether in-house, contracted out to specialized labs or university departments. Subisdies are scrutinized and audited far better than tax exemptions.

India’s import duties are inefficient, often ‘inverted’, meaning, the duty on components is higher than that on the finished product—it is cheaper to import the final product than to assemble it locally using imported components. A higher tax on the finished good than on components will certainly encourage import of components and local assembly. But the resultant value addition would be make-believe, not made in India, the product of the duty differential.

Take phone components, with zero import duty and zero countervailing duty (CVD). The phone itself has a 12% CVD, alongside zero import duty. So Indian brands import semiknocked down kits from China at zero duty, add negligible value and sell at a mark-up while pocketing a fat excise duty concession.

To avoid both killing domestic production with inverted duties as well as spurious local value addition that reaps duty differentials, and to promote true manufacture in India, which takes advantage of proximity to India’s huge market and low wage costs, import duty has to be the exact self-same rate on all imports, whether raw material, component or finished good, each of which will enjoy that rate of real effective protection. And this rate should be kept low.

Build Judicial Capacity

To develop innovation, R&D is not enough. The legal system must support it, by protecting the transient monopoly for the creator granted via intellectual property. In the case of fast-changing technology, there is probably a case for sharply lowering the patent period from the 20 years of the pharma world, but this has to be done via global consultation. But for Indian companies to be in a position to license technologies and claim royalty, they will have to begin by licensing others’ technologies, building them into their products, paying royalty for the privilege, and learn to improve on these on their own.