National Policy on Capital Goods: Civil Services Mentor Magazine: June - 2016

National Policy on Capital Goods

Goods can be largely classified in two types; capital goods and consumer goods. This classification is based upon how the goods are used. A capital good is any good deployed to help increase future production. "Capital Goods” sector comprises of plant and machinery, equipment / accessories required for manufacture / production, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernization, technological upgradation and expansion. It also includes packaging machinery and equipment, refrigeration equipment, power generating sets, equipment and instruments for testing, research and development, quality and pollution control.

Capital goods sector contributes greatly towards the development of the country. It sometimes called as an engine of growth. Initial five year plans focused on the heavy goods industries. At present capital goods sector contributes 12% to the total manufacturing activity.Capital goods sector has a market size of INR 2,50,000 Cr in 2013–14 and a domestic production of close to INR 1,92,000 Cr. The sector is estimated to grow to a market size of approx INR 4,65,000 Cr in 2016–17 with domestic production of approx INR 4,00,000 Cr. Non only it is a major contributor in market size, it is also a major employer of the people. At present more than 13 lakh people are employed in the capital goods industries. This sector has also seen great growth in recent years, it has grown at the rate of 15% per annum over the last decade. This sector is also a good contributer of the exports from India.

Capital goods sector contributes over Rs 52000 crore in 2013-14. Exports from capital goods sector have significantly grown over last few years. Amongst the sub-sectors, heavy electrical equipment and power plant equipment also drive exports, recording export revenues close to INR 30,000 Cr in 2013-14 growing at a rate of 18% per annum. Some of the sectors among the capital goods sector contribute largely in the overall contribution of the capital goods. Heavy electrical and power plant equipment is the largest sub-sector contributing to approx 65% of total capital goods requirement. Other large sub-sectors include construction equipment, process plant equipment and dies and moulds.

However there are various problems in the capital goods sector. Capital goods sector has lagged in recent years due to slow pace of domestic demand leading to growing dependence on imports and following slow growth in the world economy. India's share in global export of capital goods is very low. Capital goods sector also faces problem related to high cost of raw material, power etc. Support facilities and manpower in India for capital goods also are not of the global standards.

Key areas of concern are given below:

  • Imports continue to address ~35-40% of domestic demand for capital goods with the proportion being significantly higher in "critical components" segment for each sub-sector.
  • Indian share in global exports in the capital goods sector is still low, ranging between 0.1% and 0.6%, across various sub-sectors. In contrast, share of global exports for China ranges between 7.7% and 16.3% depending on the sub sector.
  • Large blocks of underutilized capacity, waiting to capitalize on the latent demand in the market.
  • Beyond 4-5 large players, the market is fragmented with the majority of operative units in the SME sector. These SMEs are challenged vis-à-vis large foreign competitors with low operating scale and issues related to access to capital.
  • Historically, lower appetite for capital investment in R&D and limited know-how of process technologies, the technology profile of domestic products ranges from basic to intermediate.
  • Support facilities, technology development institutions and skilled man-power continue to lag behind global standards.
  • Cost disabilities such as higher cost of power, finance and infrastructure leading to higher operating cost.

In order to remove these problems government of India has come up with policy related to capital goods, named as, National capital goods policy. This policy looks after various aspects of the capital goods from promotion to support staff to overall growth of the sector. Important aims of the national capital goods policy are given below:

  • Aims to increase the share of capital goods contribution from present 12% to 20% of total manufacturing activity by 2025.
  • clear objective of increasing production of capital goods from ~Rs. 230,000 Cr in 2014-15 to Rs. 750,000 Cr in 2025
  • raising direct and indirect employment from the current 8.4 million to ~30 million.
  • Become one amongst top 10 capital goods producing nations of the world
  • Raise exports to a significant level of at least 40% of total production.
  • increasing share of domestic production in India's demand from 60% to 80%, 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.

As you can see the national capital goods policy aims to achieve big things by 2025. So this needs supporting structure also in place to get the desired target. In order to achieve the above given objective following policy tools will be used.

  • Creating an Eco-system for globally competitive Capital Goods Sector: Long term strategy for the sector to be defined on the basis of local demand opportunities. Modify public procurement policies to give preferences to local manufacturers within WTO framework and also technology, skills and industrial infrastructure. FTAs / PTAs with partner countries should be re-negotiated further (wherever feasible) with a view to providing equal playing field to local manufacturers.

  • Creation and Expansion of Market for Capital Goods Sector: Close public–private collaboration is required to ensure that the opportunities across the complete production value chain get captured. Provide stable and investor friendly tax regime while actively addressing the current inverted duty structure

  • Promotion of Exports: Introduce market access incentive scheme for capital goods Provide incentives under export promotion scheme such as Merchandise Exports from India Scheme (MEIS) & Service Exports from India Scheme (SEIS). Open a focused line of credit for capital goods exports in partnership with EXIM Bank of India

  • Human Resource Development: Work with Universities & Institutions to promote skills, needed for capital goods sector. Further institutional mechanism to multi-institutions rope in industry for curriculum development and training. Facilitate opening of greater number of training institutes to provide skills required for capital goods industry. Long term, India to be made skill capital of the world.

  • Technology & IPR: To help implementing full fledged scheme on "Enhancement of Competitiveness in the Indian capital goods sector" through enabling policies for technology transfer, up-gradation and innovation. Acquisition of critical technologies will enable more appropriate product portfolios that would facilitate entry into global markets. Incentivize private sector in order to increase R&D expenditure.

  • Introduction of Mandatory Standards: Define national policy to increase present 5% of product range coverage to at least 25% in next 5 years and 50% in 10 years, which are equivalent to international standards. Safety, environment, quality based mandatory standard may be made for all he products in next 5 years. Import of second hand machinery is high in India; mandatory standards should be brought in force to discourage this practice.

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