Small and ignored – Credit Facility for Micro Finance Institutions and MUDRA

The myopic proposal to create a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises. By 

IN 2010, a report prepared by the then Prime Minister Manmohan Singh’s task force on micro, small and medium enterprises (MSMEs) flagged a number of impediments to the growth of these industries. The Narendra Modi-led National Democratic Alliance (NDA) government’s Budget this year has envisaged the creation of a dedicated bank for refinancing microfinance institutions (MFI) that will lend money to these industries. However, the government is yet to take concrete measures to resolve a number of concerns that have continued to thwart the growth of small and medium enterprises (SMEs) over the years.

The large number of SMEs in India (about 5.77 crore, according to a National Sample Survey Office survey of 2013), which generate considerable job opportunities, continue to find it difficult to gain access to finance. A number of recommendations of the 2010 report are yet to be implemented. Also, the model of the proposed bank based on MFIs has come under scrutiny, given the record of these institutions in charging exorbitant interest rates and employing coercive tactics of recovery. According to the announcement in Union Budget 2015, the Micro Units Development and Refinance Agency (MUDRA) Bank is expected to partner with coordinators at the State level to provide finance to SMEs. A corpus of Rs.20,000 crore has been allocated to the bank. The Ministry of Finance said in an official statement on March 1 that the bank would lay down guidelines for micro and small enterprise financing; business, registration, regulation and accreditation of MFI entities; promoting right technology solutions; and formulating a credit guarantee scheme for loans given out to micro enterprises.

The government has also announced that loans to SMEs by public sector banks are to be brought under priority sector lending. A separate sub-limit of 7.5 per cent has been created within the priority sector lending norms for micro enterprises. The Union Budget further proposed the setting up of a Trade Receivables Discounting System (TreDs), an electronic platform that will facilitate financing of trade receivables from corporates and other buyers through multiple financiers.

Concerns of SMEs

The 2010 report had pointed out several institutional problems. It observed that the high cost of credit, requirements of collateral, limited access to equity capital, lack of access to global markets, and the absence of a mechanism for the revival of sick enterprises were some of the major concerns of SMEs. The report had also recommended a series of measures to address these concerns. The task force had recommended a target of 20 per cent year-on-year growth for micro and small enterprises lending by commercial banks. It had also advocated a public procurement policy for MSMEs that would mandate a goal for government departments and public sector undertakings (PSUs) to reach a target of at least 20 per cent of their annual purchases from SMEs and report the same in their annual reports.

It had proposed that the government should earmark an additional public spending of Rs.5,000-5,500 crore over the next three to five years to deal with deficiencies in the existing infrastructure and institutional set-up of SMEs. Five years after the report was published, many of these recommendations remain on paper. The problems of SMEs getting easy access to credit from public sector banks remain. The myopic proposal of creating a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises. Speaking to Frontline, Jayant Davar, chairman of the northern regional committee of MSMEs of the Confederation of Indian Industry (CII), said: “The fundamental problem in the approach to the issue of making available credit for SMEs is that there is no concept of development banking with the intent of nation building and a separate corpus of funds is still not set aside for the banks to be able to give out as loans to these industries. The banks are still averse to taking on the risk of giving out loans to SMEs. Over the last three months, the CII has been running a credit facilitation centre which brings together banks, MSMEs and credit-rating agencies across the country to make credit easily available to SMEs. About Rs.100 crore has been disbursed to SMEs across the country as a result of this initiative. There is an attempt to bring the banks on board through seminars, road shows and interactive sessions. This initiative has led to some positive results. But a lot more remains to be

done by the government to increase these industries’ access to banks.”

Another informed industry source, who has worked closely with a number of SMEs, pointed out some of the common problems that persisted. “The creation of a Credit Guarantee Fund Trust by the Ministry of MSME and the Small Industries Development Bank of India [SIDBI] last year was meant to facilitate the flow of credit to the sector without the need for collateral or third-party guarantees. This scheme was meant to provide a cover for a credit facility up to Rs.1 crore for an annual service charge and a guarantee fee to be paid by the borrower. However, across the northern States, banks continue to insist on a collateral for loans below Rs.1 crore. The insistence on collateral creates obstacles for the small players, who have no financial security. It also creates impediments in the process of expansion of business for small players who cannot avail themselves of a second loan. 

Another issue that a lot of these units face is the delay in payment by big corporations by about 30 to 60 days and sometimes more, which affects their working capital cycle. Also, the debt to equity ratio [a measure of a company’s financial leverage, which shows what portion of debt and equity the company is using to finance its assets] of most SMEs hovers around 4:1. In the 2014-15 Union Budget, Finance Minister Arun Jaitley had announced the setting up of a Rs.10,000 crore equity fund to boost capital flow to SMEs. This fund is still lying unutilised. The SME-specific branches of banks are also not proactive in disbursing loans to the SMEs,” the source said.

It is learnt that before the Union Budget was finalised this year, the CII had submitted a set of recommendations to the government to address the concerns of SMEs. The industry body had recommended, among other things, compulsory procurement of materials by public sector units from SMEs, the setting up of common research and development facilitation centres by the government, and statutory guidelines to stipulate penalties or interest for big corporations which delay payments to SMEs. These recommendations were not reflected in the Union Budget.

Also, it is important to note that some of the recommendations of the 2010 report on SMEs are yet to translate into concrete action. The most important among these are the proposed public procurement policy mandated for PSUs to buy materials from SMEs and the mandated 20 per cent year-on-year growth in lending to SMEs by commercial banks.

Problems with the MFI model

The proposal to run the MUDRA Bank on the MFI model has also come in for criticism. Sudha Sundararaman, national vice president of the All India Democratic Women’s Association, highlighted some of the existing problems with the MFI model of financial inclusion. “The proposal to route the funding for the new bank through MFIs is a move towards increasing the profits of these institutions and encouraging the private sector instead of strengthening public sector banks. Our women’s groups working in the States of Odisha, Karnataka and Andhra Pradesh continue to report large numbers of women falling into the debt trap because of the exorbitant interest charged by MFIs. MFIs continue to function largely as exploitative institutions and not as arbiters of financial inclusion. About three months ago, women in Odisha united in an effort to refuse to pay the exorbitant interest rates charged by MFIs. There is an ongoing movement in Andhra Pradesh by women to strengthen the linkages between banks and self-help groups [SHGs] and avoid dependence on MFIs,” she said. “The

government has to reach out to SMEs with substantial allocation of funds. These are labour-intensive industries which generate considerable employment. They continue to have problems with credit availability. In a situation where the government clearly sides with large corporations, small industries are facing challenges of survival.”

(Published in Frontline.in) 

Offsets: Evolution and Legal Challenges Affecting its Success

The Indian Defence Procurement Procedure (DPP) has been under evolution since its first iteration in 2005 and can be best witnessed through the evolution of offsets. The DPP clearly establishes offsets as the desired path to eventually reduce India’s reliance on international vendors and the international political interference which usually accompanies strategic procurement. There are some legal issues, which are creating challenges for the industry and need to be examined.

The evolution of offsets

The 2005 DPP required a vendor to either directly purchase, or provide market access or create new markets for products, components and services from any Defence Public Sector Undertaking (DPSU) or the Ordnance Factory Board (OFB) as its offset obligation. It is notable that the term services remained unexplained. The 2005 DPP also allowed foreign direct investment in an Indian PSU for defence industrial infrastructure through equity participation.

The 2006 iteration was a significant step forward which removed the ambiguous concepts of providing market access and creation of new markets and instead provided for vendors to directly purchase or execute export orders for products, components or services from either a DPSU, OFB or any private defence enterprise operating under an industrial license. It also clarified the scope of services to include maintenance, overhaul, up-gradation, life extension, engineering, design, testing, defence related software or quality assurance services; permitted FDI in private Indian defence industries and in organisations engaged in defence research & development and established the Defence Offset Facilitation Agency as a regulator and facilitator for foreign vendors.

The 2008 DPP was a further step forward which introduced the concept of banking of offset credits. The 2011 DPP showed sensitivity to vendor concerns and expanded the list of eligible products to include the categories of homeland security and civil aerospace products. The inclusion was welcome, in light of the continued international concerns with respect to the qualitative aspects of products being manufactured by the Indian industry and the ability of the Indian industry to absorb technology.

Subsequently the Ministry of Defence (MoD) also issued the Offset Revision Guidelines on 1 August 2012. The Guidelines refined certain concepts and were a clear intent of how the Indian MoD wanted to proceed for acquiring key technologies.

The biggest conceptual change which the Guidelines introduced were the introduction of investment in kind. Paragarph 3.1 (c) of the Guidelines explains investment in kind as documentation, training and consultancy required for full transfer of technology (ToT). The Guidelines also explained that investment in kind could also be made by providing machinery and equipment.

The Guidelines were formally incorporated under the DPP with its 2013 iteration. The 2013 DPP took another significant step forward by introducing the concept of multipliers for investments/ purchases from Micro Small Medium Enterprises (MSMEs) and transfer of technology to Defence Research & Development Organization (DRDO). Subsequently, MoD issued a notification in May 2013 suspending the services component of offset contracts.

The evolution of the philosophy of offset has been closely watched by the world community and while the forward strides in expanding the scope of achieving offset obligations have been welcome, there are significant issues which need to be addressed to make offsets successful. The following section of the article attempts to articulate some of these issues which have both legal and commercial implications for vendors.

Legal challenges affecting the success of the scheme

The present FDI norms only permit investment up to 26%. The restriction has been universally criticized as it gives OEMs restricted operational rights and a disproportionate amount of control to Indian offset partners. The limited equity participation raises significant issues from the OEM perspective on aspects pertaining to quality control, protection of OEMs intellectual property and management issues. While the issue has been actively discussed at various governmental levels, the stasis in implementation continues to be a major stumbling block for OEMs looking to invest in critical technologies.

The discontinuation of investment in the services sector has been a significant backward step. The restriction on services would hit most OEMs who are required to provide simulators, training services and maintenance as part of their contracted obligations. Though no formal rationale for taking the step has been extended by the MoD, the probable reason may have been the abuse of the services route, in which case the emphasis should have been on instilling checks and balances and not an indefinite suspension of the option. Alternatively, the MoD, through Defence Offsets Facilitation Agency (DOFA), could evaluate each investment in services on a case to case basis.

The present regime imposes an obligation on the vendor to adhere to timelines for fulfilling its obligation without imposing responsibilities on the DPSUs to respect the timelines. In the event the delays are caused due to the scope apportioned to the DPSU, the only recourse which would remain with the OEM would be limited to seeking liquidated damages from the DPSU which assuming it agrees to pay, may or may not be sufficient to compensate the OEM for the punitive damages it may be liable to pay under the offset scheme Further, in the event the vendor seeks to enforce damages through courts, the process may derail the entire transaction and cause substantial losses to the OEM’s program.

The issues around transfer of technology are multiple and complex. The DPP places considerable emphasis on transfer of technology. In such a scenario, the valuation of the technology becomes a critical issue. The DPP provides detailed guidelines of the qualitative parameters which constitute transfer of technology, but does not provide any process for valuation of the technology or weightage for how sophisticated it might be.

An argument in favour of MoD’s position, would be that the price at which the goods may be purchased would include the value of technology and hence the same should not be given additional weightage. The authors believe that this is a myopic view. The DPP covers complex multi-year procurements with emphasis on the transfer of core technologies and therefore a weightage needs to be given to the technology a vendor may be willing to transfer. This may also prove to be an incentive to OEMs to bring the latest bleeding edge products to the table.

The present mechanism of technology transfer provides negligible protection to the intellectual property of a vendor. For example, technologies transferred to DRDO can be used by DRDO to build products and freely export them. In case DRDO collaborates with another international defence research & development organization for further refining of the technology, it would result in a vendor losing commercial opportunities in other countries along with the ownership of its intellectual property. This may also lead to a situation where an Indian DPSU may be able to offer the same product to another country cheaper than what the OEM may be able to offer.

In conclusion, it may be submitted that though the policy intention behind offsets remains progressive, there is a need to review it to iron out the various legal concerns and issues. A clear policy and implementation mechanism would help in removing the regulatory and commercial ambiguities and also help the forces to upgrade on schedule. Further, India could also take a leaf from the international practices being followed in other countries such as Australia and South Korea which have significantly gained from offsets by setting up transparent systems and an investor friendly climate. A dithering policy and legal regime would not only increase the procurement cost but would also result in considerable delays and possibilities of disputes in investing in the Indian defence sector.

Editor’s note: The authors represent Khaitan & Co law firm in Defence Practice. Their views may be in line with those of their clients.

Critique on HLC Report on Restructuring FCI and PDS system

Food insecurity

A critique of the report of the high-level committee on restructuring the FCI and reviewing its role. BY T.K. Rajalakshmi

    SOON after assuming power at the Centre, Narendra Modi’s National Democratic Alliance government set up a high-level committee on re-structuring the Food Corporation of India that was mandated to make the food management system more efficient. It was headed by Shanta Kumar, former Union Minister for Rural Development and former Chief Minister of Himachal Pradesh. The committee’s main recommendations claim to address the question of reorienting the public distribution system (PDS) in order to give a better deal to economically vulnerable consumers and make storing and stocking operations more efficient.

    On the face of it, the mandate and the terms of reference appear aimed at managing food procurement, stabilising grain markets and addressing public distribution issues. A closer look suggests that the real purpose is to bring in the private sector in procurement operations, reduce the benefits of food security and truncate the FCI’s role as a central procurement agency. The FCI should, according to the committee, hand over all procurement operations of wheat, paddy and rice to States such as Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab, which have gained experience and also created reasonable infrastructure for procurement. The FCI should accept only the surplus to be moved to the deficit States.

     Of more serious import is its suggestion that the private sector should be brought in to compete with state agencies in the procurement of grains. The committee urges the government to review its Minimum Support Price policy in the case of items such as pulses and oilseeds and ensure that the MSP does not fall below the landed cost. This is baffling in view of the Bharatiya Janata Party’s (BJP) electoral promise to raise the MSP to over and above 50 per cent of the cost of production if voted to power. The most damaging recommendations have to do with further dilution of the commitment to implement the National Food Security Act (NFSA), which in any case did not envisage universal coverage.

   The committee recommends deferring of the implementation of the NFSA in States that have not digitalised the PDS, listed the beneficiaries online for verification and formed vigilance committees to check pilferage. In short, the committee proposed to penalise States for administrative lapses that will supposedly lead to leakages.

    The committee also says that 40 per cent of the population should be covered under the NFSA for entitlement to grain at subsidised rates, instead of the current 67 per cent. It argues that the 5 kg grain for every person to priority households was making BPL households worse off, especially those who used to get 7 kg under the Targeted PDS, a scheme launched in the early 1990s. The TPDS failed to produce its intended effect. The high-level committee recommends that BPL beneficiaries be given 7 kg of rice as before, but also says that the number of BPL beneficiaries under the NFSA be reduced. The pricing for priority households, it says, should be linked to the MSP, or else the NFSA would put undue burden on the exchequer. In short, the burden of the heightened MSP should be borne by the beneficiary.

   The committee also resurrects the problematic idea of introducing cash transfers in the PDS, saying it would be much more effective to help the poor without causing any distortion in the production basket and in line with the best international practices. Cash transfers in the PDS in a country like India are not possible if the amount is not indexed to inflation. While the committee partially addresses this issue, it does not offer a plausible argument about whether it can be guaranteed that

the money would be used for purchasing subsidised foodgrain and that leakages would not happen and also does not clarify whether PDS ration shops would continue to function as always or whether the beneficiaries would have to purchase from the open market. Vijoo Krishnan, joint secretary of the All India Kisan Sabha (AIKS), said that the signs were visible soon after the Modi government took charge. A letter titled “Declaration of Bonus by Some State Governments Over and Above MSP—Change in Policy of Procurement for Central Pool”, directed at States that were giving a bonus over and above the MSP, was issued on the pretext that such bonuses “distorted the market” and drove “private buyers out of the market”. The MSP, he explained, was calculated on the basis of the All India Weighted Average Cost of Production and the States exercising the right of providing production incentives or bonuses were usually those that had a higher cost of production than the All India Weighted Average Cost of Production. The MSP did not reflect the actual cost of production, was largely non-remunerative, and was the primary reason for making agriculture unviable, he said.

  He pointed out that the Commission of Agricultural Costs and Prices (CACP) calculations of cost were often based on dated data collected by the Directorate of Economics and Statistics (DES), which were disputed not only by farmers but by several State agricultural departments as well. There were States like Kerala and even some States ruled by the BJP such as Madhya Pradesh and Chhattisgarh that had been providing bonuses to farmers growing wheat and paddy based on these considerations. The withdrawal of these bonuses, the AIKS has said, would compel farmers to quit agriculture and divert the land for non-agricultural purposes, affecting food security further.

    Also, in a seeming violation of federal principles, the Central government declared that in case a surplus Decentralised Procurement State (DCP State) declared bonus for wheat or paddy from Kharif Marketing Season (KMS) 2014-15 and Rabi Marketing Season (RMS) 2015-16 onwards, the Central government would limit the procurement to the central pool to the extent of requirement of foodgrains for TPDS/ Other Welfare Schems (OWS) allocations of that State and would provide acquisition and distribution subsidy to the State accordingly.

   The letter warned that such States alone would be responsible for the disposal of any surplus procured over and above this and also bear all the financial burden in that regard. There were more draconian provisions for non-DCP States wherein it was decreed and decided that if a State announced a bonus over and above the MSP, the FCI would “not take part” in procurement and the MSP operation in the State, and the State agencies would have to mobilise resources and take care of

the entire procurement and MSP operations including storage of the foodgrains procured. Krishnan added that in such States the FCI in consultation with the Department of Food and Public Distribution would decide how much stock of wheat or rice it should acquire in a particular season and restrict its Central Pool procurement to that extent. The rest of the surplus stocks would have to be disposed of by the State government “at its own risk and cost”. The letter that predates the recommendations of the high-level committee seemed to set the tenor of the government’s overall plan regarding the FCI and public stockholding of grains.

     Krishnan said that the committee had far exceeded its brief and made recommendations that would have an adverse and irreversible effect on food security and livelihood security of the peasantry and agricultural workers. On the recommendation to cease procurement from certain States, he said this was no remedy and that further expansion of public procurement was required. He said that the observation that Odisha had sufficient experience and infrastructure was not true as every harvest in the State was accompanied by protests from farmers to open procurement centres and guarantee an MSP. To outsource the stocking operations to various agencies under a Private Entrepreneur Guarantee scheme on a competitive bidding basis would finish off the FCI, which was the backbone of India’s food security programme, he said.

      At a time when developed countries in the European Union and the United States are going ahead with their domestic subsidies (the U.S. spent $100 billion on food aid programmes alone in 2012; India’s food subsidy bill is less than $20 billion annually), and with general food inflation showing no signs of abatement despite the reduction in global and domestic oil prices, the recommendations of the Shanta Kumar Committee are indeed surprising. Its suggestion to the FCI to reduce buffer stocks is also baffling as buffer stocks were to be raised by 60 per cent to meet the needs of the NFSA; besides, buffer stocks are always needed to meet exigencies like floods, famines and droughts. Farmers’ organisations like the AIKS have also expressed their concern over the Trade Facilitation Agreement with the U.S. at the World Trade Organisation (WTO) ministerial talks without so much as a consultation in Parliament or with the State governments. The TFA merely states that a permanent solution would be arrived on food security.

   The Central government seems to be doing exactly what its predecessor had attempted to do, that is, cut down on welfare schemes and allocation, under the name of fiscal prudence and efficiency. The United Progressive Alliance government had coalition compulsions which made it adhere to some semblance of being a welfare government; the present dispensation with its overwhelming majority does not seem to be hamstrung by such compelling factors.

(Published in Frontline.in)

Make in India- Defence Sector

            Achieving selfreliance and reducing dependence on foreign countries in defence is a
necessity today rather than a choice, both for strategic and economic reasons. The
Government in the past has created production capabilities in defence in form of Ordnance
Factories and Public Sector Undertakings to cater to the requirements of our Armed Forces.
However, there is a need to enlarge the role of Indian private sector as well to develop
capabilities and capacities for production of various defence equipments.
            Our Prime Minister has taken a very important initiative in form of ‘Make in India’ to
promote and encourage domestic manufacturing of various items. The requirement for
domestic production of defence equipment is more than for any other sector because it will
not only save precious foreign exchange but will also address the national security concerns.
Government being the only consumer, ‘Make in India’ in defence sector will be driven
by our procurement policy. The Government policy of promoting domestic defence industry
is adequately reflected in the Defence Procurement Policy, wherein preferential treatment is
given to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ categories of acquisition over ‘Buy
(Global)’. In the days to come, import is going to be the rarest of the rare option and first
opportunity would be given to the Indian Industry to develop and manufacture the required
systems. As Indian companies presently may not have adequate capabilities in terms of
technology, they are encouraged to partner with foreign companies for joint ventures,
technology transfer arrangements and tie ups.
           If we look at the profile of Acceptance of Necessity (AONs) granted by Defence
Acquisition Council (DAC) in the last couple of months after the new Government has come
to power, proposals worth more than Rs.65,000 crores have been categorized under ‘Buy
(Indian)’ and ‘Buy and Make (Indian)’. The process of further orienting the Defence
Procurement Procedure towards procurement from domestic industry will continue in future
as well. The procurement process would be made more efficient, time bound and
predictable so that the industry can plan its investment and R & D well in advance to meet
the requirement of our armed forces.
           Till now, there were many entry barriers for the domestic industry to enter into
defence sector in terms of licensing, FDI policy restrictions etc. In the last six months, the
Government has taken several policy initiatives to ease the process of entry into defence
manufacturing. The most important is the liberalization of the FDI policy regime for Defence sector to encourage foreign investment in the sector. FDI up to 49% is allowed through
Government route (with FIPB approval). FDI above 49% is also allowed on a case to case
basis with the approval of Cabinet Committee on Security wherever the proposal is likely to
result in access to modern and state of theart technology in the country. Restrictions in
earlier policy related to Foreign Institutional Investment (FII) and majority shareholding to be
held by single Indian shareholder have been removed.
            Even though private sector industry was allowed to enter in defence manufacturing
since 2001, after obtaining industrial licence under IDR Act, the process of obtaining industrial licence was very cumbersome and used to act as a major road block for the industry, particularly small and medium industry, who were in the business of making part, components, sub systems and sub assemblies.
          The Government liberalized the licensing policy and now most of the components, parts, raw materials, testing equipments, production machinery, castings, forgings etc. have been taken out from the purview of licensing. The companies desirous of manufacturing such items no longer require industrial licence and will also not be subjected to FDI ceiling of 49%. A comprehensive Security Manual indicating the security architecture to be followed by various class of industries has been put in public domain, so that companies could easily access the same and follow it accordingly. The initial validity of industrial licence has been increased from two to three years.
          For the first time, a Defence Export Strategy has been formulated and has been put
in public domain. The strategy outlines specific initiatives to be taken by the Government for
encouraging the export of defence items. It is aimed at making the domestic industry more
sustainable in the long run as the industry cannot sustain purely on domestic demand. A
Standard Operating Procedure (SOP) for issue of NOC for export of military stores has been
finalised and has also been put in public domain. Requirement of End User Certificate (EUC)
to be signed and stamped by Government authorities has been dispensed with for most of
the defence items, particularly parts, components, subsystems and sub assemblies. This will largely ease out the export by the domestic industry. A web based online system to receive applications for NOC for export of military stores has been developed and has been put in place. There is a big opportunity in the defence sector for both domestic and foreign investors. We have the third largest armed force in the world with an annual budget of about US$ 38 billion and 40% of this is used for capital acquisition. In the next 78 years, we would be investing more than US$ 130 billion in modernization of our armed forces and with the present policy of MAKE IN INDIA, the onus is now on the industry to make best use of this opportunity for the benefit of both the business as well as the nation. Besides, under offset more than Rs. 25000 crore obligations are to be discharged in next 78 years.
            While on the one hand, Government is making necessary policy changes with regard to procurement, investment including FDI, licensing, export etc., the industry also needs to come up and accept the challenge of upgradation in terms of technology and required investments. Defence is the sector which requires huge investments and technology and is driven by innovation. The industry, therefore, has also to change its mindset and think for long term rather than temporary gains. We need to focus more on Research and Development and state of the art manufacturing capabilities. The Government is fully committed to create an ecosystem for the domestic industry to rise and to provide a level playing field to all sectors of industry, both public and private.
Shri Manohar Parrikar is the Union Minister for Defence (Raksha Mantri) Government of
India (Featured in pib.nic.in)

‘Make in India’: A Lion’s Step to boost manufacturing Part-2

Favourable Milestones:
· India has already marked its presence as one of the fastest growing economies of the world.
· The country is expected to rank amongst the world’s top three growth economies and amongst the
top three manufacturing destinations by 2020.
· Favourable demographic dividends for the next 2-3 decades. Sustained availability of quality
workforce.
· The cost of manpower is relatively low as compared to other countries.
· Responsible business houses operating with credibility and professionalism.
· Strong consumerism in the domestic market.
· Strong technical and engineering capabilities backed by top-notch scientific and technical institutes.
· Well-regulated and stable financial markets open to foreign investors.
              The government has also pledged other focused approaches. Among other things, it intends to leverage the existing incentives/schemes to boost manufacturing. A technology acquisition and development fund has been proposed for the acquisition of appropriate technologies, the creation of a patent pool and the development of domestic manufacturing of equipment used for controlling pollution and reducing energy consumption, official sources said in New Delhi. This fund will also function as an autonomous patent pool and licensing agency. It will purchase intellectual
property rights from patent holders. The government has also to deal with an existing menace in bureaucratic functioning. The bureaucratic bottle necks that hinder ease of doing business need to be removed.
Training of Workforce:
The manufacturing sector cannot develop on its own without skilled labour force and in this context it is heartening to note the government’s initiatives for skill development. The creation of appropriate skill would definitely set rural migrants and the urban poor on a track towards inclusive growth. That would be a vital step for boosting manufacturing.
The New Ministry for Skill Development and Entrepreneurship has initiated the process of revising the National Policy on Skill Development. It is significant to note that under the Rural Development ministry, the Modi government has undertaken another new initiative for skill development under a recast programme named after BJP icon Pt. Deendayal Upadhyaya.
The new training programme envisages setting up of at least 1500 to 2000 training centres across the country and the entire project would result in an estimated expenditure of Rs 2000 crore and will be run on PPP model.
The new training programme would enable the youths to get jobs in demand-oriented markets like Spain, US, Japan, Russia, France, China, UK and West Asia. The government proposes to train about 3 lakh youths annually in first two years and by the end of 2017, it has set a target of reaching out to as many as 10 lakh rural youths.
Other steps:
As part of other steps, there is need to address other issues too like adequate development of basic
infrastructures – the roads and the power chiefly. For long, MNCs and software service companies have relished doing business in India due to a robust market with enhanced purchasing ability of the citizens but in terms of building up ‘manufacturing facilities’, India has been a case of also-ran. In this context it is worth pointing out that a strong political will, business-like approach of bureaucrats and the entrepreneurs, skilled of workforce along with investment friendly policies can unleash the nation’s potential. It is in this context the government’s efforts to develop an “industrial corridor” between Delhi and Mumbai needs to be appreciated.
          The government is also working on multi-pronged strategies like development of infrastructure linkages including pioneer plants, assured water supply, high capacity transportation and logistics facilities. Carrying on the good works on these fronts, the government also has begun the process of reviving five ailing Public Sector units (PSUs). Of the 11 PSUs, the government also feels that for six other units that needs to be closed, it is working on one-time settlement involving voluntary retirement scheme entailing a cost of Rs 1,000 crore VRS for employees.
The state-run units which have been identified by the government for revival include HMT Machine Tools Ltd; Heavy Engineering Corporation; NEPA Ltd; Nagaland Paper & Pulp Co Ltd; and Triveni Structurals.
*Shri Nirendra Dev is a Special Representative with The Statesman
Featured in pib.nic.in

‘Make in India’: A Lion’s Step to boost manufacturing Part-1

This is a path-breaking venture. In fact, the vision statement of official website, www.makeinindia.gov.in commits to achieve for the country among other things an increase in manufacturing sector growth to 12-14 % per annum over the medium term, increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25% by 2022 and importantly to create 100 million additional jobs by 2022 in the manufacturing sector alone. These are quite highly ambitious targets given the background that the manufacturing sector in India, which accounts for fourth-fifth of the total output, grew a meagre 3.3 per cent in January 2010.

Achievable Targets:
· Target of an increase in manufacturing sector growth to 12-14% per annum over the medium term.
· An increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25% by 2022.
· To create 100 million additional jobs by 2022 in manufacturing sector.
· Creation of appropriate skill sets among rural migrants and the urban poor for inclusive growth.
· An increase in domestic value addition and technological depth in manufacturing.
· Enhancing the global competitiveness of the Indian manufacturing sector.
· Ensuring sustainability of growth, particularly with regard to environment.
Tapping Golden Opportunity:
Now let us look at the opportunity, the initiative can actually benefit India from the ground reality, especially when the Chinese manufacturing leaps have come under strain. There are already reports that several western manufacturing players operating in China want to move away from the world’s largest manufacturing hub. Analysts say, Chinese wages are going up and the labour market is getting more challenging and that is driving away investors. Thus companies with operating factories in China should look for other alternatives in the region, such as Vietnam, Indonesia and of course India. What are the advantages Indian business and especially manufacturing sector actually offer?
The country is expected to rank amongst the world’s top three growth economies and amongst the top three manufacturing destinations by as early as 2020. This is far more ambitious scene than promised about 2050 sometime back in the context of India’s role at the BRICS level. Indian manufacturing sector has positive elements like “favourable demographic dividends” for the next 2-3 decades. The sustained availability of quality workforce is another advantage.
Importantly again, in India, the cost of manpower is relatively low as compared to other countries. There are responsible business houses operating with credibility and professionalism. The country has a democratized polity vis-à-vis the rule of law and a strong consumerism intake ability of the domestic market.

Make In India

A Shield That Is Not Required: The ‘Make In India’ plan effectively bars Indian firms from competing with the best in the world by Nayan Chanda

          In a bid to boost domestic manufacturing through its ‘Make in India’ programme, the Narendra Modi government may have taken an inadvertent, but backward step. Its decision to oblige ministries to procure only locally-built electronic products not only marks a protectionist turn but also undermines the government’s avowed goal of fighting corruption and increasing transparency. Government procurement of goods and services worldwide accounts for nearly $1.7 trillion in revenues every year. Opening that market to international competition has been the goal of the WTO plurilateral Agreement on Government Procurement (GPA). Its 42-member countries, including the United States, the European Union, Canada and Japan, open their government procurement to bidding by fellow members. In 2010, several countries, including China and India, joined the groupas observers in preparation for full accession. China since, has begun negotiation to accede to the pact, but India has restricted its ministries to domestically-made electronic goods. Supporters of the move argue that the decision will boost domestic producers of electronic goods and encourage foreign firms to invest in Indian companies that are assured of a big government procurement market. Central government procurement is estimated to be $125 billion a year. It is most likely that India’s electronic goods manufacturers will be overwhelmed by large-scale orders and import foreign components to meet the orders. This may not be a bad outcome in itself, but shielding Indian manufacturers from foreign bidders will deprive India of accessing low-cost bids by international suppliers. It cannot but have a negative impact on efficiency and quality of Indian manufacturers. Indian companies know how opening the country to foreign competition has forced them to improve their product quality and enabled them to compete abroad.The move to bar foreign suppliers diminishes India’s earlier expressed interest in eventually acceding to the GPA. China’s accession would enable its companies to compete in the international market on a par with rivals in developed countries. In contrast, the Modi government’s protectionist approach will hamper efforts by Indian firms to bid for foreign contracts. A recent example is the US Buy America Act (2009) that stipulates an additional 2 per cent tax on bidders from nations that are not members of this pact. Another cost of this plan would be borne by Indian citizens, whose frustration with the corruption of the previous government inspired them to elect Modi. The ‘Buy India’ decision will likely perpetuate the opaque, corruption-ridden system that Modi had pledged to dismantle. Indeed, India’s biggest recent corruption scandals — including the 2G scam, the Commonwealth Games fiasco and revelations about illegal mining contracts — were products of a non-transparent system in which venal officials had a free hand. Joining the GPA and opening procurement to international bidding would have obliged India to undertake measures to enhance transparency and accountability. It would have signalled to the world that India is ready to join developed countries with what is supposed to be a clean, predictable and transparent system that rewards efficiency and quality and not mollycoddle national firms, however non-competitive they may be. The GPA accession requirements would have pushed India towards adopting good governance methods compliant with international norms, while ensuring that the government got the best available goods and services at competitive prices.India’s emerging protectionist stance on government procurement will raise fresh doubts among foreign investors about the Modi government’s commitment to economic reform and liberalisation. If Modi wants local firms to be the best in the global marketplace, he has to start by first allowing them to compete against the bestforeign firms inside India. Like charity, competition too should begin at home.(This story was published in BW | Businessworld Issue Dated 26-01-2015)