Budget expectations: Manufacturing sector

31 Jan 2022 , 03:21 PM

Manufacturing remains a high-priority sector in India, contributing over 17 per cent to the country’s GDP. The recent GDP estimates peg the growth of the sector at 12.5% for the year which is the second fastest among all the sectors of the economy. It is also one of the leading contributors to our exports which is projected to cross 400 Billion USD in this fiscal year.

The Government has correctly focussed on this sector with initiatives such as the production-linked incentive scheme to boost manufacturing in the country. There is a clear policy shift towards becoming the factory to the world through the ‘Make in India’ initiative.  While the outlook for 2022 is bright, there are several challenges to be addressed. The cost of doing business in India is quite high. Successive waves of the pandemic are disrupting supply chains and production and Inflationary pressures on materials, power and freight continue to hobble industry.

The development of a robust logistics infrastructure and utility environment for the manufacturing sector should be the primary focus of the Government. There is a great focus on railway reforms as well as the road infrastructure including creation of the freight corridors. This should quickly deliver a reduction of logistics costs and improvement in supply efficiencies across the country. Port operations alo require improvement in turnaround times by benchmarking with the best in the world.

On the electrical utilities front, while there has been a good focus on strengthening discoms through various schemes like UDAY, the financial health of many of these discoms has not improved. Hence, policy reforms in this regard are essential along with financial support. The much-awaited 'Amendment to Electricity Act' also needs to be rolled out to bring reforms in the Distribution sector.

The government has stated its objective of generating 500 GW of electricity through renewables by 2030. To enable this, it has to introduce supportive policy measures for setting up solar power plants. The basic Customs Duty (BCD) that is scheduled to be implemented from April 2022 will have a significant impact on the cost of solar projects and tariffs (Rs/Unit) making them unremunerative. Hence, the BCD implementation needs to be postponed for at least six months.

India can become a hub for furniture manufacturers in view of global supply chain issues. The government has recognised this and has set up a task force which had recommended on areas of reduction in customs and import duty on raw materials and sub-assemblies, for a period 3 — 5 years till domestic capacity is built up in the Indian furniture ecosystem.  This can create a price advantage for furniture manufactured in India to compete in the world markets and substitute imports. Further, furniture manufacturing can also be taken under the PLI scheme.

The same goes for the Appliances industry which has been grappling with unprecedented rise in commodity prices and a shortage of components on the supply side. It can become a global champion if productivity is lifted by securing technology, know-how and components by easing duties on imports. The Govt. has taken a strong step by including Air conditioners under PLI for local manufacturing. It should follow this up by rationalising the GST on air conditioners which is still in the highest tax slab of 28 per cent. Moreover, lowering the GST slab for eco-friendly and energy-efficient products further to 12 per cent will not just help drive demand, but also increase the adoption of sustainable appliances.

The real estate sector employs the largest pool of labour in the organized sector. It needs to be accorded with infrastructure status. This will spur growth across the industry and boost employment. There is a huge opportunity to increase the use of recycled concrete material (RCM) in infrastructure projects. However, 18 per cent GST is charged on RCM. It is recommended that the GST charged should be 5 per cent or nil for promoting sustainable infrastructure construction thus promoting a circular economy is the need of the hour.

The manufacturing sector needs to create a robust value chain so that it can realise economies of scale even as it focuses on quality and productivity. These are sure ways of putting the economy on a path of sustained growth over the long term.

The author of this article is Mr.Anil G Verma, Executive Director and President, Godrej and Boyce

The views and opinions expressed are not of IIFL Securities, indiainfoline.com