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Capital Goods
Sector Update


Capital Goods Industry: Policy Intervention for Sustaining Growth

CAPITAL GOODS INDUSTRY

(A strategic National Asset)

 

Capital Goods refer to products that are used in the production of other products but are not incorporated into the new product. These include machine tools, industrial machinery, process plant equipment, construction & mining equipment, electrical equipment, textile machinery, printing & packaging machinery etc.

 

The Capital Goods industry is the “mother” of all manufacturing industry and is of strategic importance to the National security and economic independence.

 

It is in the interest of the User Sectors that the Capital Goods industry should be strengthened since it is a known fact that the presence of a strong domestic industry increases competition and helps in reducing the capital cost of the project and most important, the maintenance of plant and machinery can be done economically. The imported plants come at the lowest cost but the importers make up for that in their high priced maintenance contracts & spares.

 

The Capital Goods Sector was on an upswing since March 2002, due to investments having taken place in the infrastructure, oil & gas sector, power sector, steel plants, automobile industries etc.  The capital goods industry has evolved over these years in terms of competitiveness by consolidating. Hence the number of players are few. Due to its strategic importance for the country, it is essential to encourage manufacturing of capital goods rather than import and enhance the value addition and technology transfer.

 

The annual sales of the capital goods industry was about Rs.110,000 crores during 2008-09 though the market is more than Rs 300,000 crores with between 60 to 70 % of equipment across all categories being imported, with the drastic fall in customs duty and the inherent dis-advantages faced by domestic manufacturers thereby making them cost un-competitive and reducing them to be traders and assemblers, instead of manufacturers. Its contribution to the exchequer has been in excess of Rs.20,000 crores in terms of customs, sales tax and excise collections and which will be higher if corporate taxes are added. The capital investments made in this sector has registered a healthy CAGR of close of 10% for a period from 1995 to 2005. The industry currently employs 6 million skilled and semi-skilled workers. It needs to be highlighted that this sector generates the much needed employment for less educated persons like fitters, welders, machine operators and ITI graduates and employs all collared people.

 

 

Present Status :

 

Few sectors of the capital goods  sector, which have a lower gestation period & are off the shelf products  has been witnessing a downturn since October 2008. The performance of the capital goods companies are expected to lower in 2009 - 2010 as compared to 2008 - 2009 as the order in flow had slowed down since the global recession. It is expected that the industry will foresee an upswing either in the last quarter of the current financial year or first quarter of next financial year as order inflows have picked up.

 

It is anticipated that overall the sector would grow between 1 – 3 %, buoyed by some investments in the power sector and infrastructure sector, however many sectors would show a negative growth of 15 – 20 % in 2009 -2010.

 

There are many reasons behind the de-growth, slowing of economy being the prime factor. The other factors are :

 

Ø  Rise in Chinese imports.

-           Indian industry is at a serious disadvantage while competing with companies form China due to the following factors :

q  Artificially depreciated Chinese currency

q  Tax advantages & Government subsidies given by the Government

q  Much lower interest rates.

q  Simpler labour laws.

q  Better infrastructure leading to lower cost of power, transportation & cluster approach helping specialization of labour & engineering skills.

 

Ø  Rise in second hand imports.

o    TUFS and other Government support being used to procure second hand imports thereby bringing obsolete technology and depriving indigenous industry of the demand growth.

o    The customs duty on second hand imports as low as 5% at par with new equipment

 

Ø  Lack of level playing field & Inverted duty structure turning manufacturers to traders.

 

o    All domestic manufacturers of equipment are rendered uncompetitive due to additional burden of Sales Tax, Entry Tax, Octroi, VAT, and other local duties and levies etc.

o    For specified projects (Oil & Gas, mega nuclear/hydel power, fertilizer, refinery etc) zero/ 5 % customs duty applies on Capital Goods. Further for all other capital goods, the customs duty has been reduced to 7.5 %.  Some components attract 10% duty whereas complete equipment attract 10%, hence uniformly all customs duty to be enhanced to 10%.

 

Ø  Lack of finance for the SMEs.- Capital goods manufacturers should also be given 2% concession on interest rate that is given to other sectors of manufacturers.

 

Ø  Lack of Exim Bank support for exporters, specially for long gestation period projects.

 

Ø  Slowing down of Capex programmes of user sectors., cancellation / deferment of orders.

 

POLICY INITIATIVES REQUIRED FOR SUSTAINING GROWTH

 

1.         In the Budget 2009-2010 Government felt the necessity of a focused approach towards research and development as a means for companies to stay competitive on the international front. And hence had granted  150% weighted deduction for R&D but only for a year.

 

q  As Research & Development is an ongoing process with a long gestation period, Government to consider extending it for 5 years and then reviewing the progress made.

 

2.         Central Power Research Institute in Bangalore – Investments of Rs 400 Crores needed to  upgrade its facilities for high voltage testing which would reduce delivery time and cost of equipment, necessary for power projects.

 

3.         Lack of Technology Availability, Upgradation & Modernisation  - In some areas of Capital goods manufacturing, technology is not easily available due to the reluctance of the technology supplier to part with technology when they can service India at a much cheaper cost due to the falling customs duty. This not only is detrimental to the growth of the industry but also in times of crisis, components may be denied to India. There is thus a regime of “Technology Denial” by western countries which adversely affects the production of machine tools and industrial products of the latest technology both for civilian and strategic applications

 

The other area of concern is productivity, main reason being outdated technology. This factor is a major impediment in making the industry cost competitive and making inroads into the export market in a big way. Companies who have upgraded their technology and modernized have been able to sustain competitiveness from all levels.

 

It is difficult for SMEs and individual companies to set up testing laboratories and other common facilities.

 

q  Hence it is proposed that Government allow a Technology up gradation fund scheme akin to TUFS and also allow common facilities to be set up at Textile parks for the clusters of Capital goods sectors across the country. The Department of Heavy Industry Scheme for the sector is awaiting clearance from EFC ( Expenditure Finance Committee.)

 

4.         Banking Industry & Exim Bank to be advised to ease financing for the Capital Goods sector and also extend the 2% concession in interest rate given to some others sectors like textile.

 

5.             To promote buying of  Indian manufactured goods or at least 40% project to be manufactured in India for large investment made in India to spur domestic demand and also transfer technology like it is done in China.

 

6.             To review the policy on allowing imports of second hand machinery.

 

7.             Reduce transaction cost by introducing GST at the earliest as committed in the budget.

 

8.             Government to play a facilitator’s role in stimulating growth by speeding Investments in Infrastructure and a project monitoring task force to be set up to ensure projects being implemented as per schedule and also to expedite where necessary.

 

9.             Implement the Boiler Amendment Act – will release a huge bottleneck of making authorized inspectors available for checking the equipment awaiting inspection and would aid faster capacity addition for cement and power industry.

 

10.          Inter ministerial task force to be set up to suggest ways of manufacturing CRGO steel in India which would give a boost to cost competitiveness and faster delivery of transformers for the Indian Power sector.

 

11.          Removal of Technology restrictions -  USA/other western countries in high technology could be persuaded to lift the restriction on the export of CNC controls and machines now classified as “dual-use”. This would facilitate production of modern, advanced machinery, equipment, parts and finished items required for both civilian and non civilian applications.

 

It may also be considered whether India can insist on a lifting of such controls (both machine tool related and other industries) as a corollary to the deeper engagement with the west on high technology in the nuclear and defence sectors as well as civilian aircraft sector which are on the anvil. Aircrafts should be encouraged to be manufactured in India with HAL taking the lead along with other suppliers and SMEs.