Logistics, cost, and red tape: Manufacturing’s hidden hurdles

The Federation of Indian Chambers of Commerce & Industry (FICCI) is one of the country’s oldest premier business chambers. FICCI Additional Director General Jyoti Vij spoke to Bizz Buzz about a wide range of issues affecting Indian businesses today. From the upcoming general elections and the expectations of India Inc to the challenges and opportunities in boosting manufacturing and exports, Vij offered insights and recommendations informed by FICCI's deep understanding of the Indian economy

With the general elections a few months from now, what does India Inc expect from the next government?

India’s vision of becoming an upper middle income economy can be achieved only through consistent high growth and continued development efforts. We have seen several transformative reforms over the last decade and hope that there will be continued focus on structural reforms and enabling policy measures by the next government as well. The next government should lay continued thrust on capital expenditure, enhanced digital infrastructure, continue focus on ease of doing business through reduction and simplification in compliances as well as steps towards lowering the cost of doing business, specifically through reforms in factor markets. Besides, the government must ensure sustainable and inclusive development and continue to focus on farm prosperity, women development and promotion of sustainability practices.

Central government has been spending big in infrastructure, but there hasn’t been commensurate capex by the private sector. There have been reports of some rise in the last few weeks, though. Do you expect the green shoots to grow into robust plants?

Investments were impacted over the last few years due to unprecedented challenges related to pandemic and then geo-political developments. With demand and economic activity showing a turnaround, the capex cycle has seen an upward movement. Currently, capex recovery is being seen in sectors like power, steel, cement, and renewables. According to FICCI’s recent surveys, the capacity utilization levels have improved to around 73-75 per cent and, with further improvement to around 80 per cent, we can expect greenfield investments across sectors to gather pace.

The production-linked incentive (PLI) Scheme is successful in a few sectors like mobile manufacturing but not in others. What kind of course correction would FICCI recommend?

PLI has been an extremely beneficial and successful scheme introduced by the government. As per the latest data, PLI Schemes witnessed over Rs 1.03 lakh crore of investment till November 2023, which has led to production/sales of Rs 8.61 lakh crore and employment generation (direct and indirect) of over 6.78 lakhs. PLI Schemes have witnessed exports surpassing Rs 3.2 lakh crore, with significant contributions from sectors such as large-scale electronics manufacturing (LSEM), pharmaceuticals, food processing, and telecom and networking products. As of January 2024, 746 applications have been approved in 14 sectors.

There has been a value addition of 20 per cent in mobile manufacturing within a period of three years. Production of mobile phones has increased by more than 125 per cent and export of mobile phones increased nearly four times since 2020-21. Foreign direct investment (FDI) increased by almost 254 per cent since the inception of the PLI Scheme for LSEM.

Import substitution of 60 per cent has been achieved in the telecom sector, and India has become almost self-reliant in antennae, GPON (Gigabit Passive Optical Network), and CPE (Customer Premises Equipment).

There has been a significant reduction in imports of raw materials in the pharma sector. Unique intermediate materials and bulk drugs are being manufactured in India including Penicillin-G. Transfer of technology has happened in manufacturing of medical devices such as CT scan and MRI.

The drone sector has seen a seven times jump in turnover, which consists of MSME startups.

Under the PLI Scheme for food processing, sourcing of raw materials from India has seen significant increase which has positively impacted income of Indian farmers and MSMEs. The scheme has also led to increased millet procurement, from 668 MT (2020-21) to 3,703 MT (2022-23).

Under the PLI Scheme for white goods (ACs and LED Lights), 64 companies have been selected under the scheme. All applicants who opted for a gestation period up to March 2022 have commenced production. The value addition achieved by AC players has already reached 45-50 per cent. As against the threshold investment of Rs 1,266 crore, actual investment of Rs 2,002 crore was done by the beneficiaries up to March 2023. Investment of Rs 2,084 crore was done by the beneficiaries up to September, 2023.

Despite PLIs and other stimuli, the contribution of manufacturing to GDP remains stagnant. What else can be done to boost factory output?

PLI is one of the key enablers for achieving globally competitive manufacturing. Since these are initial years of PLI, it may not be appropriate to draw such conclusions at this stage. Besides PLI, logistics, productivity, high finance and energy cost, ease of doing business issues, etc., are the areas that need to be continuously looked into to make our manufacturing more competitive and efficient.

Which are the issues that the government needs to address urgently? What supply-side reforms would you recommend to the Central government?

On a priority basis, we need to see how to bring down the cost of manufacturing in India from the perspective of compliances, energy, finance and logistics. FICCI is supporting the DPIIT (Department for Promotion of Industry & Internal Trade) to develop a framework for the cost of doing business in states. The DPIIT is working with FICCI, inter alia, to assess time and cost impact of various regulations through the Cost of Regulations (CoR) framework.

Some of the other key supply-side reform measures that the government should consider include:

• Encourage innovation by providing incentives for R&D and innovation under different tax policy measures like Patent Box Regimes, weighted deduction, and R&D tax credits.

• Extend the concessional tax regime (under section 115BAB of the Finance Act) for manufacturing operations for at least five years. This will help improve the Indian industry’s global competitiveness.

• Continue to lay thrust on infrastructure development. Also consider establishment of free-trade-zones and port proximate clusters with plug-and-play frameworks.

• Introducing a mechanism to ensure efficient supply of agricultural products, especially vegetables. FICCI has been suggesting creation of a Food Inflation & Response Strategy (FIRST) to ensure efficient supply-chain movement of agricultural products through integrated data and logistical strategies and co-ordinated work across multiple government agencies.

• Continue the ease of doing business measures, especially implementation of the Jan Vishwas Act.

• Continue to engage with states to bring petroleum products (petrol, diesel, natural gas, ATF) under the ambit of GST.

• Regulatory reforms, including undertaking regulatory impact assessment, rationalization of multiple regulators, and enhancing the capacity of regulators.

How are states doing on the reform front? What more can they do?

State governments are taking various initiatives to catalyze investments and industrial activities. Several reforms have been initiated across states in areas related to industrial policy, ease of doing business, etc. Today, all states and Union Territories are being assessed by the DPIIT under the Business Reform Action Plan (BRAP) on the basis of implementation of designated reform parameters related to Investment Enablers, Access to Information and Transparency, Online Single Window System, Land Allotment, Construction Permits Enablers, Labour Regulation Enablers, Environment Registration Enablers, Inspection Enablers, Obtaining Utility Permits, Contract Enforcement, Sector-specific reforms, etc. The report of BRAP 2022 is currently underway and is expected to be released soon.

Various states are also learning from the best practices of other states. The single window systems of some states are very effective and work as the models for other states. The Maharashtra government recently tabled the Industry Trade and Investment Facilitation (MAITRI) Bill, which aims to improve the ease of doing business by speeding up the application process and also the procedure of getting permissions from the government. The Bill aims to make the single window system more effective in the state.

Many states have introduced the Right to Public Service Delivery legislations which guarantee public services to citizens in a time bound manner. State governments are proactively formulating policies with requisite incentives and support measures for attracting investments in the identified sectors. All states have an industrial policy and sectoral policies to provide specific thrust to sectors like food processing, textiles, electronic, manufacturing, defence & aerospace, films, logistics & warehousing, tourism, renewable energy, electric vehicles, and startups. State governments are also investing in improving industrial infrastructure and providing plug-and-play facilities wherever possible.

Going forward, we are hopeful that states will continue to undertake various reforms, especially through liberalization of rules and regulations related to land, labor, and power, as well as market access reforms in agriculture and improvement in healthcare and education. Additionally, state governments can also repeal obsolete laws and reduce the number of compliances at the state level.

What can be done to boost merchandise exports?

India’s merchandise exports have been impacted by various external challenges over the last few years. Going ahead too, there is huge uncertainty in global trade owing to the geopolitical conflicts and overall growth slowdown. The WTO too had revised its estimates downwards for the volume of world merchandise trade to 0.8 per cent for 2023 as against its previous forecast of 1.7 per cent growth. To boost Indian exports amidst such a challenging global environment, the government needs to chart out a comprehensive strategy and long-term vision across products as well as foreign markets and aggressively promote Brand India in major markets.

The government should enter into free trade agreements with countries that provide Indian exporters significant market access and take steps to ensure effective utilization of the FTAs (currently FTA utilization level in India is very low). There is also a need to address various non-tariff barriers. FICCI’s recent study on non-tariff barriers brings out key issues that our exporters across different sectors have been facing, be it related to quality regulations, quota restrictions, or testing requirements. Leveraging PLI Schemes to become an integral part of global value chains will also give a strong boost to exports from India.

How can the government boost the MSME sector?

MSMEs are a significant contributor to the economy in terms of output, exports as well as employment. Supporting MSMEs is essential to ensure sustainable and inclusive growth. To address the finance-related challenges faced by MSMEs, there is a need to shift towards cash flow-based lending for MSMEs instead of collateral-based assessment. Even though today several government-backed schemes facilitate credit to small businesses by giving collateral-free loans at reasonable interest rates, a noteworthy gap remains between demand and supply of finance through the government schemes.

Further, integration of SMEs in the global value chains is extremely important, and one of the ways to that is to enable information access to MSMEs. We have been suggesting setting up of an institutional mechanism for global market intelligence to provide real-time updates on international trade processes and regulations as well as to regularly conduct market studies, sector-specific studies providing better understanding of barriers to trade, market entry opportunities, etc.

FICCI recently conducted a study to assess the preparedness of SMEs on digitalization and adoption of sustainability practices. The study clearly shows that businesses today recognize the importance of digitalization as well as of integrating sustainability practices in their operations; an overwhelming 72 per cent of respondents were generally aware of sustainability and ESG practices. What is needed is to handhold SMEs for greater digitalization and quality upgrade, and to encourage adoption of sustainability practices.