National Manufacturing Policy: Don't go wrong this time

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Economic Times
By
Abhaya Agarwal
Executive Director, Government practice, EY India

and

Karthik Kamath 
Associate, Government practice, EY India

In the last four decades, many emerging countries adopted development strategies that focused primarily on promoting the manufacturing sector. As a result, countries such as China, Taiwan and South Korea succeeded in accelerating the growth of output and employment in this sector. So, the robust growth in these countries can be mainly attributed to their strong and vibrant manufacturing sector.

India has, for various reasons, failed to expand its manufacturing base and capitalise on employment creation in the manufacturing sector. Several earlier attempts have not yielded the desired result of promoting growth in the sector. But with the Cabinet approving the National Manufacturing Policy (NMP) last week, some of the chronic problems plaguing the manufacturing sector are set to be resolved.

The new manufacturing policy broadly addresses issues pertaining to flexibility in labour rules, reducing the burden of compliance by simplifying business regulations, providing faster clearances by proposing single-window system for clearances, simpler and expeditious exit mechanisms for closure of units while protecting the interests of labour. The policy also aims at capturing benefits arising out of clustering manufacturing activities by proposing National Investment and Manufacturing Zones (NIMZ).

It acknowledges the fact that technology upgradation is the only and fastest way to be able to compete globally and ensure sustainable growth in the sector. The policy proposes to establish Technology Acquisition and Development Fund that will address the concerns across industries. It provides part-reimbursement for technology acquisition and eliminates traditional barriers of cost problems, faced especially by SMEs. Thus, it intends to promote use of cleaner energy sources, renewable energy resources and energy conservation technologies in the manufacturing sector.

But the key to success will be policy implementation, but there are several challenges. Firstly, contiguous land required for setting up NIMZ will not be available due to the size of the requirement. Moreover, acquiring land of this scale will be a major challenge in India. Limitation to acquire newer land parcels for industrial developments has pushed up the cost of industrial land to prohibitive levels. The proposed special purpose vehicle (SPV) model for governing the NIMZ should take care of this aspect and adopt measures such as deferred payment towards land cost to ease the burden of entry cost for new units.

Also, the policy relies excessively on creating few greenfield clusters, or NIMZs, only along the Delhi-Mumbai Industrial Corridor (DMIC) to catalyse growth in manufacturing. Thus, it appears that the NIMZs have been conceptualised on the basis of DMIC. This is exactly the reverse of what the policy should ultimately aim to achieve. In fact, policies such as NMP should lead to spin-offs, resulting in the creation of projects like DMIC - that aim to develop the entire region by providing superior infrastructure and promoting industrial activities.

DMIC itself has not reached full-scale implementation stage and would take another 3-4 years to be operationalised. This, in turn, means that the proposed seven NIMZs will also take at least 3-5 years to start yielding desired results.

A more appropriate approach would be to focus on creating opportunity for incremental growth in such existing clusters or brownfield regions, identifying existing clusters (even though they will be non-contiguous) and extending benefits of NIMZ to these regions. Interventions in the brownfield regions will have far-reaching consequences in terms of growth and employment creation and, thus, will lead to overall development of the region.