GOVERNMENT OF INDIA
DEPARTMENT OF HEAVY INDUSTRIES
MINISTRY OF HEAVY INDUSTRY & PUBLIC ENTERPRISES
MEMORANDUM FOR EXPENDITURE FINANCE COMMITTEE
1. Project identification
1.1 Title of the project/scheme:
Scheme for Enhancement of Competitiveness in the Indian Capital Goods Sector (SEGC-Capital Goods)
1.2 Name of the sponsoring agency (Ministry/Department/Autonomous Body/Central PSE):
Department of Heavy Industry (DHI), Ministry of Heavy Industries & Public Enterprises, Government of India
1.3 Proposed duration of the project:
During 12th Five Year Plan
1.4 Total cost of the project over the proposed duration
The during the 12th Plan Period the proposed Government budgetary support to be given as grants to various proposals is Rs.1081.22 crore as alloted.
2. Project Status
2.1 Please indicate which category the project belongs to:
(a) Continuing scheme from past Plan periods and included in current Plan period.
NA
(b) New Plan Scheme included in the current Plan period
Planning Commission accorded with a condition to ‘in principle’ approval incorporate recommendations of the Working Group on the ‘Capital Goods and Engineering Sector’ as mentioned in the Chapter on Industry of the 12th Five Year Plan.
(c) New Plan Scheme not included in the current Plan period
Not applicable
(d) RCE proposal
Not applicable
2.2 If project pertains to category 2.1 (a), please summarise the benefits already accrued and expenditure already incurred along with an independent evaluation of the past performance of the project scheme.
Not applicable
2.3 If the project pertains to category 2.1 (c), please indicate steps initiated for obtaining approval of Full Planning Commission.
Not applicable.
3. Justification for the project
3.1 The justifications for taking up/continuing the project or scheme may be provided.
I. Background: Indian capital Goods Sector is suffering from Adverse Policy regime, obsolete technologies, lack of skilled manpower and other infrastructure challenges. The capital goods industry is considered as the ‘mother’ of all manufacturing industry and consequently is of strategic importance for depth in technology in manufacturing sector, national security and economic independence. The Capital Goods sector consisting of machinery manufacturers has an estimated turnover of Rs 1,85,000 crore against a demand of Rs 2,67, 000 crore. The imports are at Rs 1,16,000 crore ( 43.5% of demand and 62.7% of production). Exports are a Rs 34,000 crore ( 18.4% of production).
The Prime Minister’s Group in its Report (PMGR) identified capital goods as one of the sectors that is strategic for strengthening national capabilities for the long term. The PMGR has recommended that a time-bound action plan should be prepared in each of these areas for building high class modern capacities with R&D facilities, appropriate programme to encourage growth and development of these areas in the private sector together with Industry strengthening of the existing public sector and revisiting the existing policies to protect and promote selected capital goods industries.
Industry has been demanding modernization of the Capital Goods sector at all forums for past five years. The Indian Capital Goods Sector presented a comprehensive study of the sector few years back. The study brought out the need for modernization and upgradation through Government support.
DHI, in association with Indian Capital Goods Sector, had conducted a study to develop a road map and scheme for modernization of the capital goods sector. India is amongst the five large consumers of Capital Goods. While very high tech Capital Goods will continue to be imported, India needs some degree of strategic independence by local manufacturing. Given the technology denial regime, we need to development our own technology and other infrastructural facilities, to make our industry globally competitive.
The Working Group formed under the aegis of the Planning Commission on the sector also recommended the modernization needs of the Industry (Annexure I). The 12th FYP document also attached significance to the capital Goods sector as strategic sector.
II. The major constraints affecting the competitiveness of the industry are:
A. Technology & Knowledge Constraints
i. Lack of Technology upgradation & Modernization – The current level of technology is not contemporary. The large firms are able to modernize to some extent, but are dependent on vendors for supply of components and intermediates. Since the vendors are not cost competitive due to lack of modernization, the competitiveness of the large firms is also eroded.
ii. Lack of Cutting Edge Technology – Without institutional R & D support, Capital Goods units are unable to develop and adopt cutting edge technologies. This erodes their global competitiveness.
iii. Lack of Research & Development Support – The capital goods industry is a knowledge based industry which requires constant R&D efforts to produce state of the art machinery to meet the growing demands of the user industry. However, due to the non-availability of sustained R&D support from institutions, experts, and in house R&D capabilities of the Capital Goods sector, the industry is out of pace with modern technology.
iv. Capacity constraints due to lack of new investments: Capital goods industries are capital intensive and also have a long gestation period; besides, creation of new capacities requires land and infrastructure. For these reasons, creation of new capacity has been slow, and this has further encouraged increased imports of capital goods. Bringing new investments for capacity enhancement is a priority for the CG sector.
v. Lack of Skilled Manpower – Primarily due to service sector absorbing a majority of technical manpower graduating from institutes like engineering colleges, manufacturing sector including Capital Goods sector is suffering from non- availability of trained manpower. Secondly, the quality of institutional output is not what is needed by the industry in sectors like R & D, design, product development, technology development & modernization, manufacturing processes etc.
vi. Lack of Level Playing field: Import of Capital Goods is easier and less expensive. Open trade policy has turned India into second largest importer of Capital Goods after China. Adverse policy regime creates unfavourable environment for technology upgradation and also domestic production. Imports are cheaper due to zero duties under FTA or special provisions and additional statutory duties like sales tax, entry tax, octroi, VAT and other local duties levied on domestic manufacturing of Capital Goods.
vi. Import of Second hand Capital Goods: Second hand capital goods are allowed to import freely in India without any technical barrier. Capital Goods is the largest manufactured commodity in India’s import basket. This hinders capacity utilization, modernization, investments and growth.
vii Infrastructure constraints in terms of unreliable power and its high cost, port congestion and high turnaround time, high cost of fuel and poor road connectivity of ports / airports with hinterland leading to higher transportation cost and high cost of money adversely impact global competitiveness.
Viii The above situation has resulted in India becoming largest market for import of capital Goods in the World , while creating and upgrading domestic capacity can reduce imports by increasing domestic production.
ix Without the scheme, the imports will continue to increase and adversely affect the indigenous capital goods industry and user industries in terms of closure of units, loss of employment, loss of investment and affecting the social fabric of the country.
X The scheme will encourage investment in technology upgradation, skill development and augmentation of modern manufacturing capacities for holistic growth of the industry. The technology upgradation of the SMEs will enable the large firms to get adequate support from small vendors in execution of large orders expeditiously.
Xi The scheme proposes to mitigate the impact of the some constraints and to enhance the competitiveness of the capital goods industry enabling it to withstand the import penetration and increased exports. The scheme will offset the global disadvantages to a large extent. Most importantly, the scheme envisages actions in synchronization with 12th FYP for rejuvenating growth in manufacturing sector.
Xii The proposed scheme envisages Govt investment of Rs 1081.22 crore during 12th FYP. Most of which is proposed to create permanent technical services, industry parks for clusters & common facility centres.
Xiii The amount proposed to be spent is a fraction of contribution of the industry to the national exchequer as taxes. During the 12th FYP the industry is likely to have a turnover of not less than Rs 10,00,000 crore with the scheme. The tax contribution is calculated @ 16% of its turnover i.e. Rs 1,60,000 crore.
Xiv As per a back of the envelope calculations, atleast 1% of above turnover during the Plan may be attributed to the technologies and services through the proposed facilities. The additional tax component itself works out to be Rs 1600 crore during the 12th FYP.
Xv The other intangible benefits arising out of the improved technology level are growth in employment and exports.
3.2 The alternatives that have been considered before firming up the design of the project may be stated. (This should also include alternate modes of project delivery, e.g. outsourcing PPP etc. that have been considered).
India does not have technology development facilities dedicated or general, which can be used by the Capital Goods sector. Though some efforts are made in laboratories and academic institutions, these efforts are far too inadequate and not in the direction needed by the industry. It can be safely concluded that the existing system has failed to address industry issues on technology and skill development. There is no alternative except to comprehensively address the problems faced by the sector by involving all stake holders – owners of the value chain in planning and implementation.
The proposed scheme is a part of integrated approach for transformation of the sector. The Industrial Park & Common Facilities project components are proposed to be implemented in PPP mode with stake holders ensuring efficient project delivery. Pre-competitive technologies development in dedicated facilities with 90% grants to be created under the proposed scheme will be linked to Technology Centre of Excellence of CMTI, IITs-Bombay/Delhi/Madras/Kharagpur etc. 360 degree involvement of all stakeholders will provide checks and balances.
Dedicated facilities for pre-competitive technology development at Technology Centre of Excellence (TCoE) and undertaking mandatory tests are proposed to be created through DHI floated SPVs, whereas Industry Parks, Common Facilities for Machine tools, Textile machines and other sub-sectors of capital goods are proposed through PPP mode and also through dovetailing of academia.
3.3 Please state whether the project proposal has objectives and coverage which overlap with projects/schemes being implemented by the same or another agency (Ministry/Department/State Government). In cases of overlap, please state why the project scheme needs to be considered as a separate stand alone effort.
The scheme is limited to the Capital Goods sector, and as per Allocation of Business Rules DHI is the Administrative Ministry. It is the first scheme ever for the sector. The Working Group formed under the aegis of the Planning Commission had proposed a number of steps and proposals for development of Capital Goods Sector. All of them could not be covered in the present scheme for lack of resources in the present Plan. The scheme covers only the most essential and core subjects such as technology generation centre through Centre of Excellence, quicker technology acquisition, etc. in the Capital Goods sector. The rest of the recommendations are proposed to be undertaken in the 13th FYP for which separate EFC proposal will be prepared at an appropriate stage.
Other Ministries/ Departments such as DIPP (MIIUS), MSME (CFC & Cluster Development), M/S & T (R & D) and DGET & NSDC & Skill Authority (Skill infrastructure) run some schemes with well defined scope and objectives. Design of the proposed scheme for Capital Goods sector ensures no overlap with objectives and coverage of these schemes. Focus of existing schemes mentioned before is on enhancing access of manufacturing & service sectors to better quality of industrial infrastructure. DIPP – MIIUS is run with State Governments , supporting them in brown field industrial infrastructure projects. They provide grants upto Rs 50 crore to the States (upto 75% of the project cost). MSME Schemes are well designed to suite all types of the industrial infrastructure requirements of smaller clusters of artisans and MSME units. These scheme are based on templates and individual proposals are submitted under the scheme by project authorities. Concerns of the Complex Nature of Capital Goods sector could not be addressed by these schemes.
Existing scheme’s focus are either on low cost, low technology and general types of higher level of hi-tech component & production facility, industrial infrastructure, common facilities or limited technology services. While the proposed scheme is an integrated one and includes technology development, integrated supply chain, common test facility & acquisition..
DHI proposal is for specific facilities, which are much larger & above the limits of other schemes. The scope of the proposed facilities is also technologically complex and suits machine building sector , therefore, the basic nature of DHI proposal is quite separate than existing schemes. Also these proposals need integration with other initiatives on policies etc included in the 12th FYP document , which have to be coordinated by DHI as the Administrative Ministry.
This fact was established by the Planning Commission while according “in principle” approval.
4. Project Objectives and targets
4.1 The objectives of the project may be mentioned. These objectives should flow from the project justification.
The overarching objective is to make the domestic Capital Goods Sector globally competitive by addressing the constraints. The primary objectives of the scheme are Technology development & acquisition through creating enabling environment and facilities. The desired results are reduction on dependence on imports and doubling the production & employment.
The present structure of the Indian Capital Goods industry started to take shape in the hands of private techno-entrepreneurs after liberalization of 1991. However, size of the units being small, they could not keep pace with the technology modernization. National priorities with sectors like textiles, highways, steel, fertilizers etc and external trade relations resulted in a regime of free and cheap ( sometimes) imports of capital goods. This blocked modernization, capacity addition and new investment & technology induction. India became the world’s top market for Capital Goods with unique feature of access to second hand capital goods. Manufacturers of Capital Goods elsewhere preferred export to India being more profitable, rather than making investments in India. They did not agree to transfer their technologies to Indian manufacturers of the capital goods. Import of Second hand capital goods in India made the situation more difficult for Indian manufacturers of Capital Goods.