New industrial policy 2023 – a look into the crystal ball

The industrial policy of 1991 was one of the boldest initiatives that a government could ever take in a very difficult economic situation; The significant abolition of the Raj license and the opening of the door to foreign direct investment (FDI) heralded a major turning point in India’s economic landscape.

More than three decades after that major overhaul, the world looks very different today. Recent press reports suggest that an Industrial Policy 2023 (NIP’23) is in the works and will likely focus on new industries, carbon neutrality and the drive to make India a major manufacturing hub. It is expected that NIP’23 will refocus on the world we find ourselves in today.

Some interesting statistics

Services contribute 54 percent to India’s gross domestic product (GDP), while manufacturing stagnates at around 16 percent. Agriculture employs about 49 percent of the labor force but contributes only 15 percent to GDP. On the other hand, between 1991 and 2021, the share of industrial employment increased from 15 percent to 25 percent.

A NITI-Aayog document “Strategy for New India @ 75” lists several initiatives to increase the contribution of manufacturing as a percentage of GDP, but mentions various limitations including regulatory uncertainty, investment, technology adoption and challenges for ease of Doing Business (EODB). ).

Against this background, NIP’23 must provide a path for the manufacturing sector by bringing about holistic reforms, including linkages in areas such as infrastructure, logistics, warehousing and energy. A combination of core and semi-core enablers must exist to kick-start manufacturing, although the complexity of achieving this is enormous.

NIP’23: Core Enabler

There are a variety of issues that need to be addressed in order to advance the Indian manufacturing base. The core areas are:

Direct Incentives: The government introduced a Production Linked Incentive (PLI) system in key sectors to create production champions for an Atmanirbhar Bharat. It is anticipated that the NIP’23 will identify products where the PLI should be extended, taking into account the China +1 opportunity.

While a lower tax rate of around 17 percent applies to new manufacturing companies, it should also be extended to new manufacturing units to reduce complexity. The reduced tax rate is only available if production has started by March 2024. However, given the dynamism required in manufacturing, NIP’23 may seek to extend the date by two to three years.

Land Resources: On a broader scale, the availability of large tracts of land with clear ownership rights is a major impediment to establishing production units. Additionally, India’s initiative to digitize land records has some major gaps and the physical nature of registration is extremely cumbersome.

Logistics and warehousing: The National Logistics Policy 2022 has set the reduction of significant costs in logistics as its main goal and outlined an action plan for it; including improvements in transportation, inventory management, regulations and integrated digital logistic systems. Given the link between logistics and industry, it is hoped that NIP’23 will be linked to these initiatives.

Employment and skill development: Increasing automation is likely to lead to a reduction in staff levels and hence better quality and a higher level of complexity in the workshop. There is an enormous shortage of skilled workers, the cause of which lies in the functioning of the education sector. While the National Education Policy 2020 and various other skills development initiatives provide a refreshing take on the education sector, the inaccessibility of technology to the economically backward class is hampering educational outreach, especially in a post-coronavirus world.

Other problems

Certain other issues and areas, including those addressed in the Ficci-Mckinsey Report entitled India’s Century Achieves Sustainable, Inclusive Growth, 2022 include:

India’s manufacturing sector has been slow to make the transition to advanced technology, particularly in sectors such as electronics, semiconductors and renewable energy components.

Certain goods have quality defects and lower brand value than those from comparable economies;

Sectors are burdened by comparatively high compliance costs as it is an EODB issue;

Production sites are usually located in areas far from cities or towns. Therefore, regional development of such areas is important to incentivize workers to relocate. There are big disparities between the states of India – 40 percent of the net value added is generated by Maharashtra, Gujarat and Tamil Nadu;

Half of the states do not have functioning special economic zones.

Summarize

The global landscape today is extremely complex and volatile. However, China +1 is a significant opportunity from an Indian perspective. With unemployment relatively high in India, the manufacturing sector is vital to providing jobs in a country home to one seventh of the world’s population. In this regard, it is hoped that NIP’23 will contain some worthwhile initiatives that will enable India to realize its enormous potential.

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