Manufacturing Challenges in India

I’ve read this article in Electronics Bazaar magazine and I thought
it would be good to share some of the insights here.

The world today sees India’s economy growing into what’s expected  to be one of the biggest global economies by mid-century. Although India is still viewed by manufacturers as an economy where the risks are higher and the business environment more problematic than other rival Asian countries, India does offer some advantages for investors/manufacturers. Analysts say that the legal framework in India that protects investment is one of the best in Asia. The country also offers an abundance of  technical and managerial talent. The demand for electronics hardware is increasing at a rapid pace and is estimated to reach US$ 400 billion by 2020. At the same time, the gap between the demand and local manufacturing will widen and can reach US$ 300 billion, if the necessary measures are not taken on time. The major sectors driving the growth of local electronics manufacturing are telecom, consumer electronics, automobiles, defence, medical electronics, and the EMS industry, the last of which is expected to grow at a CAGR of 9 percent over the next five years.

India is changing fast. There is no comparison with what it was 10 years ago. So, what prevents manufacturers from setting up production on Indian soil? Here we will discuss some of the major challenges in setting up industries in India. There has to be a willingness and sense of urgency in the concerned government departments to solve these issues.

License

The burden of licensing and involvement of the bureaucracy has significantly reduced in India, since 2000. In terms of the companies’ perception of the burden, India is rated better than China and Brazil on business regulation. Licensing is no more a requirement in India, after liberalisation. Only in few areas of manufacturing or services is licensing applicable, as in the case of 3G services, etc. But there are a lot of other formalities that have to be fulfilled before any industry can be started, which is a waste of effort, time, and money. A few examples are: registration with the department of industries, clearance from the Pollution Control Board, registration under the Factories Act, registration for VAT/CST, excise, service tax, etc.

There is a lack of a standard procedure and no clear cut information about the formalities that are required to start manufacturing. Startups are in the dark as to what license is required and what are the different requirements of the government departments. Industrialists depend on consultants for such information to avoid penalties and legal hassles.For example, a lot of complicated procedures need to be followed for an import/export industry.

Companies also complain of the time it takes to secure a wide range of approvals. One manufacturer reports that after many years of operation in India, the company has just secured an “approval agreement”, which is considered a routine agreement in any other country. Companies are largely in agreement that one of the most significant regulatory burdens in India is related to labout legislation, which remains a significant drag on business. Companies say, they need one common body to handle all license and registration related issues. This body should periodically educate the industry of the list of requirements by different government departments.

Taxation

India’s commercial taxation system is unusually complex, especially where indirect taxes are concerned. While income tax, excise and customs duty are set by the Central Government, states and municipalities also levy their own taxes and provide discretionary exemptions to attract investment. Although the tax policy and many tax rates are set by the Centre, states and municipalities also levy their own taxes, which can overlap with state taxes. A manufacturer has no option but to take professional assistance to understand the tax structure.

The rate of taxation is very high in India as compared to that of other countries. The tax structure is also quite complex as many different types of taxes are levied, like CST, VAT, BED, cess, service,tax, surcharge, entry tax, TOT, octroi, etc, and it becomes very difficult for a small industry to understand and comply with these regulations. Both the implementation of and compliance with these tax rules is difficult, as the regulations are not very clear and there could be different interpretations leading to legal proceedings. Besides this, tax rates are different in different states, giving rise to regional imbalances and confusion.

The duty regime applicable to special economic zones(SEZs) is at par with imports; for example, on STBs, the BCD is 5 percent for imports as well as what’s produced in the SEZ. This is a big disadvantage for manufacturers in India. Presently, units operating in an SEZ are at a disadvantage when making DTA sales because of differential tax structure. While DTA units and EOUs are exempted from payment of custom duty, the SEZ units have to pay customs duty for the full value of the product. This is discriminatory, and SEZ units are not able to compete with EOU and domestic units, as they pay customs duty only on components imported and not on the whole product, as is the case with SEZ units.

The government is aware of the problem related to the complexity in taxation. It is working on the the implementation of goods and service tax(GST) to overcome this problem. Under GST, there will be one single tax and this will replace many different taxes being levied at present. The government should, however, ensure that the rate of GST is reasonable and at par with other developed countries. Implementing GST should be simple and maintaining records should have the least bureaucratic procedures. If the rate of GST cannot be made at par with the developed countries, there should be incentive for exports or some sort of trade barrier for imports to provide a level playing field to Indian industry.

GST should incentivise and promote local manufacturing, which is not the case today. The inverted duty structure should be put in place more dynamically. This means that the possibility of lower duties and taxes on inputs and components needs to be considered, whereas the duty rates for final products should be enhanced. This will reduce the cost of components and will encourage local manufacturing. Also, duties on input components
and finished goods should be aligned.

The special additional duty (SAD) on finished goods being imported is either
refunded or exempted, and now rules are being framed to make the refund of SAD faster and more efficient. And in the case of local manufacturing, central sales tax , which is in lieu with of SAD, is neither exempted nor refunded. There should be a consideration where SAD and CST are treated at par and have no differentiation. Also, SAD on raw materials , components, and machinery are eligible for Cenvat credit. however, in practice, these cannot be effectively utilised and, hence, keep accumulating in the balance sheet. There should be a consideration in the structure where these credits can be well utilised. If a product is manufactured in a SEZ, all FTA incentives should be extended as the product is still “physically” manufactured in India.

A decision to manufacture in India is quite likely to be affected by the government policies. Government policies are one of the major deterrents to entrepreneurs starting their ventures. There are many registrations required before an enterprise can be started. All the concerned departments have a bureaucratic attitude and harass the entrepreneurs rather than supporting
them. These policies are also complicated and difficult to implement. A lot of valuable time of the enterprise is wasted in complying with these complex requirements. Besides, tax rates are high making Indian products expensive compared to imports from China, Vietnam, Indonesia, Malaysia, and Thailand.

Even today, after so many years after liberalisation, in schemes for exports like EHTP, EOU, etc, one has to go through too many rules and regulations.A lot of time and money is spent on collecting and presenting data to authorities like EHTP, EOU, etc. The import and export rules are also very cumbersome and consignments are held at the airport for the slightest of discrepancies. Proper procedures should be in place to ensure smooth clearance of consignments without any delay. Customs and excise matters should be customer friendly to avoid bottlenecks, and above all the governments should keep the industry informed about the schemes and plans in the industry.

Infrastructure

Weak infrastructure remains a significant cost factor for companies, although most infrastructure indicators are showing an improvement. For the efficient running of any industry, good infrastructure is of prime importance. Infrastructure helps in improving efficiency, quality, cost, and service. The basic infrastructure for any industry comprises good roads, power, water, telecommunications, finance, raw materials, components, and logistics. In India, availability of these facilities is not upto the mark even in established industrial estates.

The most significant infrastructure constraint for manufacturing is the unreliability of power supply. On an average, a company can expect nearly 17 significant power outages per month, against one per month in Malaysia and fewer than 6 in China. At the same time, power costs are high, and transport is also a constraint with road and rail systems deteriorating. This adds to two primary costs: delays in distribution and delays at ports. Transport delays increase the cost of distribution, although companies believe that other factors also contribute to distribution difficulties. This is one of the areas where Chinese have an advantage with their first class infrastructure.

Due to poor infrastructure, it takes days to clear imports and exports, resulting in further delays in customer dispatches. Imports are constrained by inadequate facilities at ports of entry. There are barely 2000 miles of expressway throughout India, and distribution costs are correspondingly high.

The government has to speed up its building of highways. The targets of the National Highway Development programme should be achieved. India’s budget for building and maintaining roads is less than that of its neighbours. China invests 2.5% of its GDP on roads as compared to India which invest only 0.3% of its GDP on roads. This results in higher freight costs in India. Power shortage and costs are really high, which creates a big challenge for local manufacturers to be competitive. Power shortage in rural areas is also hampering the penetration of consumer electronics products in rural areas.

Over the last 15 years, India has changed much faster than many predicted. Yet, things are still not to the level that allow us to compete on a global scale. Unless a concerted effort is made by the industry and the government to resolve these problems, India cannot compete with its rivals.

References: Electronics Bazaar magazine

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