Inclusive Growth: Impossible without Manufacturing

‘Inclusive Growth’ and ‘Aam Aadmi’ have been two of the most commonly used slogans of UPA. The Eleventh five year plan is also titled ‘Inclusive Growth’. So let us try and define what Inclusive Growth should really mean.

Why Growth ? What kind of Growth ?

Growth is not just an economic agent of change; it is also an agent of social change. India does not only need growth to eradicate poverty, it also needs growth to break the social barriers. The ‘Hindu rate of growth’ , which India witnessed in the first four decades of independence, is definitely not desirable. The Hindu rate of growth couldn’t get rid of caste.

Caste is still a reality in large sections of Indian society and the last two decades of growth has seen it somewhat cracking. The only thing that can break the caste barrier is rapid economic growth which creates enough opportunities for people to come out of their caste boundaries and hierarchies. Growth thus has to be rapid. Hindu rate of growth is unacceptable.

What is Inclusive Growth ?

‘Inclusive growth is growth that ensures meaningful and sustainable jobs for all, which includes the poorest of the poor.’

Indian economy at a glance

India’s GDP can be divided into three broad sectors – primary sector (agriculture), industrial sector and the services sector. The table below depicts the sector composition of GDP over the years.

Sectoral Composition of GDP

Year Agriculture Industry Services
1950-51 53.1 16.6 30.3
1960-61 48.7 20.5 30.8
1970-71 42.3 24 33.8
1980-81 36.1 25.9 38
1990-91 29.6 27.7 42.7
2000-01 22.3 27.3 50.4
2010-11QE 14.5 27.8 57.7
2011-12AE 13.9 27 59

 

Source: Economic Survey 2011-12

As is evident from the table above, the contribution of industrial sector to GDP has stagnated since 1991. Industrial sector can be further broken down into Manufacturing and Mining. Manufacturing constitutes roughly 16% of our GDP and has been stagnant at that level.

India’s GDP growth has essentially been services led growth with the share of agriculture consistently going down. This has naturally meant that growth has not been inclusive enough.

Why manufacturing ?

It is often alleged that the reforms initiated in 1991 has not really benefited the poor as inequality has increased. Unfortunately, it ignores the stagnant state of manufacturing. So why is manufacturing important for inclusive growth ?

The answer to this question is because it cannot just be the other two sectorsagriculture or services. In the next 15 years, around 250 million more people would join the workforce – we need create adequate jobs for them.

Agricultural growth, though has improved from 2% earlier to now 3.5%, it still cannot accommodate this humongous number. Area of cultivated land per cultivator has declined from 0.43 hectares in 1901 o 0.23 hectare in 1981 and current. Availability of cultivable land is not increasing any further and current figures of area of land per cultivator would be even lower. There are far too many people involved in agriculture. (Source)

Services –There are some countries like Singapore and Switzerland that have become rich through services, like finance, tourism and trading; does it not show the viability of service-based prosperity ?

The answer is no. Firstly, because India’s population is 1.2 billion and cannot be compared to much smaller countries. India is  too large to survive on a services led economy and needs a more diverse economy. Within the services sector, knowledge based sectors like IT or Financial services provide jobs only to highly skilled and educated labor.

The two sub-sectors in services that are mass employment creators are – tourism and retailing. While there is tremendous scope for developing tourism in India, the latter is again not applicable in case of India. India has highest number of retail outlets per 1000 population (Source). This essentially means any growth in retail sector through reforms such as FDI is unlikely to produce too many incremental jobs as many more existing ones may be destroyed. FDI in retail must therefore happen once manufacturing reforms are in place.

Manufacturing

The history of economic development followed a pattern of pulling people out of agriculture, moving them into non-farm activities such as into manufacturing and then into services. The present growth pattern led by high service sector growth and a stagnant manufacturing sector is leading to a rural-urban divide.

Manufacturing is crucial to the Indian economy. The effect of improvement in manufacturing sector goes far beyond the goods provided by it. Manufacturing sells goods to other sectors and in turn buys materials and services from them for its growth and development. Manufacturing spurs demand for everything from raw materials to intermediate components.

For instance, despite being hailed as the IT superpower, Indian IT sector is largely services based and not product based. This is because of lack of domestic manufacturing which essentially means that Indian IT companies don’t have adequate domain knowledge to create products. Likewise, manufacturing can spur growth in other sectors like financial, health, accounting and transportation.

Growth of manufacturing sector also lends greater support to Agriculture through more intensive efforts on agro-based Industries like food processing. As per the CII-Mc Kinsey Report prepared for Manufacturing Summit 2004, manufacturing can create 25-30 million jobs and possibly create two or three times this number in allied sectors (e.g. construction, education and entertainment) due to multiplier effect.

Factors ensuring Manufacturing competitiveness:

Source: National Strategy for Manufacturing

Factors which directly depends on Government and its policies:

1. Ensuring macro-economic stability: The first essentiality for ensuring manufacturing competitiveness is macroeconomic stability. This essentially calls for keeping inflation and fiscal deficit in check, and ensuring interest rates are lower. Large fluctuations in economic variables like inflation and interest rates add to the uncertainty for firms, consumers and the public sector, and can reduce the economy’s long-term growth potential.

2. Infrastructure Development: Energy availability is critical to sustain industrial growth and competitiveness. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil. It is estimated that power shortage alone contributed to a production loss of at least one per cent of GDP.

Besides power, from the manufacturing perspective the most important infrastructure areas are ports, and roads. Improvement of these sectors has direct impact on the competitiveness of the manufacturing sector.

3. Providing right market framework & regulatory environment: Government has a major role to play in providing the right market framework and regulatory environment as these provide invaluable impetus to the competitiveness of manufacturing sector. Sound regulatory regimes increase competition, encourage efficiency and also enhance productivity growth.

A framework that ensures fair competition, better access to markets – both domestic and foreign, level playing field for domestic manufacturers, review of existing regulations and reduce the burden of paperwork and inspector raj in respect of existing Laws, promote sub-sector wise policy on regulation can give a huge boost to the manufacturing sector..

The adverse impact of regulations on SMEs is particularly large. This is because the SMEs are less equipped to deal with the complex regulatory requirements. The inherent strength of SMEs which is flexibility would also be hampered by unnecessary and complex regulations.

4. Ensuring cost competitiveness and stimulating domestic demand: Various studies have shown that India suffers on competitiveness due to following factors such as:

· Higher import duties including inverted duty structure

· Higher incidence of indirect taxes

· Sub-optimal levels of operations

· Lower operational efficiencies

· Higher transaction costs

· Lower labor productivity

India’s ranking in the annual ‘Ease of doing business’ rankings in 2011 was 132 while its rank was 123 in the Index of Economic Freedom in 2011.

5. Labor Laws: Despite being a country which has abundant supply of cheap labor, Indian manufacturing has been long held back because of its archaic labor laws. Welfare provisions are an important part of labor laws, however, this has lead to unnecessary inspector raj. India’s archaic labor laws were last updated in the Industrial Disputes Act of 1948. They require companies with over 100 workers to get government permission to fire workers.

Barring the Payment of Wages Act, all other labor laws don’t prescribe any maximum period for which records and registers must be maintained. Compliance thus becomes difficult. This system also tends to hurt the small-scale sector much more than it hurts large-scale industry.

6. Land acquisition: Increasing manufacturing growth rate would require land to support this expansion. India currently has an archaic Land acquisition law that goes back to 1894.

Other Factors:

7. Availability of Skilled labor: If Indian manufacturing has to grow at around 12 percent per annum, it will be necessary for the education and training system to produce at least 1.5 million technically skilled people every year. India would need an incremental requirement of about 20 million skilled technicians by 2015.

As the country moves up the technology ladder and begins to produce more complex products in greater volumes, manufacturers will need to invest in research and require talented employees. It is important to attract the best minds to teaching and research in our institutes of higher learning especially in science and technology.

The current salary structure with the upper limit set is unable to attract the best talent. At present the salaries of Assistant Professors are well below those offered to fresh B. Tech. and MBA graduates by the industry. In the long run this is detrimental to the interests of the nation. Generally there are 20,000 Post Graduate (PG) seats in engineering of which only 10,000 are filled while 4, 00,000 enter Under Graduate (UG) education every year. This is to be contrasted with the USA where there are about 60,000 seats each at the UG and PG level in engineering. At this rate there already is and there will continue to be a very severe shortage of teachers in Engineering and Technology.

8. Investing in innovations & technology: Innovation holds the key to increasing productivity, and productivity gains are the key to both economic growth and rising the standard of living. Increasing productivity is the key to maintaining competitiveness in manufacturing. Indian firms need to invest in research and development.

9. Enabling Small & Medium Enterprises (SMEs) achieve competitiveness: The Small and Medium Industries form the backbone of Manufacturing Sector not only in this country but even in the developed countries. SMEs are more labor intensive as compared to larger firm. In India, the Small Scale Sector contributes to 40% of Manufacturing.

Among the several impediments preventing the segment from achieving its full potential, the important ones are : access to timely and adequate credit (particularly, as a sequel to the general decline of the State financial corporations), technological obsolescence, infrastructural bottlenecks, lack of R & D linkages, marketing constraints and disabling rules and regulations.

10. Increasing the usage of Information & Communication Technology (ICT) in manufacturing sector: In today’s information age, business environment requires new capabilities in manufacturing organizations for competitive success. ICT has been fundamentally changing the way organizations conduct their business and compete in the market place and it can significantly improve the productivity of manufacturing sector.

Current stage of ICT adoption in Indian manufacturing sector is not encouraging and the lack of global competitiveness in manufacturing is partly due to lack of adequate ICT enablement. Most of the enterprises have not been able to adopt the ICT architecture due to non-affordability of the costs associated with it. They lack the knowledge of business performance improvement potential of ICT and it is still used as office administration and accounting automation tools.

Manufacturing Timeline: Comparing BJP and Congress

In this section, I compare the BJP and Congress’s performance and contributions in promoting Indian Manufacturing.

1. Macro-economic stability:

BJP gave special emphasis towards ensuring a stable macro-economic situation. The 2000-01 budget set the goal – “To abolish poverty through job creating growth of 7% to 8% per annum’

o Fiscal Deficit was kept under check by rationalizing the subsidies and generating additional revenue by selling of Govt owned companies.

o Decontrol of petroleum prices: Petroleum prices were completely decontrolled from Govt control in 2002 and this reduced the fiscal deficit.

o Fertilizer prices were also increased

o FRBM Act 2003: This landmark act was passed in 2003 and was aimed at institutionalizing financial discipline, reducing India’s fiscal deficit and improving macroeconomic management.

o Pension Reforms 2002: India’s pension liability was growing, and it was NDA which in Dec 2002 took a decision to establish the New Pension Scheme (which was contributory in nature) and all new recruits from January, 2004 would be placed under NPS.

o Interest rates during BJP steadily fell making it cheaper for private firms for borrow and invest.

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Congress came into power in 2004 and got an economy that was in good shape.

o Decontrol of petroleum prices: UPA soon after coming into power dismantled the policy of decontrol of petroleum prices.

o Fiscal Deficit: FRBM act was thrown out of the window as UPA went about spending money on costly populist schemes such as NREGA. The fiscal deficit for the year 2011-12 was at 5.9% as against a projected figure of 4.6% in the budget. In 1991 when the country faced BoP crisis, India’s fiscal deficit was 7%.

o Oil bonds: UPA Govt neither increased petroleum prices nor reduced the excessive taxes levied on petroleum products. It also cooked up its books by issuing oil bonds which meant that Govts numbers on fiscal deficit were incorrect.

o Interest rates under UPA have been steadily rising making private investments very difficult.

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2. Infrastructure Development: Comparison between BJP and Congress couldn’t be more stark than that in case of Infrastructure spending and execution.

o Roads: BJP paid special emphasis towards improving road connectivity, both highway and rural road construction (Gram Sadak Yojna). National Highways Development Project (NHDP) was launched in 2000. Table below gives a list projects for Phase 1, 2 and 3 and also gives a respective timeline.

NHDP Phase Length (km) Status Approval Planned Completion
Phase 1 (Golden Quadrilateral) 5846 Fully Awarded December, 2000 December, 2006
Phase 2 (NS-EW) 7300 Award in progress December, 2003 December, 2009
Phase 3 A 6455 Already Identified March, 2005 December, 2009
Phase 3 B 6523 Already Identified March, 2006 December, 2012

Source: Wikipedia and NHAI

The two tables depict progress of the National Highway Project and how they have progressively deteriorated under UPA.

Progress of First Phase

Phase 1

Total Length 5846
Completion Status as on 31.03.2003 1327
Completion Status as on 31.03.2004 2612
Completion Status as on 31.03.2005 4697
Completion Status as on 31.03.2006 5278
Completion Status as on 31.03.2007 5556
Completion Status as on 31.03.2008 5663
Completion Status as on 31.03.2009 5721
Completion Status as on 31.03.2012 5839

Source: Annual Report of NHAI

The table below gives the latest status of NHDP projects and they running far behind their original schedule.

Total Length (km) Completed Till Date (km) Completion Percentage
Phase 1 5846 5839 99.88
Phase 2 7300 6011 82.34
Phase 3 12109 3643 30.09

Source: Latest Status as per NHAI

o POWER

The table below shows the targets for capacity addition in various five year plans

Capacity Addition
Target (MW) Actual (MW) Percentage Completed
9th Five Year Plan 40245 19015 47.25
10th Five Year Plan 41109 21080 51.28
11th Five Year Plan 78700 Less than 50000(estimate)
12th Five Year Plan 100000

Source: Planning Commision

After a disastrous completion percentage of just 47% in the 9th plan, the target in the 10th plan wasn’t increased much by the BJP Govt. There were power sector reforms introduced in the form of Electricity Act 2003 along with a monitoring mechanism that was put in place by then Power Minister Suresh Prabhu.

However, not much progress has been made and the percentage completion of the 10th Five Year plan was at a paltry 51%. Yet almost inexplicably, the target for 11th Plan was increased by 91%. The approach paper of 12th Five Year Plan says that’

“Actual realization may not exceed 50 GW, largely on account of slippages in public sector projects”

And yet, the approach paper sets the target for 12th plan at 100GW, which will include 28 GW of capacity from projects supposed to be completed in 11th plan. It is anybody’s guess if this target will be achieved. Without reforms, this looks like an empty promise.

Yet the picture is not completely bleak. There are some states like those in North-East, and some BJP ruled states, Gujarat, Himachal and Chattisgarh, that have now become power surplus state. Gujarat is set to have 7000 MW of surplus power by end-2012. A more detailed analysis on Power Sector in Gujarat has already been done on CRI

1998 – Amendment to allow private players in distribution

2000 – Coal Mines (Nationalization) Amendment Bill 2000 introduced in parliament to permit private sector participation in non-captive coal mining.

2001
– Draft Electricity Bill Introduced in Parliament

2002 – Accelerated Power Development and Reform Program launched.

2003 –Electricity Act 2003 passed by the parliament.

Electricity Act 2003

Real Instituto Elcano in its report titled “The Development of Power Sector in India” said:

The Electricity Act (2003) was a landmark policy document in that it provided the

First legislative framework to revamp the legal and regulatory framework governing the

power sector. It signaled a new openness to reform and a desire to accelerate sector

reform in an effort to harmonize the operations of various agencies in the sector.

Salient features of this Act:

· ‘Unbundling’ of the generation, distribution and transmission sector.

· Complete liberalization of the generation sector to allow private sector participation.

· Removal of FDI limits on generating companies and capital equipment manufacturing companies, with the result that 100% equity participation is permitted.

· Permitting ‘open access’ whereby consumers above 1 MW of power could choose their own suppliers and power producers were allowed to sell beyond provincial markets in an effort to create a nation-wide market for power.

· Permitting ‘merchant sales’ whereby power producers could sell excess power over and above what was contracted to SEBs, at market determined rates.

· Regularizing the supply chain, especially for coal, whereby thermal power producers could enter into binding long term arrangements with domestic coal producers. Import of fuel and feedstock were also liberalized.

The tables below show the dire state of the power sector. Average Realization % which was barely 73% in 2001-02, increased nearly 85% but has now once again fallen to 77%.

Average Cost of Supply and Average Realization of Electricity (from All Sectors)

Year Average Cost of Supply (in paise/unit) Average Realization Realization %
2001-02 246 181 73.58
2002-03 238 195 81.93
2003-04 239 203 84.94
2004-05 254 209 82.28
2005-06 260 221 85.00
2006-07 276 227 82.25
2007-08 293 239 81.57
2008-09 340 261.8 77.00

Source: TERI

Year-wise Commercial Losses of Power Utilities

Year Annual Losses in crores
2001-02 29331
2002-03 21245
2003-04 19107
2004-05 23995
2005-06 20869
2006-07 27101
2007-08 31862
2009-10 40000
2010-11 70000

Source: CEA 2009 report, TERI

The accumulated losses which stood at Rs 39,444 crores in 2004-05, jumped to Rs 50,503 crores in 2007-08 and Rs 74,977 crores in 2008-09. These are expected to go up to Rs 1.16 lakh crore by 2014-15, according to estimates by the Power Ministry.

One of the key reasons for this rapid increase in losses has been increasing cost of coal due to coal imports. 55% of India’s energy is produced through thermal coal. India has the fourth largest reserves of Coal in the World, yet India imported 80m tones in 2011. Coal imports were just 20 m tones in 2000.

(Million Tonnes) FY07 FY08 FY09 FY10 FY11 FY12E
Coal production 431 457 493 532 533 534
Domestic demand 464 504 549 582 612 686
Imports 33 47 56 50 79 152
Imports as % of demand 7% 9% 10% 9% 13% 22%

Source: Equitymaster

Coal India enjoys virtual monopoly in Coal production in India. The Tenth five year plan called for privatization of Coal Mining. The Coal Mines Amendment Bill 2000 which was introduced in the parliament in 2000 has been pending since then because then NDA Govt could not manage to pass it through the Rajya Sabha (it was in minority).

o Railways: Railways is truly the lifeline of India and without railways, India cannot expect its manufacturing to grow. Railways are also the largest employer in India, second only to Chinese Army. Unfortunately this has meant that in the era of coalition politics, Railways ministry has been held by populist politicians from Bihar or Bengal.

1998 – Railway Budget presented by Nitish Kumar increased passenger fares of all classes while freight tariff is largely untouched.

1999 – Railway Budget presented by Mamta Banerjee increases passenger fares for all classes (except second class), freight tariffs increased by 4%.

2000 – Railway Budget presented by Mamta Banerjee leaves passenger fares untouched, freight tariffs increased by 5%, essential commodities kept out. Budget lays a special focus on railway safety.

2001 – Railway Budget presented by Mamta Banerjee leaves passenger fares untouched, marginal increase in freight tariffs, essential commodities kept out.

2002 – Railway Budget presented by Nitish Kumar increased passenger fares across the board. Rationalization of freight rates is put in place with number of categories of charging freight reduced by 50%, down to 32 from 59. Special Railway Safety Fund is setup.

2003 – Railway Budget presented by Nitish Kumar leaves passenger fares untouched. Rationalization of freight rates continued with number of categories of charging freight reduced to 27 from 32.

2004 – Railway Budget presented by Laloo Prasad leaves passenger fares and freight rates untouched.

2005 – Railway Budget presented by Laloo Prasad leaves passenger fares untouched. There is a marginal increase in freight rates while rationalization of freight rates continued with number of categories of charging freight reduced to 19 from 27.

2006 – Railway Budget presented by Laloo Prasad reduces AC1 and AC2 tier passenger fares, other classes are untouched. There is a marginal increase in freight rates while rationalization of freight rates continued.

2007 – Railway Budget presented by Laloo Prasad reduces passenger fares for all classes, while freight rates are reduced marginally.

2008 – Railway Budget presented by Laloo Prasad reduces passenger fares for AC1, AC2 and AC3 tier, while freight rates on diesel and petrol slashed by 5%.

2009 – Railway Budget presented by Mamta Banerjee, no increase in passenger or freight fares.

2010 – Railway Budget presented by Mamta Banerjee, no increase in passenger or freight fares.

2011 – Railway Budget presented by Mamta Banerjee, no increase in passenger or freight fares.

2012 – Railway Budget presented by Dinesh Trivedi, proposed marginal hike in fares across the board. It also contemplated a Fuel Adjustment Component (FAC) in fares.

When NDA came into power in 1998, Railways was already struggling under the pain of the Fifth Pay Commission. The operating ratio was nearly 91% in 1998-99. NDA took the middle-path between populism and rational decision making. Railway fares were hiked regularly and special focus was laid on safety. An expert group under Sam Pitroda was also formed.

Under the UPA, the railway fares are not touched much. Rather there are some cosmetic changes done, like lengthening the train by adding more coaches, increasing the speed of the trains marginally thereby charging superfast charges. Tatkal charges are also increased. Furthermore, with the dismantling of the deregulation of petroleum products, fuel costs were substantially subsidized.

These measures did produce results in the short term as railways operating ratio improved substantially to 78.70% in 2006-7. However, this improvement was far from being sustainable and this was proved when costs began to escalate as a result of the Sixth Pay Commission and rising fuel prices. The UPA failed to gauge this and could not take overcome its populist temptations and fares were reduced in 2006 and 2008. The Govt subsequently failed to increase the prices later and operating ratio deteriorated. Even today these figures do not reflect the true picture due to highly subsidized diesel.

Year Operating Ratio
1998-99 90.90%
1999-00 94.00%
2000-01 94.00%
2001-02 98.34%
2002-03 96.00%
2003-04 92.00%
2004-05 90.98%
2005-06 83.70%
2006-07 78.70%
2007-08 79.60%
2008-09 90.00%
2009-10 92.50%
2010-11 95.30%
2011-12 95.00%

Nevertheless, there have been some innovative means under UPA to generate additional revenue (Sustainability of the Indian Railways Turnaround, IIM Bangalore):

· Earning additional revenue through printing ads on the back of passenger tickets

· A long distance train was named after a corporate brand name. Pepsico was granted the right to run three summer trains from Bangalore under the name “Kurkure Express‟ with branding by Pepsico for its lines of snacks of that name.

Dedicated Freight Corridor

This is one of the biggest initiatives of the UPA Govt.

Need for Dedicated Freight Corridor Project (DDFC)

The Indian Railways’ quadrilateral linking the four metropolitan cities of Delhi, Mumbai, Chennai and Howrah, commonly known as the Golden Quadrilateral; and its two diagonals (Delhi-Chennai and Mumbai-Howrah), adding up to a total route length of 10,122 km carries more than 55% of revenue earning freight traffic of IR. The existing trunk routes of Howrah-Delhi on the Eastern Corridor and Mumbai-Delhi on the Western Corridor are highly saturated, line capacity utilization varying between 115% to 150%. The surging power needs requiring heavy coal movement, booming infrastructure construction and growing international trade has led to the conception of the Dedicated Freight Corridors along the Eastern and Western Routes.

Targets:

· Dedicated Freight Corridors (DFCC) is registered as a company under the Companies Act 1956 on 30 October 2006.

· The Western corridor of 1469 km will connect Jawaharlal Nehru Port to Dadri and Tughlakabad in the North. The Eastern corridor of 1232 km will connect Ludhiana to Sonnagar via Dadri and Khurja, thus facilitating transfer from one corridor to another.

Present Status

The table below showcases the status of freight corridor projects as per Annual Report for 2010-11. In Feb, 2012, the Prime Minister’s Office took away the monitoring of DFCC project into its own hands after being dissatisfied with the progress under Railways.

Western Corridor Year Status as on 31-Mar-2011
Financing Construction
Phase I Rewari- Vadodara (920 Kms) 2009-2016 Contract signed in 2010 with JICA Construction contracts expected by March 2012
Phase II Vadodara- JNPT(430Kms) 2010-2017 Contract signed in 2012 with JICA
Phase III Rewari – Dadri(140 Kms) 2010-2017
Eastern Corridor Year
Phase I-APL1 Khurja – Kanpur (343 Kms) 2009-2016 World Bank has approved loan
Phase II-APL2 Kanpur – Mughalsarai (390 Kms) 2010-2016 World Bank has “in principal” agreed to finance.
Phase III-APL3 Khurja-Ludhiana (397 Kms) 2011-2016 World Bank has “in principal” agreed to finance.
Phase IV Dankuni – Sonnagar (550 Kms) 2011-2016
Phase Ia Sonnagar – Mugal Sarai (125 Kms) 2010-2016

Source: DFCC Annual Report

o PORTS

Timeline:

1999 – Encore Port is declared as a major port and is incorporated under the Companies Act 1956.

2001 – In Feb, Encore Port is commissioned by PM Vajpayee, making it the first corporatized port of India.

2001 – NDA introduces Major Port Trusts Amendment Bill 2001 in the Parliament, aimed at opening up major ports for corporatization. The bill is vehemently opposed by trade unions and after suggestions that it could pose threat to coastal security, the bill is kept in the cold storage.

2002 – Tenth five year plan is released and lays a special focus on improving the efficiencies at ports.

The spare capacity at the terminal year of the Ninth Plan indicates that port capacity is no more a constraint. Hence, in the Tenth Plan there is a need to improve productivity at the major ports to improve the quality of service and reduce the turnaround time of ships to the minimal level.

In order to improve the efficiency, the plan called for more participation of the private sector and use of Information Technology at ports.

2003 – Sagar Mala project is announced. The project is on the line of the National Highway Development Program and aimed at a holistic development of India’s maritime sector.

2004 – Tremendous improvement in the Turnaround time and Average Pre-berthing Detention at Major Ports during the 2002-04 period.

2004 – Mid-term appraisal of 10th Five Year Plan says,

After an impressive addition of 46.05 MTPA in the first two years of the 10th Plan and going by present indications, the capacity at the end of the Tenth Plan is expected to exceed the projected Target.

2005 – UPA Govt announces the National Maritime Development Programme (NMDP). It is a 10 year program aimed at boosting the infrastructure at major ports. (Source)

2008 – Capacity at major ports stretched as port traffic reaches 519MT against a capacity of 532 MT.

2010 – In June, UPA Govt announces a that new 10 year plan will be launched in two month to replace NMDP which had been marred by delays. As against the projection of 430.74 million tonnes’ capacity addition at the end of the program in 2012, the actual addition as on March 31, 2010, was a mere 55.88 million tonnes. (Source)

2010 – Port Blair declared a major port taking the total number of major ports to 13.

2011 – In Jan, UPA Govt launches Maritime Agenda 2010-2020. It aims to create a port capacity of around 3200 MT by 2020. (Source)

2011 – A background paper by Deloitte emphasis the capacity constraint at major ports.

Around 8 of the 12 major ports are operating at more than optimum range of 70-75 per cent utilization. Further, four of these, namely, Vizag, Tuticorin, Mormugao, & Mumbai ports are experiencing more than 100 per cent utilization.

Port Statistics at Major Ports of India

Year Capacity
(Million Tonnes)
Traffic
(Million Tonnes)
Utilization (%)
2000-01 291 281 96.56
2001-02 343.95 287 83.44
2002-03 358 313 87.43
2003-04 390 344 88.21
2004-05 397 383 96.47
Ideal Utilization rate should 70-75%
2005-06 456 424 92.98
2006-07 504.7 464 91.94
2007-08 532 519 97.56
2008-09 575 531 92.35
2009-10 600 561 93.50
2010-11 645 570 88.37

Source: India Ports Association , ICRA

Productivity Parameters of Major Ports

Year Average Turnaround Time (Days) Average Pre-berthing Detention (Hours)
2001-02 4.24 11.53
2002-03 3.69 6.9
2003-04 3.45 4.9
2004-05 3.41 6.03
Turnaround time of Singapore is less than a day
2005-06 3.41 8.77
2006-07 3.62 10.05
2007-08 3.93 11.4
2008-09 3.87 9.55
2009-10 4.38 11.67
2010-11 4.64 11.96

Source: Mid-term appraisals of 10th and 11th Plans, Financial Express

The above two tables clearly depict how badly managed our port sector really is. As against an ideal utilization rate of 70-75%, utilization rates at major ports in India have almost consistently over 85% and there are hardly any signs of improvements. The 11th plan targets are going to be missed by a long way.

The Port efficiency remains way below international standards. It showed improvement during 2002-04 has deteriorated dramatically since then.

3. Governance Reforms: Providing right market framework & regulatory environment

Good governance is one of the most crucial factors required if the targets of the Plan are to be achieved. It is also this factor, or rather lack of it, which could be the cause of immense disappointment and missed development opportunities. (10th Five Year Plan)

Timeline:

1998 – Soon after coming into power, NDA established a national IT task force to oversee e-government efforts. E-governance was identified as an important tool for achieving good governance especially with regard to improving efficiency, transparency and making interface with government user friendly. E-Governance in India was pioneered by Chandrababu Naidu in Andhra, who was also the co-chairman of the IT Task force. Andhra remains the number one state in e-Governance till date.

1999 –New Telecom Policy (1999) was launched. During the initial phase of the NDA Govt, emphasis has been on providing connectivity, networking, technology upgradation, selective delivery systems for information and services. NTP -99 was an important step in that direction.

2001 – Greater use of IT in Governance started. Pradhan Mantri Gram Sadak Yojna had an elaborate mechanism for online monitoring of the on-going projects.

2002 – IT task force submits its report.

2002 – 10th Five Year Plan released, laid special emphasis on Good Governance. Some of the recommended measures in the plan are:

· Enacting the ‘Right to information’ to enable greater transparency in policies and procedures

· Use of IT for Good Governance (e-Governance)

· Civil Service Reforms

· Better Monitoring to remove leakages

· Judicial Reform

2003 – Ambitious Rs 2,550-crore Electronic Governance plan for ’03-07 launched

2005 – A landmark Right to Information’ act is passed by UPA. This was a major step towards improving transparency.

2009 – Unique Identity Project is started. UID project since then has been marred with controversies and has been in turf battles with the home ministry.

2010 – In Aug 2010, BJP ruled Madhya Pradesh became the first state to enact ‘Right to Service’. Since then 11 more states have joined the bandwagon and this act has now become an important tool in fighting red tape.

2010 – In Nov 2010, National e-governance plan (N-eGP) is launched.

2011 – ‘Citizens Right to Grievance Redress Bill’ and ‘Electronic Delivery of Services Bill’ are introduced in the parliament.

Below table shows results of a recent survey which shows that NDA ruled states are far ahead.

Rank 1 Rank 2 Rank 3 Rank 4 Rank 5
E-Governance Andhra Pradesh Gujarat Karnataka Bihar Punjab
Administrative Reforms Odisha Bihar Gujarat Tripura Punjab

Source: Sunday Guardian 2012 Survey

In the run-up to the 2009 elections, BJP came out with a special Vision Document on IT and e-Governance which focused on solving India’s Governance issues using innovative use of technology.

While there have been some initiatives, more needs to be done in this area.

4. Reforms of the Revenue System: The tenth plan (2002-07) released by the BJP led NDA Govt laid special emphasis on the reforms of the revenue system.

The revenue system as evolved in India is perceived to be one of the most oppressive and corrupt systems of government. As a result of mal-administration and corruption in the revenue system, not only is there a loss of revenue but it also encourages the people to participate in the black/parallel economy. – 10th Five Year Plan

India tax laws are extremely convoluted and difficult to understand. There are far too many exemptions and tax rates. For instance, individuals get Rs 15000 exemption for medicals and this leads to submitting of fake bills to avoid tax. Similarly, Corporates get a variety of exemptions like that on SEZs.

Exemptions not just provide opportunity to tax evaders to misuse such exemption to evade tax, they make whole process of tax audit far more cumbersome and hence much more difficult to monitor. In an ideal tax system, tax rates should be low and without any exemptions.

NDA timeline:

1999 – Intention to rationalize tax structure and introduction of VAT announced in the Budget. Ad valorem rates rationalized from 11 different rates to just 3. 68% of the items brought under single rate of 16%. (Budget 1999)

1999 – Meeting of all Chief Ministers, convened on Nov 1999 by Yashwant Sinha, an Empowered Committee of State Finance Ministers was set-up.

2000 – Rationalized of CENVAT rates continued with 80% of item brought under single rate. Minimum Alternate Tax rate reduced from 10.5% to 7.5%. (Budget 2000)

2001Budget 2001

2002 – A task force under Vijay Kelkar was setup to come up with recommendations for rationalizing and simplification of taxes. (Budget 2002)

2003 – Customs duty on large number capital goods like machinery reduced to boost investment. In order to boost the capital markets, long term capital gains tax (for more than a year) waived off. (Budget 2003)

Kelkar Committee major recommendations for Corporates: (Source)

· Minimum alternate tax (MAT) should be abolished.

· The committee has suggested that the general rate of depreciation for plant and machinery should be reduced to 15 per cent from the existing level of 25 per cent.

· Corporate and partnership firm tax rate should be cut from the existing 36.75 per cent (including surcharge) to 30 per cent for domestic companies and to 35 per cent for foreign companies from 48 per cent at present.

· Business loss should be allowed to be carried forward indefinitely.

Kelkar Committee: Rationale behind recommendation

· Business loss to be carried forward indefinitely should spur merger and acquisition (M&A) activity as corporates and businessmen would like to buy out sick units for getting tax shelter.

· Reducing the rate of depreciation would mean more companies would come under the tax net and MAT would not be required, hence be abolished.

· Lowering tax rates would encourage economic activity and foreign companies into India.

Congress Timeline

2004 – Long term capital gains brought back at 10%. New tax Securities Transactions Tax (STT) at 0.15% introduced. These measures directly affect the investments into stock markets. Rationalization of CENVAT to a uniform rate continued.

2005 – Depreciation rate for reduced to 15%. Customs duty reduced on capital goods like textile machinery.

2006 – Budget 2006-07 increased the MAT rate from 7.5% to 10% despite depreciation rate already reduced (completely against the Kelkar Committee recommendations,). Securities Transactions Tax (STT) increased by 25%. Finance Minister announces his intention to introduce Goods and Services Tax by 2010.

2009 – MAT rate increased from 10% to 15%

2010 – MAT rate increased from 15% to 18%

2011 – MAT rate increased from 18% to 18.5%

2012 – Union Govt is still not able to evolve a consensus on GST and DTC. One of the major pending issues that State Finance Ministers have been complaining is about compensation of Central Sales Tax. The states have accused the centre of unilaterally deciding on this matter.

States share of Central Sales Taxes is still pending to be transferred from center to states. In the backdrop of delays in the release of funds for centrally sponsored schemes particularly to the non-Congress states, many states are not prepared to lose their financial autonomy without adequate safeguard. They are demanding IT backend to be established so that there is complete transparency.

5. Labor reforms: Labor reforms remain an area where the India’s reform process has yet to reach.

Timeline:

1999 – NDA government formed the ‘Second National Labor Commission’ to suggest rationalization of Labor laws. The first labor commission was setup in 1966.

2002 – Second Labor Commission submits its report in Sep. Some of major recommendations include:

2002 – NDA tries to introduce labor reforms by amending the Industrial Disputes Act. Under the proposed change firms employing upto 1000 workers would not need government approval to lay off workers as against earlier figure of 100. Facing opposition from its own allies and recent electoral reverses, NDA backtracks.

2004-11 – No real reform initiative by the UPA Govt. Labor reforms remained a part of BJP’s election manifestos of 2004 and 2009.

2011 – New Manufacturing Policy 2011 proposes different set of labor laws for NIMZ. This is could create major anomalies in our labor market.

India’s manufacturing since 2000

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Source: CII BCG Report

As the graph above depicts, the growth of the manufacturing sector has been erratic. The worrying part is that this growth is going downward. As per the economic survey 2012, manufacturing grew by just by 3.9% in 2011-12 (Apr-Dec).

The recent CII Annual Manufacturing Summit also noted that the Indian manufacturing continues to grow well below its potential.

While there has been an improvement in rate of growth with manufacturing growth breaking the 12% mark in 2006, the inconsistency shows that there is no particular trend. For instance, for the period of 2004-09, the highest manufacturing growth was witnessed in Uttarakhand at 30%, this was largely on account of the tax benefits. Next in line was Meghalaya, which was based on a very low base. India’s industrialized states – Maharashtra, Gujarat and Tamil Nadu account for 44% of India’s manufacturing output. (Source)

Timeline

2000 – The budget of 2000-01 outlines the objective to steer the country toward faster growth of 7-8%.

2002 – The tenth plan is released; it has a special focus on Manufacturing.

2002 – The first CII-Annual Manufacturing Summit was organized. The theme was ‘Unleashing the Manufacturing Potential of India’. This summit has been organized annually since then.

2003 – Second Manufacturing Summit organized and it discussed on creating a ‘National Manufacturing Policy’. An executive summary report released at the summit noted several positive developments:

· Significant infrastructure investments (ports, telecom, roads) have been undertaken. Further, new projects such as the Golden Quadrilateral project are likely to have a multiplier effect on the manufacturing sector

· Setting up of Special Economic Zones (SEZ’s) and simplification of procedures (goods are cleared at ports within 24-48 hours against 14 days earlier)

· Electricity reforms initiated will considerably bring down the power costs for the manufacturing sector

· Ongoing reforms in excise, customs and sales tax duties, introduction of VAT to replace retail sales tax

· Further, steadily declining interest rates have reduced the cost of capita. Corporates can now borrow at 8.0-9.0% compared to 14.0- 15.0% four years ago. Besides, over the last few years, borrowing in foreign currency has also become relatively easier.

2004 – NDA was defeated in the nation elections and Congress came into power. In Sep 2004, PM constituted National Manufacturing Competitive Council (NMCC). It was supposed to be an inter-disciplinary and autonomous body to help synergize the policy making for growth of manufacturing.

2006 – NMCC release a strategy paper titled, “National Strategy for Manufacturing”. In its preface, the paper declares 2006-20015 as the “Decade of Manufacturing for India” aimed at achieving an average manufacturing growth rate of 12 to 14%.

2006 – NREGA is launched in the poorest 200 districts guaranteeing 100 days of employment.

2006 – Indian manufacturing registers a growth rate of 12% though this was short-lived.

2007 – NREGA is expanded.

Effect of NREGA : The low skilled jobs in Indian manufacturing plants have been filled from workers migrating from rural areas in search of better paying jobs. With the implementation of NREGA, and the assurance of pay, laborers have little incentive to continue far away from their home town. This has not only created an acute labor shortage but is putting pressure on the manufacturing wage rates.

2007-09 – This period saw dramatic slowdown in the investments in infrastructure space.

2009 – Indian manufacturing growth rate for 2008-09 falls to a meager 2.5%.

2011 – In Oct 2011, more than five years into the promised Decade of Manufacturing, the National Manufacturing Policy is released. Some of the major features of the NMP:

· The NMP sets a vision to ramp up the contribution of manufacturing from 16 percent to 25 percent of GDP and in the process create 100 million jobs.

· NMP focuses on a cluster based approach. National Investment and Manufacturing Zones (NIMZs) will be developed as integrated industrial townships with state-of-the art infrastructure.

· The NIMZ will be managed by a local SPV with a governing board. This SPV is for all practical purposes, the nodal body for the NIMZ, and is empowered to take several decisions from planning of the NIMZ.

· Labor laws and exit mechanism in NIMZ would be eased off.

2011 – In Dec 2011, the theme for the Tenth Manufacturing Summit is aptly “Indian Manufacturing at a Point of Inflection”. The summit points out some of the key risks:

· Intent to implementation is there but inadequate monitoring mechanisms in place.

· Over dependence on state, for Land acquisition, power and water supply.

· Funding is largely unaddressed.

2012 – Indian manufacturing growth rate for 2011-12 (Apr-Dec) is 3.90%.

Overall Analysis

Appraisal of BJP

There is little doubt that BJP (1998-04) did its best to push reforms. It tried to build consensus and change the narrative to pro-reform making it difficult for others to oppose.

There is however one criticism that can be leveled against the BJP – many of its reforms came towards the end of its term. For instance, Electricity Act and FRBM Act came in 2003. Sagar Mala and National e-Governance were also announced in 2003 and not much progress was made in either of them till the elections happened in 2004. Second Labor commission report was submitted in late in 2002, and BJP did not implement its recommendations.

While all these are fair criticism, there are some possible reasons for this as well. First is the external factor. In 1998, soon after BJP came into power, India became a nuclear power which was followed by economic sanctions by the US and its allies. India also faced defense challenges with Kargil conflict in 1999 and Operation Parakram in 2002. Both these conflicts were costly affairs.

Second reason is the state of India’s economy. When the BJP came to power, Indian economy was not in a good shape having gone through three years of political uncertainty during the rule of the Third Front. Adding to that, world faced an economic recession during 2000-01.

All this meant that the Govt had to revive the economy with its limited resources and reform process started in 2000 only, as first couple of years was lost due to uncertainty. Additionally, most of the reforms required groundwork and consensus building, as it did not have the numbers in the Rajya Sabha. For instance, labor reforms are sufficiently contentious and last first labor commission was formed in 1966. Similarly, extensive groundwork and consensus building was required in case VAT.

Sagar Mala, which was an ambitious project aimed at upgrading ports and linking them with Golden Quadrilateral. This project depended a lot on the success of NHDP project, the first phase of which was Golden Quadrilateral. It was launched in 2003 after GQ had achieved nearly 80% completion.

While critics can demand for greater reforms, on relative basis, BJP’s performance was extremely good. BJP took most steps in the right direction, and none in the opposite. On a scale of one to ten, it would be fair rate BJP’s performance at around 7.

· As per the NSSO survey, 92 million jobs were created in 1999-2004 as opposed to just 2 million in 2004-09.

· It left an economy with sound fundamentals and a right framework for the next Govt to follow-up on the reform process.

· Many of the leftover items were mentioned in the BJP’s Vision Document 2004.

Appraisal of Congress

Congress party came into power in 2004 and more recently with a thumping win in 2009. We must take into account that Congress got an economy with strong fundamentals in 2004. Also, the period from 2004-12 has been largely peaceful without any external conflict. It was also the period with which saw a massive global bull rally from 2004-2008 until a year of recession.

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Image Source

Yet looking back at its record on the reform front, there is hardly any progress that the Govt has made. Congress is caught in its own narrative, narrative of being pro-poor. While the excuse for the first four years was that of crucial support from the left parties, Congress has absolutely nothing to show even during its second term.

During its 8 year rule, Congress led UPA took very few steps in the direction of promoting greater job creation through manufacturing. Whatever baby steps that were taken were negated by several roadblocks put forward by the Govt like NREGA, rising Inflation and Interest rates. On a scale of one to ten, Congress’s performance was barely 2.

· Just 2 million new jobs were been created in 2004-09.

· In fact, the scenario is bleaker than expected. The Eleventh Plan (2007-12) targets creating 580 lakh jobs. But the latest NSSO survey confirms the creation of only 40 lakh jobs until 2010. (Source)

· It did implement VAT in 2005, but has hardly been able to evolve consensus on GST.

· It has picked battles which it could avoid. It hasn’t paid states their rightful share in Central Sales Taxes on time – especially to non-UPA states.

· Same is true for disbursing the states in the centrally sponsored schemes.

· Such needless battles have meant there evolving consensus on critical reforms has become much more difficult as suspicion between centre and states.

Conclusion

Manufacturing holds the key as India tries to eliminate poverty. 2004-14 looks to be a lost decade. If India fails to take corrective action, it wouldn’t take long for our demographic dividend to turn into demographic disaster.

This post first appeared in CRI. The author can be reached @moderateright

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