Mar 23, 2016 08:10 PM IST | Source: CNBC-TV18

Cabinet approves capital goods policy, sops for rural housing

The Union Cabinet has approved the national capital goods policy. It has also given a go ahead to the doubling of two rail lines in Bihar and Jharkhand. The government has also approved an incentive scheme for rural housing

The Union Cabinet has approved the national capital goods policy. The government believes implementation of the capital goods policy is critical and needed to give a boost to the sector and the 'Make in India' initiative.

The government had unveiled the National Capital Goods Policy in February. This is the first time such a policy has been framed for the sector.

The Cabinet has also green flagged the doubling of two rail lines in Bihar and Jharkhand and approved incentives for rural housing.

MS Unnikrishnan, Managing Director of Thermax welcomed the capital goods policy, saying it would improve trade and exports and also pave the way for advances in technology.

In particular, the policy will make sure the country utilizes the capital goods that already exist and cut down on imports, he says. To give a rough idea, the capacity utilization for the industry as a whole, he says, would be between 45 percent and 70 percent, adding, Thermax operated at a capacity level of 50 percent-60 percent.

Unnikrishnan estimates India is importing around USD 35 billion worth of capital goods right now – a figure, which, he is confident, will come down.

Indian companies will find themselves exporting capital goods into countries where there is a trade deficit. Long-term loans will be made available to these companies through the likes of EXIM bank, he says.

One can see India offering sops to Indian companies wanting to export more in the manner of countries like China and Japan, says Unnikrishnan.

However, Rohit Natarajan of IDBI Capital Markets Services, sees two short-term worries. Aggregate demand everywhere for capital goods, he says, is bleak, and equally poor is local capacity utilization. The policy, as such, bodes well in the long-term, he says.

Below is an excerpt of MS Unnikrishnan and Rohit Natarajan's interview..

Q: We know that the cabinet has approved the capital goods policy. Now we don't know exactly what the policy looks like, whether it is similar to the one that was being discussed with the industry. But what according to you are some of the most important features if you were part of any of the consultative process that was involved in formulation of this policy?

Unnikrishnan: Certainly I happen to be chairing the sub group which worked on the trade and exports. Let me clarify that after being independent for almost 68 years the country has decided to have its own capital goods policy itself is a great thing. Otherwise there is policy for everything in this country but this is one area where it is neglecting. So, congratulations to the government for having done it and really in very quick succession - less than one year it has taken for the NDA process to be completed. So, that is a three part of it.

We got three sections, the first one is for creating demand in the country, second is for improving the trade and exports and third part is for technology development that will make India sufficiently capable of looking up the demand and requirements of the industry. These are the three sections in that one. In each one of them there are detailed work out done but specific to talk about is in majority of the areas we have capacity built in the country which are getting under-utilised. So, how to ensure that this capacities get utilised by having clauses of minimum local content addition which is not mandatory in the earlier parts, that is the first part of it which would certainly ensure that either the multinationals come and set up capacities over here or the Indian purchases will be directed towards Indian companies only.

Free imports which is erstwhile allowed for in the name of project import or maybe concessional tariff duty on certain kind of things to be imported into the country will be progressively withdrawn once the government is convinced there is local capacity in existence. So, that capital goods are made in India, not imported into India because as of now we are almost USD 35 billion worth of capital goods in India. Progressively we are going to bring it down to much lower numbers.

Second part is to support Indian companies to export capital goods into the markets where we already have trade deficit available and that will be taken through the diplomatic channels as far as negotiations are done to ensure that there is always a fillip given and government also do take supportive route for the industry, that is the next area.

Long term credit facilities will be made available because Indian companies compete with Japanese, Korean and even Chinese competition who normally come with credit support also. So, EXIM bank will be the road which we create to support. So, that is why it is a very lengthy, fairly well written policy. Now it depends a lot on implementation.

Q: What are the existing capacity utilisation levels at Thermax in particular and general industry wide levels, so that we know the immediate numbers from where we are hoping to scale up and get things back to normal and better than normal as well?

Unnikrishnan: On an average, the capacity utilisation varies between 45 percent and 70 percent of the industry. Themax could be between maybe 50 percent and 60 percent depending upon location you are talking about. On an average you can say just above 50-55 percent in the country in capacity utilisation.

Q: So we are talking about moving or boosting capacity utilisation from just around 50 percent. Are you hoping that some of the slightly more protectionist measures that you alluded to earlier, that they will be of much help to domestic manufacturers?

Unnikrishnan: 100 percent forget about supportive or that kind of measures, even a level playing field. For example, an international company is given a letter of credit even by public sector undertaking for import of capital equipments whereas an Indian company will have to wait for the payment after the supply is made. So where is the equality prevalent?

Some of the rules are very archaic in the country in support of import not for local. So, those are the things which we will be ensuring that there is a preference given to that. Indian companies may not ask for a protection beyond a level. I think there are companies in India who are capable of fighting the level competition provided there is a level playing field available. However, there are countries like China, Japan especially where there are benefits given for exporting outside the country which means they are already being subsidised by the local government and that is why they are able to supply it cheap in India.

So, that kind of facility is not available so those are the areas where the government is now taking initiative as per this policy. Now the implementation is the most important crucial thing where I believe there is a joint taskforce which will created between the multiple ministries because capital goods is coming under department of heavy industries and they alone will not be able to implement it. It has to have the support of commerce ministry, finance ministry and various other concerning ministries like power ministry, steel ministry all of them.

Q: The policy has been approved, what according to you will be the biggest features which might come to the help and rescue of domestic capital goods companies?

Natarajan: I haven't gone through the policy document as such but from the information that I have received, I could not agree more with what Unnikrishnan has to say. I totally agree about the export focus and especially talking about factor cost reduction in terms of giving level playing field for boosting exports. I fully agree with that part. However, having said that, two things that concern and even external aggregate demand currently looks bleak and even the domestic, if you look at any of the indicators, capacity utilization, it continues to look bleak.

I fail to see positive green shoots for domestic as well as export markets so these are the short-term concerns that need to be addressed first. We need to see how things are from here. Having said that, the entire policy that is good for the long-term as such, I fully agree with that.

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