Capital goods policy: Think more exports, jobs

Moneycontrol Bureau

The government has approved the first-ever capital goods policy that aims to reduce the country’s dependence on imports by incentivising local production and job creation. The policy also aims to facilitate improvement in its technology depth across sub-sectors, increase skill availability, ensure mandatory standards and promote growth and capacity-building of micro, small and medium enterprises (MSMEs).

What are capital goods?Capital goods are assets used by companies to manufacture equipment utilised by consumers or end-users. Heavy equipment and machinery used to build roads, offices, defence equipment, among others fall in this category.

Here’s a look at key highlights of the policy:

ProductionThe policy looks to increase domestic production of capital goods to Rs 7.5 lakh crore by 2025 from Rs 2.3 lakh crore in 2014-15.Data from Index of Industrial Production shows that capital goods production contracted 2.9 percent in FY16, while industrial machinery imports rose 5.7 percent in the period.

JobsOn-offer jobs — direct and indirect employment — could rise to 3 crore from 84 lakh at present.

ExportsThe policy envisages increasing exports from the current 27 percent to 40 percent of production while increasing the share of domestic production in India's demand from 60 percent to 80 percent by 2025, thus making India a net exporter of capital goods.Skill AvailabilityThe government plans to enhance availability of skilled manpower in the sector by training 50 lakh by 2025 to fuel growth and profitability.NUMBERS SPEAK

Lagging GrowthThough the market size of the capital goods sector is Rs 2.8 lakh crore, its growth has been lagging with the domestic market size contracting at 3.6 percent per annum. Total production rose a mere 1.1 percent per annum in the past three years.

Capital goods market size (Rs cr, FY15)

Capital goods total production (Rs cr, FY15)

 Global export share below parIndia's capital goods exports stood at Rs 61,000 crore in 2014-15. However, India's share in global exports of capital goods is still significantly below-par at a mere 0.8 percent.

Capital Goods exports (Rs cr, FY15)

Import DependenceAbout Rs 1.1 lakh crore-worth of capital goods were imported in 2014-15. And data shows that between FY10 and FY15, India’s imports grew at 9.8 percent annually. This points to the fact that consistent domestic demand has been fulfilled through imports. 

Capital Goods Imports (Rs cr, FY15)

Hurdles to domestic expansion and demand creation

Capacity UnderutilisationThe domestic industry had invested in capacity based on the projections for the capital goods sector but the built-up capacity is currently under-utilised at 60-70 percent in most sub-sectors due to sluggish domestic demand.

Import of Second-hand MachineryImport of second-hand machinery comprises 15-20 percent of production. Such imports lower initial acquisition cost but are resource inefficient and hurt both equipment manufacturers and users in the long run due to sub-optimal technology. Quality of output from such imports is affected thereby compromising India's overall manufacturing competitiveness and technology depth.

DelaysDelays in implementation of approved projects in areas like infrastructure and power limit domestic production of capital goods.

Compiled by Chaitanya GudipatySource: Department of Heavy Industries