FDI in Defence: Change is good

With a big hue and cry finally FM has increased the FDI in defence from 26% to 49%. With just having 6 weeks of governance, facing opposition and criticism from the economists it was definitely not a cakewalk for the NDA.

                                        India’s policy on FDI has always been a bureaucratic obduracy and perverse intransigence. Unwillingness to learn from the experience is another aspect that can be added to it. Considering the fact that FDI in defence was first mentioned in Budget 2001-02 with 26%, India has received less than $5 million inflow till today. The scenario was worst in 2004 when the then Defence Minister George Fernandes was forced to admit in the Lok Sabha that India had received no FDI proposal till that time. In 2010, the Commerce Ministry circulated a note recommending the raising of FDI cap to 74 per cent to encourage ‘established players in the defence industry to set up manufacturing facilities and integration of systems in India’. But again it was not in the interest of the country and Ministry of Defence (MoD) retained the 26 %. In May 2013, modifying his earlier proposal, Commerce Minister Anand Sharma suggested that the upper cap be raised to 49 per cent as a first step. It was again shot down by the MoD.

                                 There was always a need to increase the FDI percentage but there were some of the myths or perception that India was struggling with. Now, NDA has increased the FDI percentage, this article jots down the major myths that NDA government has put aside.

Myth One: Increasing FDI percentage a threat to national security

                                  Apprehensions were being made that during operational emergencies, foreign investors can show their back at us, shut their factories and choke their supplies to the armed forces.

But the irony is that India is procuring all critical weapon systems produced/integrated abroad till today. It was not understood as to how India’s security would get threatened if the same weapon systems would be produced/integrated in India.

                                   As regards dependability during crisis situations, no foreign investor can risk loss of his total investment by shutting down his production facilities. Further, all major defence equipment producers follow ‘Global Factory’ concept, wherein various manufacturing functions are spread over a number of locations in different countries.

                                  Most importantly, adequate safeguards could have been incorporated while issuing licenses. India could have reserved the right to take over the licensed facility under certain extraordinary circumstances of national emergencies. Most nations include such an enabling provision then why not India. Fears expressed were totally unfounded and highly exaggerated.

Myth Two: Indian policy was highly investor friendly and did not require any changes

                                  According to the UPA and previous government MoDs FDI in defence (26 %) was highly investor friendly and required no changes. However, if we look by the investor company perspective, there was nothing for them till now. Management would be under the control of India, the CEO had to be Indian resident and a foreign investor could not transfer his equity before the expiry of license.

                                  Oddly, India expected a prospective foreign investor to be excited by such an asymmetrical policy wherein he was expected to invest his resources in a venture where he had no significant control, faced strict capacity/product constraints, no purchase guarantee and had no open access to other markets (including exports). It defied logic. Such a lop-sided policy can never attract FDI.

                                The new budget has definitely a lot to offer. The outcome will definitely get unwrapped in couple of months and the list of investors taking interest in it. There is a need of retrospection in every sector. Every budget in every year promises in the same way but the execution. With a new government and the famous ‘Achche Din’ let’s hope the execution proves the mettle on the people’s expectation.

This article is written by Kumar Prashant, a PGDM student of 2014 batch  He  can be reached at pgp14085.prashant@iimraipur.ac.in"

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Expectations from Union Budget 2014-Growth through Employment Generation

Expectations from Union Budget 2014-Growth through Employment Generation

As evident from the election manifestoes the Modi Sarkar is expected to come up with policies to boost the manufacturing sector. But to sustain the labour force required for it is yet a big issue. The working class consists of the people in age group 15-24. About 65% of the total population of India lies in this age group. India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. The country with rich resource of man power has not been able to harness its potential.

India missed opportunity in textiles and clothing a labour-intensive industry that was dominated by China. In 2011 McKinsey, a consultancy, found that purchasing managers at global clothing firms slowly shifting their sourcing from China; their favoured new destinations included Bangladesh, Vietnam, Indonesia and Cambodia—but not India. This probably can be attributed to the low growth textiles due to lack of skilled labours.

The previous government came up with schemes like NREGA as a gimmick for the immediate cause of unemployment. Such a populist scheme merely provided employment. It included no measures to develop the skills of the masses engaged under this scheme. Increased labour-wages and lethargic labours came out as the output of this scheme. Budget 2014-15 is hoped to bring some skill development measures so that the country can get best out of its huge man-power resource.

India will soon have a fifth of the world’s working-age population. It urgently needs to provide them with better jobs.

Again not only the quantity of jobs but the quality matters too. We can see armies of guards, peons, delivery boys and men who sit on stools in lifts pressing the buttons. About 85% of India’s jobs are with “informal” enterprises—those organizations with fewer than ten staff which are not incorporated. Another 11% are casual jobs with formal companies. Only 16% of Indians get a regular wage. People with informal jobs are usually very poor. An official study of 2004-05 data concludes that 80% of informal workers got less than the then national minimum wage of $1.46 a day.

The other hurdle in manufacturing sector is the stringent Indian law which delays the setting up of industries. Since 2000 India has tried carving out special economic zones (SEZs) to create islands with lower taxes and access to infrastructure, where manufacturers can feel at home. But these have been a limited success, with many dominated by IT firms. The government should bring up a plan to expedite the industry establishment process.

Here are mentioned only a few steps that should be taken by the government. It needs to plan many more strategies in the upcoming budget to fulfill the expectations of the people who hope that-  “ ÁCHHE DIN ANEWALE HAIN “.

"This article is written by Janhavi Jilhare, a PGDM student of 2014 batch  She can be reached at pgp14082.janhavi@iimraipur.ac.in"

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Expectations from the Union Budget 2014- The financial perspective

Expectations from the Union Budget 2014- The financial perspective

Background:

With the downfall of the reign of United Progressive Alliance (UPA) and the rise of National Democratic Alliance (NDA), the expectations of people in our country has changed. UPA government who is known for making pro-populist policies and at the same time remaining silent on inflation, has been replaced by the NDA government who has always been in the favor of long term financial and business growth. Rather than concentrating on the short term populist measures NDA government is expected to concentrate more on long term growth and prosperity. And this pro-business and stringent policies would eventually lead India to acquire the position where there would be minimal requirement of government aids or subsidies.

Now, before the union budget is announced, let’s analyse the provisions that the union budget can bring to fight with the problem of twin deficits i.e. fiscal deficit (difference between the government income and expenditure) and current account deficit (difference between exports and imports).

Figure 1: Indian current account deficit (CAD) as a percentage of GDP

Figure 2: Indian fiscal deficit as a percentage of GDP

Expectations from the Union Budget:

Reforms in the Taxation system

Out of the total people eligible for paying tax, only the people working in private and public sector and few businessmen are paying tax. The current system allows the majority of people to evade tax using unfair means.

To cater to the existing problem, the NDA government is expected to make the process of tax paying and tax collection, easier and more transparent. This will increase the government income and would help in reducing the fiscal deficit.

Hold down Subsidies

Unlike UPA government who used to make populist policies and added burden on unplanned expenditures, NDA government is expected to plan judiciously and wisely for providing the subsidies.

The government is likely to focus more on better governance to reduce leakage in the system which transfers the government money to the people who are not entitled to get the benefit of subsidies.

Higher tariff on luxury items

Like the UPA government, NDA government is also expected to raise the tariffs on the luxury and electronic items like cigarette, SUVs, LCDs etc. This in turn will bring money to the government and would help in controlling both fiscal and current account deficit.

Continue restrictions on gold import

The demand for gold has always been high in our country because we relate our sentiments with gold. Apart from the investment purpose, it is used in all the auspicious occasions.

In order to reduce the huge current account deficit, the government is expected to continue the restrictions on the import of gold, which forms the second largest contributor of import bills after petrol.

Implement goods and services tax (GST)

The inconvenience created by the indirect taxes can be addressed by GST. And the Modi government is likely to design the implementation plan for it and take this on priority. This is going to provide impetus to the manufacturing sector. And would bring growth to our country and would fight with the twin deficits as well.

Disinvestment

To reduce the increasing gap between the government income and expenditures and to control the fiscal deficit, the new government is likely to go for disinvestment in the public sector undertakings.

Improvements in the existing land acquisition act

The current land acquisition act poses a big challenge to the growth of business in our country. Big projects like Posco’s steel project in Karnataka, Arcelor Mittal’s steel project in Odisha are stuck due to long and complicated process of land acquisition. Under the current land acquisition system a company has to wait for 5 years to get the ownership of land. Hence the current act needs to be amended. And the Modi government is likely to take this up.

There is an urgent requirement to make the process of land acquisition hassle free, which will attract foreign investors. In the long run this is going to bring capital inflows to our country and would help in reducing the fiscal and current account deficit.

Privatisation

Government enterprises running under loss is likely to be privatized to increase the accountability of the top management team. This would help in improving their condition and would also help in generating revenue, which in turn would reduce fiscal deficit.

Skill development programs

Out of the total labor force, the majority of labors in India are unskilled. But the industries have huge requirement for the skilled labor force. And with the progress of manufacturing sector the current demand is going to rise further.

The new government is expected to go for skill development programs to solve the existing problem.

Encourage savings

The government would probably provide incentives to increase savings, like reducing the lock in period which is 5 years for the fixed deposit which qualifies for the tax benefits. 

  

Insights:

The new government is going to wisely cut on the expenditures, fix the loop holes in the governance to prevent leakages, and work for the long term growth of the country which in turn would generate revenues. And this will help India in combating the problem of twin deficit.

"This article is written by Sneha Shrivastava, a PGDM student of 2013 batch  She can be reached at pgp13110.sneha@iimraipur.ac.in "

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Union Budget 2014: Manufacturing sector's expectations

Union Budget 2014: Manufacturing sector's expectations

                        The Union Budget 2014-15 will be presented on 10 July, 2014 by the new BJP-led government, which secured more than 300 seats of the 543 parliament seats on promise of providing relief to common man by reducing inflation, along with economic growth.

Finance Minister P. Chidambaram on Feb 17 in his nearly hour-long interim budget speech, while talking about the state of the economy, summed up: “Manufacturing is the Achilles heel of the Indian economy”.

Manufacturing sector of India has been worst and stuck there for a while. After recovering to a growth of 9.2 % in 2009-10 and 2011-12, growth in the industrial sector, comprising manufacturing, construction services, mining, and electricity, slowed to 3.5 % in 2011-12 and to 3.1 % in the current year. The manufacturing sector is the most dominant sector within industry and it declined to 2.7 % in 2011-12 and 1.9 % in 2012-13 compared to 11.3% and 9.7 % in 2009-10 and 2010-11.

The decline in the manufacturing sector has been driven by low domestic demand. High interest rates reduced consumer spending while slow decision-making by the government and land acquisition issues stalled projects progress and held back investment in the sector, thereby reducing chances for growth. "More than consumer spending, which is a significant portion, confidence level has an impact in India. That confidence level is low. The captains of industry are all waiting and watching," says S.V. Sukumar, Partner at KPMG India. The manufacturing sector has been dragging down the overall economy. It has been worst time for manufacturing since 1999/2000.

Growth in jobs in the manufacturing sector is anticipated from the coming budget. The finance ministers of the past have emphasized that the manufacturing sector needs to grow from the current levels of 16-17% of GDP to a healthier 25% which will help in bringing growth in the economy to healthy 8% per annum.

This new government made promises about the immediate importance of skills development and paying work through jobs and self-employment. The National Skill Development Corporation (NSDC) has played a vital role in skilling industry to take off and produce results in the longer term. By setting up of Sector Skill Councils, encouraging private initiatives in the skilling industry and providing starting points for research in skill development – Such work by the NSDC helped in building a sustainable public-private skilling industry. But, NSDC is close to reaching out to only 2 million people and still has a long way to go to achieve 150 million target. The target would increase to 350 million by 2022 and the government is already well short of achieving the current target.

Due to this, industrial growth is slowing down and a gap between skills required and skills available is widening. A concerted and speedy effort of skilling workers and developing the economy is needed, so that we skill our people in terms of quality and quantity.

We also need a better connect between training and paying work (jobs or self-employment), so that youth get paying work after coming out of the training. The new step of independent ministry combining skills development and entrepreneurship is on the nail.

And if this ministry works in tandem with MSME and finance ministries, a lot of employment can be generated.

Amendments in the archaic apprenticeship regulations are well needed. Industries have by far the largest capacities of training - both in terms of equipment as well as trainers with relevant expertise.

The government should also turn focus towards stalled projects in infrastructure sector due to land acquisition bill and archaic taxation system. The government should cut a clear path for implementation of Goods and Service Tax (GST). Retrospective taxation should be removed to attract better investment in the country.  Amendments to new land acquisition bill will make government and companies to acquire land easily from farmers and will speed up the implementation of stalled projects. Projects worth billions of dollars, including South Korean steel maker Posco’s $12 billion (around Rs.72, 000 crore) factory in Odisha, have not been even started because land acquisition problems.

"The government should focus on improving core infrastructure like rail, roads and ports. That, in turn, will kick-start manufacturing in core areas like cement and steel," argues SV Sukumar, partner and head of operation and supply chain, KPMG in India.

To make India a manufacturing hub and meeting the burgeoning demands of technological products, the Government should provide an effective single window clearance mechanism to the initiatives taken in Electronics/Semi-Conductor manufacturing sector to further increase production in technological products.

We hope that the budget announcement will prioritize fast-track skill development and create the sync between skill training and jobs. The budget proposal should also prioritize impetus for job growth to provide a vibrant job market to an adequately skilled workforce.

"This article is written by Kalpendra Manu, a PGDM student of 2013 batch  He can be reached at pgp13026.kalpendra@iimraipur.ac.in "

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