Government scripts new manufacturing policy

In an ambitious move to revamp India’s manufacturing prowess, the government has come out with a draft National Manufacturing Policy.

“We don’t want to sit behind the door any longer. We have a dream… to make India the workshop of the world,” minister for industry and commerce Anand Sharma said on Thursday, announcing the release of a draft for stakeholder consultations.

The minister’s inspiration is neighbouring China, which has grabbed the status of the manufacturing hub of the world through a combination of relaxed laws and strong infrastructure support.
Sharma’s new plan also revolves around creating hubs and zones to focus government support to manufacturing industries.
The policy focuses on removing the problems that have bedevilled the five-year-old special economic zone (SEZ) policy — the government’s earlier attempt at aping China — and prevented it from achieving the full target.

“This is what SEZs were lacking... It is solving a lot of the problems for the developers as well as for the individual units inside,” says Chintan Patel, associate director - real estate practice at audit and consulting firm Ernst & Young, India.

If implemented in the current form, says Patel, the government may actually be able to increase the share of manufacturing industries from 15% of the total national production (GDP) to 25% in 12 years.

“By far the biggest problem for SEZs has been land acquisition,” says Patel, who tracks SEZs closely as part of his job. “You need at least 250 acres of contiguous land if you are developing a single-product SEZ and at least 4,000 acres if you are targeting a multi-product zone. Private companies are just not able to acquire so much contiguous land at viable prices,” Patel adds.

The new policy too envisages setting up zones, but unlike SEZs, they will not necessarily be focused on exports; nor will they exempt the members from paying income taxes etc. However, unlike SEZs, the full onus of acquiring the requisite land will be placed on the state governments and the developers are also likely to get low cost loans, another big demand from the current SEZ developers.

One area of significant difference between the primarily foreign investment-oriented SEZs and the new manufacturing zones will be in taxation. While SEZs are considered ‘foreign deemed territory’ and the units inside are exempt from paying nearly all Indian taxes, the tax incentives for manufacturing zones will be much more modest.

The draft has mooted a moratorium on all local taxes for ten years and exemption from paying income taxes in proportion to the size of sales within the zone.

Perhaps the biggest advantage, as far as a manufacturer is concerned, is the ease of getting regulatory clearances. Under the current rules, a manufacturing industry must get two to three dozen clearances from different central, state and local governments, including those from state pollution control boards, central environment and forests ministry and other forms of licenses.

“Consent to operate and establish from State Pollution Control Board does not happen in stipulated time. Validity period for consent to operate and establish by the state pollution control board is very short,” the draft points out.

To solve the regulatory pain, the guidelines suggest ‘time outs’ and other mechanisms to ease the process of getting approvals. For example, wherever the laws permit, the onus of gaining the approval will be shifted to the zone itself, rather than the individual units.

The zone, however, must ensure that the laws are not violated by its member units. If the clearance cannot be awarded to the zone, the zone or another single agency must be empowered to issue such clearances to member units on behalf of the government, suggests the draft.

Another Chinese touch, one which likely to draw political fire from the Left parties, is the dilution of labour laws inside the Zone, a privilege not available to even the SEZs. Suggestions include the non-applicability of the ‘Contract Labour Abolition Act’, ability to appoint temporary workers and downsize easily, extension of shift hours and ‘union’ rights. In return, the onus of protecting labour from exploitation will shift to the zone authority.

“The tax, clearance and labour related changes address the issues of the manufacturers while the promise of low cost funds and easier land acquisition solves the problems of the developers... All in all, this is fairly ambitious,” says Patel.