National capital goods policy won’t help the Sector

The Draft National Capital Goods Policy would appear to be an employment guarantee scheme for babus rather than anything designed to expand and improve India’s capital goods sector. The sector is today defined more by negative factors than by positive ones. The negative determinants of the country’s capital goods sector can be summarised as follows: (a) absence of a vibrant domestic manufacturing sector, (b) absence of a culture of research and development that would constantly innovate goods used to produce goods or deliver a service, (c) absence of commitment to quality and long-term profits among domestic producers, (d) absence of clarity on the need to structure import duties in a manner that promotes manufacturing in general rather than specific sectors, and (e) absence export finance/transaction ease on par with the competition’s.

The first two factors are self-explanatory, as is the fifth. The third results in Indian companies preferring second-hand equipment. The fourth is a real killer. We have project imports often at zero duty. Our negotiators happily agree to trade deals with near-zero rates of import duty on some goods even while their inputs bear higher import duties, adding to the proliferation of goods with an inverted duty structure, in which inputs bear a higher rate of duty than the final good. The solution to both problems is to fix a low, uniform import duty, say, 5 per cent, on all goods and services without exception. This will offer the same rate of effective protection to all sectors, including to those that currently see no production. At the same time, cheap imports would rid domestic manufacturing of shoddiness.

The policy document does not even mention telecom equipment. As equipment that is used to create value for the consumer, it conceptually qualifies as capital goods. India is nowhere in the reckoning in a sector that is vital for national security, apart from being a pervasive requirement of the modern economy. More than a capital goods policy, the government needs a policy to put India on the map in telecom technology and equipment.