YES BANK - ASSOCHAM Knowledge Report - Make in India - Presing the Pedal

8/19/2019 YES BANK - ASSOCHAM Knowledge Report - Make in India - Presing the Pedal

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YEAR May, 2015

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YES BANK Ltd.

Shubhada RaoSenior President & Chief Economist, Economics Knowledge Banking

Preeti Sinha

Senior President and Global Convenor, YES InstituteRegistered and Head Office

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website : www.yesbank.in

TITLE ‘Make in India - Pressing the Pedal

AUTHOR Economics Knowledge Banking, YES BANK

No part of this publication may be reproduced in any form by photo, photoprint, microfilm or any other means without the written permission of YES BANK Ltd.and ASSOCHAM

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By 2025, India's manufacturing sector is expected to generate over 100 million new domestic jobs and contribute 25% of national GDP compared to ~15% currently. However,

for India to grow at 9–10% over the next 3 decades, we must aim to be a part of the global supply chain and produce for both domestic as well as international markets.

Hon'ble Prime Minister of India, Shri Narendra Modi has launched the landmark 'Make in India' campaign aimed at steering investments, infrastructure development,

employment generation as well as financial inclusion, thereby making it one of the most transformational initiatives to augment India's economic development.

'Make in India' and domestic manufacturing are also the central plank of India's 2015-16 Union Budget with focus on job creation through revival of growth and investment. I am

confident that the progressive proposals of the Union Budget, such as liberalization of foreign investments will enable companies to raise long term capital at competitive prices

and immensely boost the dual agenda of 'Invest in India' and 'Make in India' – thereby making India a global manufacturing hub of excellence.

To support the efforts of the Government of India, ASSOCHAM, India's apex Knowledge Chamber, has formed the Global Investors' India Forum to attract foreign investmentsinto India by leveraging the newly established network of 14 International Offices as well as 14 International Business Promotion Councils in India. The Forum will aim to

improve Ease of Doing Business, promote cross-border business development, initiate strategic collaborations and focus on policy advocacy, thereby actualizing the 'Make in

India' strategy.

I am pleased to present this ASSOCHAM – YES BANK special publication which is being released at this highly significant Interactive Investment Forum - Fast tracking India's

Growth Story with Confidence & Conviction, under the aegis of ASSOCHAM Global Investors' India Forum in New York. This special occasion also marks the formal launch of

ASSOCHAM's US office which will further strengthen India-US strategic and economic partnership.

The publication provides an overview of India's manufacturing sector and suggests key recommendations for actualizing the transformational 'Make in India' strategy. I am

confident that the contents of this publication will be insightful for the Government, policy makers and industry towards heralding a manufacturing-led economic resurgence.

FOREWORD

Thank You.Sincerely,

Rana Kapoor

President

Chairman, ASSOCHAM Global Investors' India Forum

Founder & CEO


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Contents

01‘Make in India’ - Pressing the Pedal

1 ‘Make in India: Overview and Synopsis

2 Strengths of Indias Manufacturing Sector

3 Realizing Indias Comparative Advantage

4 Key Challenges for India's Manufacturing Sector

5 Analysis of Key Sectors: Short, Medium and Long Term Measures

6 Summary of Key Recommendations

7 ASSOCHAM Global Investors' India Forum

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‘Make in India’: Overview

and Synopsis

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Make in India: Overview and Synopsis

Economic theories and empirical studies have postulated that manufacturing is the main engine of growth in an economy. In order to develop India into a global manufacturing

giant, the NDA Government unveiled the national program of 'Make in India' last year with an aim to facilitate investments, foster innovation and build the best in class

manufacturing infrastructure.

The 'Make in India' pitch assumes significance for its criticality. Igniting the manufacturing sector is the key to kick-start a virtuous cycle of higher economic growth in India.

Manufacturing sector has for long been the Achilles heel of our economy. The contribution of manufacturing to India's GDP has largely been stagnant at 15.5% over the last 35

years and its contribution to India's export basket remains meager vis-à-vis offshore competitors.

In the first section of this report, we assess India's structural strengths that are in some sense pre-requisites for manufacturing led growth to kick-off. In the second section, we

draw from classic economic theories of comparative advantage - Hecksher Ohlin and Factor Price Equalisation, to justify a focussed manufacturing of labour intensive goods (basis

India's comparative advantage, given a cheap and abundant labour) in Textiles and Garment, Leather, Food Processing and Gems & Jewellery sectors. Thereafter, we argue how

technology can also prove to be a key determinant of manufactured exports from India. A decomposition of domestic value added for India's current export basket indicates a

higher share of non-labour (i.e capital) inputs, reflecting a pervasive process of technological change that has already taken place. To reaffirm our validation, we draw from two

trade theories of – Technology Gap and Product Cycle Hypothesis which suggest that technological capability is not only in terms of creating 'new products' but minor innovations

around a given technology have historically succeeded in augmenting exports for less developed economies. India, too can replicate this by focusing on 'know-why' and 'know-

how' in sectors such as Pharma, Electronics, Auto, Biotechnology and Defence, which are most effectively expected to give India a competitive edge in order to become a

meaningful player in the global supply chain.

The third section identifies the key challenges riddled in the Indian manufacturing sector which have been a deterrent to investment. We explicate that India fares extermely poorly

as compared to not only advanced economies (AEs) but even Emerging Market Economies (EMEs) when it comes to infrastructure & logistics, R&D spending, taxation structureand labour productivity; which have been stumbling roadblocks for manufacturing led growth to taking root.

The last section concludes with key recommendations that in our opinion would enable the groundbreaking 'Make in India' campaign to achieve the vision of transforming India

into a global manufacturing hub.

04 ‘Make in India’ - Pressing the Pedal


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While India has metamorphosized from an agrarian economy into an economy driven by the services sector, the desired dynamism in the manufacturing sector has remainedelusive. The share of agriculture in Indias GDP has declined from 35% in 1980 to 18% in 2013 and the corresponding share of services has risen from 40% to 57%; however the

share of manufacturing has largely remained stagnant averaging around 15.5% of GDP over the last 35 years (see chart 1).

The share of manufacturing in Indias GDP stood at a meagre 12.8% in 2013, falling behind both EMEs and AEs (see chart 2). Further, India is still struggling for a manufacturing

led export growth to take root. Of Indias export basket, 62% comprise of manufacturing exports (as of 2013) which is the lowest among most Asian economies (China 94%,

Japan 88%, Phillipines 77%, Singapore 70% and Thailand 74%).

Harnessing Indias manufacturing potential is the key to ensure a sustainable long term growth. The most significant and comprehensive policy initiative by the Government in this

regard has been the National Manufacturing Policy (NMP) in 2011, which envisioned to increase manufacturing sector growth to 12-14% per annum, share of manufacturing to

25% of GDP, and create additional 100 mn jobs in the sector by 2022.

After averaging at 6% from 2000-04, manufacturing growth accelerated to an average 10.1% between 2005-11, but thereafter

slipped to a negative 0.7% in 2013. Further, with the contribution of manufacturing to GDP averaging around 15% of GDP fromth

2000-13, total employment in manufacturing sector stood at 52.4 mn in 2011-12. While data from the 68 NSSO (National

Sample Survey Organisation) round indicates a growth in manufacturing employment between 2009-12 (versus a contraction

over 2004-05 and 2009-10), India seems to be far from the envisioned target of creating an additional 100mn jobs in

manufacturing sector by 2022. Although NMP was a step in the right direction, the lingering slowdown in global economy,

alongwith a slack in domestic policy push, meant Indias manufacturing sector underperforming its intended targets.

Reinforcing the vision to develop India into a global manufacturing giant, the NDA Government last year unveiled a national

program of ‘Make in India with an aim to facilitate investments, foster innovation and build world class manufacturing

infrastructure. A strong political mandate and push for reforms, Reserve Bank of India (RBI) commencing its rate easing cycle,

benign global commodity prices along with gradually improving global growth have created a favourable setting for Indias manufacturing sector. The envisaged creation of smart

cities and investment corridors, allowing higher FDI in sectors such as defence and railways, actions to foster project execution including faster approvals and clearances,

appeasing investor sentiment, correcting inverted duty structures amongst others, have been some of the encouraging efforts that the Government has undertaken over the last

10 months. However, these efforts needs to be supplemented with proper implementation here on along with overhauling some of the fundamental factors such as labour laws,

poor infrastructure, and tax policies that have held back Indias manufacturing potential.

Pressing the Pedal – Make in India

Ongoing reform efforts need to be

s u p p l e m e n t e d w i t h p r o p e r

implementation hereon along with

overhauling some of the fundamental

factors such as labour laws, poor

infrastructure, tax policies that have

held back India’s manufacturing

potential.



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Chart 1: Stagnant share of manufacturing in India's GDP (in %)

Source: World Bank Database, YES BANK Limited

Chart 2: Share of manufacturing lags Advanced Economies (AE) and EmergingMarket Economies (EMEs)


Services, value added

Non Manufacturing Industry, value added

Manufacturing Industry, value added

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Strengths of

India’s Manufacturing Sector

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Strengths of India’s Manufacturing Sector


Cheap abundant labour gives India a natural comparative advantage in low-value added, labour intensive manufacturing goods

Demographic Dividend to Indias advantage: With a population of 1.2 bn people, and the worlds highest youth population (India has 572 mn people under the age of 24);

labour is a vital factor of production for India. As per the Economic Survey 2014, the proportion of working-age population in India is likely to increase from around 58% in 2001 to

more than 64% by 2021. Demographics indicate that India will soon surpass China, with Indias dependency ratio declining from 61% in 2002 to 36% in 2020 and Chinas

remaining stagnant at 44% (UN department of Economic and Social affairs) (See chart 3).

Low Labour costs in India: Indias harnessing of its manufacturing potential will lie in tapping its low cost labour. India fairs as the most competitive economy in terms of bothaverage monthly wages and minimum monthly wages as compared to its Asian peers. Cheap semi-skilled and unskilled labour intensive products give India a natural

competitive advantage (See chart 4).

Additional advantage stemming from abundant raw material

th Adequate availability of raw material inputs: India has rich availability of raw materials inputs such as cotton, coal and iron ore. India has the worlds 5 largest coal reserves,

India is the fourth largest iron ore producer accounting for 5% of global production, and is likely to overtake China as the largest cotton producer. Abundant raw materials give

India a comparative advantage in terms of low-cost manufacturing inputs, reducing the overall cost of production. Further, domestic availability of raw materials can insulate

Indias manufacturing sector from global commodity cycles.

Rising wages in China is creating room for India

Rising incomes with rising exports: With growing labour intensive exports and increasing prosperity, the low cost wage dynamics in China are gradually seeing a shift (seechart 5). Average Chinese wages have grown 14.2% YoY from 2000 to 2013. Average wage in China is more than three times of India, and about double the wage in other Asian

manufacturing hubs. This suggests that China is losing advantage as a low–cost manufacturing destination and inducing investors to shift to other South and South-East

destinations for low-end manufacturing bases. Further, demographic dividend is expected to cap labour force growth in China as population ages; hence creating room for India

in the global markets to export labour intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys


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‘Make For India: Indias domestic demand offers tremendous potential to tap economies of scale in manufacturing consumer goods segment

Recognition of Indias neo-middle class: Indias domestic consumer market is the most rapidly growing consumer market in Asia. The new aspiring Indian middle class is

expected to touch 267 mn over the next 5 years as per National Council of Applied Economic Research (NCAER), presenting tremendous opportunities to realize economies ofscale for fast moving manufacturing consumer goods. With consumerism and disposable incomes on the rise, retail sector has experienced rapid growth in the past decade

with many global players entering the Indian market

Chart 4: Wages in India lower than offshore competitors

Source: ILO (2012), National Wages and Productivity Commission, YES BANK Limited

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Chart 3: Dependency ratio for India expected to improve up to 2040

Source: UN Population Statistics, YES BANK Limited

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Empirical Experience from Trade Theories

Studies and empirical findings have shown that international trade has a direct correlation with economic growth and very few countries have sustained high growth over long periods

without experiencing an increase in the share of foreign trade in their GDP. To draw policy recommendations for Indias manufacturing sector, we rely on popular economic tradetheories, as outlined below:

Hecksher-Ohlin Model

This pioneering model of international trade states that relative endowments of the factor of production (land, labour, capital) determine a country's comparative advantage. In other

words, countries have comparative advantage in those goods for which the required factors of production are relatively abundant, such that a rich country (i.e an advanced economy)

that is capital abundant would export a capital intensive good and import a labour intensive good (from a developing economy) and vice-versa.


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Factor Prize Equalization Theory

The factor price theorem asserts that that if commodities were freely tradable we would see the wage to rental ratio (payments to factors of production i.e. wage to labour and rent to

capital) equalize across trading partners. Free trade which results in a unified market (of the trading partners) would lead to rising capital costs in the rich country as a consequence ofexporting the capital intensive good rise (rising demand); and rising labour costs in the labour abundant country until the wage to rental ratio in both the countries is equalized.

Chinas Export Miracle

The expansion of China's exports has been one of the most remarkable features of Chinas economic development. Chinese exports rose on average by 5.7% in the 1980s,

12.4% in the 1990s, and 20.3% during 2000-03. By 2003, China's export growth rate was seven times higher than the world export growth. Chinese economy comprised of

one fourth of the worlds population and a low-wage labour market. In 1990s, light manufacturing unskilled products comprising of toys, footwear, apparels among other labour

intensive goods, accounted for more than 42% of Chinas exports. The cheap abundant labour resource supplemented with its sheer size played a strategic role in terms of

generating economies of scale and enabling China to realize its export potential. Chinas top four trading partners - EU, US, Japan and Hong Kong, which accounted for 54% of

Chinas merchandise trade with the world, were nations characterized by high capital intensity. However, since the 1990s, the composition of Chinese manufacturing exports

has been gradually undergoing a transformation from traditional and unskilled to skilled labor exports. As a consequence, the share of light manufactures in Chinas export

basket has declined from 42% in 1990s to 28% in 2003 and further to 20% in 2013; while corresponding share of machinery and transport (including electronics) has increased

from 17% in 1990s to 41% in 2003 and further to 57% in 2013 (see chart 6). While the Chinese economy is gradually shifting from relatively simple manufactured goods

towards more sophisticated products; these products are low-cost, high-volume labour intensive products with not much technological sophistication. The share of high-tech

exports remains low in Chinas exports.

China's endowment structure gives it a huge comparative advantage in labour-intensive goods. Thus Chinese trade pattern is an exposition of Hecksher-Ohlin model with trade

stemming from Chinas comparative advantage in cheap labour exports to AEs (capital abundant economies).



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Chart 5: Rising wages in China Chart 6: Changing composition of China’s exports

Source: N ational Bureau of Labour Statistics of China, YES BANK Limited Source: IMF, YES BANK Limited

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Technology Gap Model (Posner, 1961)

The Technology Gap Theory describes an advantage enjoyed by a country that introduces a new good in a market. As a consequence of research activity and entrepreneurship, new

goods are produced and the innovating country (i.e rich capital intensive Advanced Economy (AE)) enjoys a monopoly for a period of time the innovations remain unique until the other

countries learn to imitate these goods. Until the imitation is complete the AE (innovating country) enjoys an export advantage. The intuition behind this is the fact that time elapses

before the other countries' consumers come to know of the new good and acquire a taste for it (i.e demand lag). Hence, imports of the new good take place only during the time period

between the imitation lag and the demand lag.

Product Cycle Hypothesis (Vernon, 1966)

This theory postulates that a new product is produced by a country which has an advantage in producing innovations (capital intensive rich country). At the early stages of production of

the new product, the production unit is located in the innovating country as a high level of skill is required to produce the good. Gradually, as the product matures and becomes more

standardized, production of the commodity gets passed to other countries (Less Developed Countries - LDCs) which have cost advantage in production (like cheaper raw materials,

cheap labour). Thus according to Vernon, in the country where the product originated, production dwindles while the demand keeps on increasing gradually turning the nation into a net

importer from exporter.


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Realizing India’s Comparative

Advantages

3.


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Realizing India’s Comparative Advantage in

Labour Intensive Manufacturing Goods

Given the availability of cheap and abundant labour, Indias true comparative advantage lies in labour intensive goods.

However, we estimate, that of aggregate exports, Indias share to developing economies is double that of Chinas and higher than that of South Asia and Low and Middle Income

nations (see chart 7). Between FY11-14, Asia and Africa accounted for 66.8% of Indias total exports, more than double the combined share of Europe and US at 30.6%. The lower

export realizations of India with advanced economies, with whom India enjoys a comparative advantage, defies the conventional wisdom of international trade. (i.e a labour abundant

country should have higher trade with capital abundant countries)

At the same time, employment share of workers in manufacturing sector is roughly 10% in India, which is less than half of China and the lowest among BRIC economies. The share of

manufacturing employment in India is infact comparable to advanced Economies like UK and USA where manufacturing sector is largely capital intensive (see chart 8). The lower

engagement of employment in manufacturing activity demonstrates that Indias manufacturing sector is yet to tap the potential of its low cost and abundant labour endowment.

Chart 8: India’s share of manufacturing employment less than

EMEs but comparable to AEs

Source: International Labor Organization, YES BANK Limited

Chart 7: Significant share of export realizations with

developing economies (in %)


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Share of employment in Manufacturing Sector (%); 2013



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Textile and Garments

Indias vast endowment of cheap unskilled and semi-skilled labour gives India a natural comparative advantage in low value added manufacturing goods. Basis this, we

recognize four sunrise sectors which are expected to most effectively tap Indias labour endowment.

Skilled and semi skilled cheap abundant manpower : With over 45 mn people, the industry is one of the largest sources of employmentgeneration in India

Raw Material: India accounts for about 14% of the worlds production of textile fibre and yarn, and is the largest producer of jute and the secondlargest producer of silk and cotton

Exports in textiles and apparel from India are expected to increase to USD 65 bn by FY17 from USD 40 bn in FY14

ComparativeAdvantage

With consumerism, favourable demographics, rising per capita income and shifts in preferences for branded products is expected to be a major boost

in demand for textiles and apparels

The domestic textile and apparel industry in India is estimated to reach USD 100 bn by Fy17 from USD 67 bn in FY14

DomesticDemand

The sector contributes 14% to industrial production, 4% to Indias GDP and constitutes 13% of the countrys export earnings

India has the second largest manufacturing capacity in textile sector, globally The Indian textile industry accounts for about 24% of the worlds spindle capacity and 8% of global rotor capacity

India has the highest loom capacity (including hand looms) with 63% of the worlds market share

ReasonstoInvest



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Leather Industry

Semi skilled cheap abundant manpower: With 55% of the workforce below the age of 35, the Indian leather industry has one of the youngestand most productive workforces

Raw Material: India is endowed with 21% of the worlds cattle and buffalo and 11% of the worlds goat and sheep and produces 2 bn sq. feet ofleather, accounting for 10% of the world's leather

Exports have grown from USD 1.42 bn in 1990-91 to an all time high of USD 6 bn in 2013-14 and are projected to grow at 24% per annum over thenext five years


Rising purchasing power and growing middle class, domestic demand for light manufactures and consumer goods in the leather industry, offerstremendous opportunities

The domestic market is expected to double in the next five years

DomesticDemand

The total production of the Indian leather industry stands at USD 11 bn with great potential for exports and a huge domestic market

High growth potential of exports, the ready availability of leather, the abundance of essential raw materials and rapid strides in the areas of

capacity modernization offer significant growth potential to the sector

Reasons

toInvest



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Food Processing Industry

Skilled cheap abundant manpower: The sector is also one of the largest employment creators, with growth in direct employment in theorganised food processing sector growing 6.05% YoY in FY12

Raw Material and Geographical Advantage: With a large agricultural resource base, abundant livestock and cost competitiveness, India is fastemerging as a sourcing hub of processed food

A total of 127 agro-climatic zones have been identified in India

Strategic geographic location and proximity to food-importing nations


One-third of the population is expected to be living in urban areas by 2020 Increasing desire for branded food as well as increased spending power

Large and distinct consumer brackets to support customised offerings, new categories and brands

Consumption in India is driven towards packaged and ready-to-eat foods

There is an awareness and concern for wellness and health, for high protein, low-fat, wholegrain, organic food

DomesticDemand

A global outsourcing hub with large retailers sourcing from India due to abundant raw materials, supply and cost advantagesth

Food processing sector ranks 5 in the world in exports, production and consumption, and has grown at 8.4% for the last 5 years Value addition of the food processing sector as a share of GDP manufacturing was 9.8% in 2012-13

Investment in registered food processing sector had grown by 20.1% at the end of 2012

Reasonsto

Invest



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Gems and Jewellery

India is deemed to be the hub of the global jewellery market because of its low costs and availability of semi-skilled labour

India is the worlds largest cutting and polishing centre for diamonds, with the cutting and polishing industry being well supported by Governmentpolicies. Moreover, India exports 95% of the worlds diamonds, as per statistics from the Gems and Jewellery Export promotion Council (GJEPC).


The sector is witnessing changes in consumer preferences, as the westernization of lifestyle is responsible for changes in the buying habits of the

consumer. Increase in per capita income has led to an increase in sale of jewellery, as jewellery is a status symbol in India.

The domestic gems and jewellery industry had a market size of USD 40.45 bn in 2013, and has the potential to grow to USD 80.59 - 85.43 bn by 2018

The country's gems and jewellery market is expected to double in the next five years. The growth will be driven by a healthy business environment

and the Government's investor friendly policies

DomesticDemand

The Gems and Jewellery sector contributes around 6-7% of the countrys GDP

The Government has declared the sector as a focus area for export promotion based on its potential for growth and value addition. The

relaxation of restrictions of gold import is likely to provide a fillip to the industry India's Gems and Jewellery sector has been contributing in a big way to the country's Foreign Exchange Earnings (FEEs). In FY14, it

contributed USD 34.74 mn to the country's FEEs

Reasons

toInvest



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Realizing India's Comparative Advantage in

Capital Intensive Manufacturing Goods

The decomposition of domestic value added for India's exports allows examination of how the benefits of international trade are being distributed between domestic capital and labour.

The domestic value of exports is divided into two components - labour and non-labour (i.e capital). Using this classification, an academic study (Estimating Value Added and Foreign

Content of India's exports, Indian Council for Research on International Economic Relations, ICRIER) shows that the combined share of non-labour component is significantly higher in

India's merchandise exports at 42.9% vis-à-vis services exports (at 35.8%). This reflects a pervasive process of technological change in India's export basket across goods and

services, alike.

At a disaggregated level, the labour component in domestic value added of India has increased mainly for agriculture, food processing, whereas capital contribution has

increased for machinery, metal products among other sectors.

Sector 1998-99

Merchandise exports 34.2 32.1 27.9 50.7 47.3 42.9

Services exports 48.8 51.4 50.9 42 41.4 35.8

Total exports 39.2 38.9 39.1 47.8 45.2 39.5

Labour component Non-labour component

Decomposition of India's Domestic Value Added of exports by factor components

2003-04 2007-08 1998-99 2003-04 2007-08


Source: Economic Survey 2014-15, Government of India


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India's Comparative Advantage stems not only from low labour costs but also technological capability

These encompass major innovations or shifting of the technological frontierKnow-why related technological progress:

We must broaden the definition of comparative advantage to not only include major innovations but minor changes, whichKnow-how related technological progress:

reflects the ability of developing countries to adapt and invent around a given technology. This absorptive capacity of developing countries gives countries like India a

competitive edge that enables them to compete in global markets with the advanced industrial nations.

The technology factor can prove to be a key determinant of manufactured exports from Emerging Market Economies (EMEs) even for high-technology products. Technological

capability is not only in terms of shifting the technological frontier but minor innovations around a given technology, which have historically succeeded in augmenting exports for

Less Developed Countries (LDCs) and made them successful in competing in global markets.

There are significant inter - industry differences in developing countries. For some industries the 'know-how' variable generates significant results and for others the

'know-why' variable plays an important role. It is not the absolute level of technological capability which augments exports but the efficiency with which R&D is employed.

Therefore, comparative advantage of developing countries like India lies not only in low labour costs, but even technological capability.

Japan's comparative advantage in technological capability and lessons for India:

To cite historical examples, electronic products such as television receivers were for many years a prominent export of the US, but Europe and especially Japan emerged

as competitors, causing the US share of the market to diminish dramatically. More recently, Japan has been threatened by South Korea and other Asian producers. The

textile industry is another example where developing countries such as China, Taiwan, South Korea and India have become major suppliers in the world displacing in

particular US and Japan.

After 1960's Japan started developing comparative advantage over USA in several high technology industries such as automobiles, semiconductors and electronic

goods. According to Technology Gap Model and Product Life Cycle hypothesis, this phenomenon was initially attributed to labour cost advantage of Japan. But later on, it

was acknowledged that technological capability of Japan and know-how oriented technological progress i.e. its ability to invent around a given technology was the

reason behind its growing competitiveness. Therefore we need to attach the importance of technological capability to the comparative advantage of developing

countries.



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We identify five key industries with tremendous growth potential where India enjoys a competitive advantage in terms of technological capability

Pharmaceutical Industry

In India's pharmaceutical exports, comparative advantage stems from both know-how and know-why-oriented technological capabilities (reverse engineering). Product development, in

the context of the pharmaceutical industry in general, implies development of formulations using a particular bulk drug and in the Indian context it means simple alteration of dosage forms.

Indias cost of production is significantly lower than that of the USA and almost half of that of Europe

A skilled workforce as well as high managerial and technical competence

Indias generic drugs account for 20% of global exports in terms of volume, making the country the largest provider of generic medicines globally


The healthcare sector in India is expected to grow to USD 250 bn by 2020 from USD 65 bn currently The generics market is expected to grow to USD 26.1 bn by 2016 from USD 11.3 bn in 2011

In 2011, Indias OTC drug market stood at USD 3 bn and a rise to USD 6.6 bn is forecasted by 2016

Pharma companies have increased spending to tap rural markets and develop better infrastructure. The market share of hospitals is expected to

increase from 13.1% in 2009 to 26% in 2020

The purported rise of lifestyle diseases in India is expected to boost industry sales figures

Rising levels of education are set to increase the acceptability of pharmaceuticals

Indias patient pool is expected to increase to over 20% in the next 10 years, due to the rise in population

DomesticDemand

India's pharmaceuticals industry accounts for about 2.4% of the global pharma industry by value and 10% by volume Industry revenues are expected to expand at a CAGR of 12.1% during 2012-20 and reach USD 45 bn

Between 2011 and 2016, patent drugs worth USD 255 bn are estimated to go off-patent, leading to a huge surge in generic product and

tremendous opportunities for companies

Following the introduction of product patents, several MNCs are expected to launch patented drugs in India

Over USD 200 bn is to be spent on medical infrastructure in the next decade

Reasonsto

Invest



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Electronic Systems

In Electronic Systems Industry in India, know-how or production engineering rather than know-why would better explain export success in this sector. Rather than absolute levels

of technological capability it is the efficiency with which technological capability which is acquired is likely to play an important role. The sector comprises Electronic Products,Electronic Components, Semiconductor Design and Electronics Manufacturing Service.

India has the third largest pool of scientists and technicians in the world

Skilled manpower available in abundance in Semi-conductor Design and Embedded Software

Strong design and R&D capabilities in auto electronics and industrial electronics

Rising manufacturing costs in alternate markets


Large demand generated due to Government schemes like the National Knowledge Network (NKN), National Optical Fibre Network (NOFN), tablets

for the Education sector, a digitisation policy and various other broadband schemes

Growing consumerism and rising middle class contributing to significant local demand

DomesticDemand

The Indian Electronic System Design & Manufacturing (ESDM) Industry was estimated to be worth USD 68.31 bn in 2012 and is anticipated to be

worth USD 94.2 bn by end of 2015 with a CAGR of 9.88% between 2011-15

Existing R&D capabilities can be encouraged to develop ‘Made in India products and generate local Intellectual Property (IP)

Adequately developed Electronic Manufacturing Services (EMS) industry is set to be a significant contributor to the entire industrys development

Reasonsto

Invest



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Bio-Technology

In this sector, India's comparative advantage stems from both know-how oriented and know-why-oriented technological capabilities. The sector is divided into five major segments

— bio-pharma, bio-services, bio-agri, bio-industrial and bio-informatics.

rd India is in the top 12 bio-tech destinations in the world and ranks 3 in the Asia-Pacific region

India has the second-highest number of USFDA–approved plants, after USA. No. 1 producer of Hepatitis B vaccine

India has the potential to become a major producer of transgenic rice and several genetically modified or engineered vegetables

A strong pool of scientists and engineers and cost-effective manufacturing capabilities

Global companies looking to economise, outsourcing to lower cost economies results in a cost arbitrage of more than 50%


The market size of the sector is expected to rise up to USD 11.6 bn by 2017 due to a range of factors, such as, growing demand for healthcare services,

intensive R&D activities and strong Government initiatives

India constitutes around 8% of the total global generics market, by volume, indicating a huge untapped opportunity in the sector

DomesticDemand

The sector has seen high growth with a CAGR in excess of 20% and the key drivers for growth in the biotech sector are increasing investments,

outsourcing activities, exports and the governments focus on the sector

The industry is expected to grow at an average growth rate of around 30% per annum to reach USD 100 bn by 2025

The Indian bio-economy grew to USD 4.3 bn at the end of 2013, up from USD 530 mn in 2003

Reasons

toInvest



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Defence Sector

The opening up of defence sector provides significant opportunity for know-how oriented technological progress in defence modernization and advanced weaponry. The

Government aims to promote self-reliance, indigenization, technology upgradation, achievement of economies of scale and development of capabilities in the defence sector.

India has one of the largest defence budgets in the world, but is also the worlds largest arms importer

Developing institutional mechanisms to identify technologies that need to be developed for defence does not only offer potential to be selfsufficient but also to transform into an exporter in the long term

India's modernization plans, increased focus on homeland security and growing attractiveness as a defence sourcing hub


The opening of the strategic defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic

partnerships with Indian companies and leverage the domestic markets by building domestic capabilities DomesticDemand

Defence Production Policy, 2011, to encourage indigenous manufacture of defence equipment. The Policy has been amended to provide for the

following: -

1. Preference to ‘Buy (Indian) 2. ‘Buy and Make (Indian) over ‘Buy (Global )

3. Simplification of the procedure for ‘Buy and Make (Indian) 4. Clear and unambiguous definition of indigenous content

5. Provision for Maintenance Terms of Trade (TOT) to Indian Industry partners

Reasonsto

Invest



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Auto Sector

Growing population and an expanding middle class are expected to remain massive drivers for know-how oriented production progress. This along with Government support can

allow know-why technological progress.

Global car majors have been ramping up investments in India to cater to growing domestic demand. These manufacturers plan to leverage Indiascompetitive advantage to set up export-oriented production hubs

An R&D hub: strong support from the Government in the setting up of NATRiP (National Automotive Testing and R&D Infrastructure Project)centres. Private players such as Hyundai, Suzuki and GM are keen to set up an R&D base in India

A low cost market and engineering skills are likely to give India a competitive edge when it comes to ‘frugal engineering


By 2015, India is expected to be the fourth largest automotive market by volume in the world

Over the next 20 years, India will be a part of the big global automotive triumvirate

Tractor sales in the country are expected to grow at CAGR of 8-9% in the next five years

Two-wheeler production has grown from 8.5 mn units annually to 15.9 mn units in the last seven years. Significant opportunities exist in rural markets

Indias car market has the potential to grow to 6 mn+ units annually by 2020

DomesticDemand

The sector currently accounts for ~7% of the countrys GDP and employs about 19 mn people both directly and indirectlyth

India is currently 7 largest producer in the world with an average annual production of 17.5 mn vehicles, of which 2.3 mn are exported

The total turnover in 2010-11 was USD 58.5 bn turnover by 2016 is slated to be USD 145 bn

Reasonsto

Invest



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Key Challenges for

India's Manufacturing Sector

4.


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Key Challenges for India's Manufacturing Sector

Ease of Doing Business

According to World Banks ‘Ease of Doing Business survey 2014, India ranks 142 out of a total of 189 countries, significantly behind its Asian peers (Singapore ranks 1, Hong

Kong ranks 3, Malaysia 18, China 90, Philippines 95 and Indonesia 114), highlighting that the procedures and costs of doing business are particularly cumbersome for India.

Start up procedures to register a business requires 12 days in India as compared to 5 days in OECD nations and 8 days in Low and Middle Income nations. Further, 1420 days

are required to enforce a contract in India as compared to 527 days in OECD nations and 655 days in Low and Middle income nations. India is characterized by multi-tier

regulatory frameworks and complex procedures making it tedious for investors to venture into manufacturing projects.

Labour Related Issues

Manufacturing entails enhancing labour productivity and a sustained availability of skilled workforce. Relative labour productivity in India fallsLabour Productivity:

behind its global peers, despite a cheap and abundant labour resource. Only 14% of labour force in India is endowed with primary education, 36% with secondary

education and 10% with tertiary education. Literacy rate in India stands at 62%, much below comparable levels of above 90% in other EMEs. The public expenditure on

education is a meager 3.3% of GDP as compared to 5.5% of GDP in OECD nations and 4.4% in lower middle income nations, respectively. As a result of poor

education, labour productivity remains low in India, serving as a deterrent for attracting investment and manufacturing opportunities.

Rigid labour laws and limited adsorptive capacity of the manufacturing sector, have led to restricted job creation in theHigh concentration of Informal Labour:th

organised sector. As per the latest NSSO 68 round Employment-Unemployment Survey, nearly 72% of the workforce is employed in the informal sector. The

corresponding figure for developing countries is 40%. Waged and salaried workers comprise a meager 18% of workforce, with close to 84% of the workers being self

employed.



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Chart 11: Low level of educated workforce

Source: World Bank, YES BANK Limited

70

60

50

40

30

20

10

0

I n d o n a s i a

B r a z i l

P h i l i p p e n s

S i n g a p o r e

H o n g k o n g

S A R ,

C h i n a

M a l a y s i a

I n d i a

R u s s i a n

F e d e r a t i o n

80 Labor force with primary education (% of total)

Labor force with Secondary education (% of total)Labor force with tertiary education (% of total)

Chart 12: Public spending on education

Source: World Bank

7

6

5

4

3

2

1

0

U K

M a l a y s i a

I n d o n e s i a

S i n g a p o r e

L o w e r m i d d l e

i n c o m e

O E C D

I n d i a

U S

B r a z i l

R u s s i a

Public spending on

education, total (% of GDP)

Low & MiddleIncome NationsOECD MembersIndia

11.9

28.4

47

105.7

1420

185.9

4.8

8.9

24.4

81.8

527.3

146.5

7.6

25.2

54.8

113.7

654.5

159.1

Start-up procedures to register a business (number)

Time required to start a business (days)

Time required to register property (days)

Time required to get electricity (days)

Time required to enforce a contract (days)

Time required to build a warehouse (days)


Chart 9: Cumbersome costs and procedures of doing business in India Chart 10: Labour productivity lags behind both AE's and EME's


110

90

70

50

30

10

C h i n a

H o n g k o n g

M a l a y s i a

I n d o n a s i a

P h i l i p p e n s

S i n g a p o r e

J a p a n

T a i w a n

B r a z i l

G e r m a n y

U S

S o u t h K o r e a

S r i L a n k a

T h a i l a n d

S o u t h A f r i c a

India’s labour productivity as a

proportion to others (%)

Infrastructure Bottlenecks

Infrastructure and logistics in India lag far behind international standards adding significantly to the cost of doing business. Highways, bridges, world-class airports, reliable

power and clean water are in short supply. Power shortage is estimated at 12% at peak levels and 8% at non-peak levels. Indian ports have a vessel turnaround time of 3-5

days as against only 4-6 hours in Singapore and Hong Kong. Lack of clear-cut policies on land acquisition, multiplicity of authorities and bureaucratic hurdles lead to delays

in the implementation of industrial and infrastructure projects in India.

29“Make in India” - Pressing the Pedal‘Make in India’ - Pressing the Pedal

L o w

i n c o m e


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Chart 13: Frequency with which shipments reach consignee Chart 14: Ease to arrange competitive priced shipment


Chart 15: Competence and quality of logistic services

Source: World Bank, YES BANK Limited Source: World Bank, YES BANK Limited

Chart 16: Efficiency of customs clearance

0 1 2 3 4 5

Low & middle income

Philippines

India

Indonesia

China

Malaysia

OECD members

Hong Kong SAR, China

United States

Japan

Singapore

United Kingdom

Logistics

performance

index:

Frequency with

which

shipments reach

consignee

within

scheduled or

expected time

(1=low to

5=high)

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Low & middle income

Indonesia

India

Philippines

OECD members

United States

Japan


China

United Kingdom

Malaysia

Singapore

Logistics

performance

index: Ease of

arranging

competitively

priced shipments

(1=low to 5=high)

0 1 2 3 4 5

Low & middle income

Philippines

India

Indonesia

China

Malaysia

OECD members


United States

United Kingdom

Japan

Singapore

Logistics

performance

index: Competence

and quality of logistics

services (1=low to 5= high)

0 1 2 3 4 5

Logistics

performanceindex: Efficiancy

of costoms

clearance process

(1=low to 5=high)

Low & middle income

Indonesia

India

Philippines

OECD members

United States

Japan

Hong Kong

China

United Kingdom

Malaysia

Singapore



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Chart 17: Logistics Performance Index fairs poorly Chart 18: Poor development of Port infrastructure



0 1 2 3 4 5

Low & middle income

Philippines

India

Indonesia

China

Malaysia

OECD members


United States

United Kingdom

Japan

Singapore

Logistics

performance

index: Overall

(1=low to 5= high)

7

6

5

4

3

2

1

0

C h i n a

M a l a y s i a

I n d o n a s i a

P h i l i p p e n s

S i n g a p o r e

U K

U S

I n d i a

R u s s i a

S o u t h A f r i c a

J a p a n

B r a z i l

WEF (1=extremely underdeveloped to 7=well

developed and efficient by international standards)

Low R&D Spending

Productivity is a function of innovations and technology which relates to both know-how and well as know-why oriented technological progress. India's expenditure on R&D

as a share of GDP is a paltry 0.8% as compared to 2.4% in OECD nations and 1.2% in Low & Middle income nations.

Tax Structure

Currently the taxation regime faces challenges such as double taxation, inverted duty structure and lower incentives which have rendered the manufacturing sector

uncompetitive. Taxes on international trade account for 15% of revenue (as compared to 5.6% in Low & Middle income nations and 0.3% in OECD nations) taking a toll onmanufacturing exports. The indirect taxation regime is riddled with double taxation such as sales tax on cenvat, sales tax on central sales tax, entry tax on sales tax, and

income tax on service tax. Further, the current direct tax structure is a major impediment towards building an investor friendly ambience and boosting consumer

sentiment. Taxes on income profits and capital gains comprise 45% of total revenues in India with comparable ratios at 23% in OECD nations and 21% in low income

nations, reflecting disincentives the current tax structure at present imposes. In the recent FY16 budget, the Government proposed to reduce the corporate tax rate to

25% from 30% over a four-year period along with removal of exemptions. While this may imply a higher tax rate vis-à-vis the current effective tax rate of 23%, it

nevertheless imparts predictability to the tax regime.

31“Make in India” - Pressing the Pedal‘Make in India’ - Pressing the Pedal


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Chart 19: R&D expenditure is amongst the lowest Chart 20: Researchers engaged in R&D lag global peers

Chart 21: High Taxes on international trade


0

0.5

1

1.5

2

2.5

33.5

4

J a p a n

U n i t e d S t a t e s

O E C D m e m b e r s

Research and development

expenditure (% of GDP)

S i n g a p o r e

C h i n a

U n i t e d K i n g d o m

L o w

& m i d d l e

I n c o m e B

r a z i l

R u s s i a n

F e d e r a t i o n

M a l a y s i a

I n d i a

H o n g K o n g S A R

Source: World Bank, YES BANK Limited 0 2,000 4,000 6,000 8,000

Singapore

Japan

United Kingdom

United States

OECD members

Russian Federation

Hong Kong SAR

Malaysia

China

Brazil

India

Indonesia

Korea, Dem. Rep.

Philippines

Researchers in R&D (per mn people)


0

5

10

15

20

25

30

Taxes on internationaltrade (% of revenue)

R u s s i a

P h i l i p p i n e s

I n d i a

L o w

& m i d d l e

C h i n a

B r a z i l

I n d o n e s i a

M a l a y s i a

J a p a n

U n i t e d S t a t e s

O E C D

m e m b e r s

H o n g K o n g

S A R

Chart 22: Direct taxes on the higher side


0

10

20

30

40

50

Taxes on income, profits and capital gains (% of revenue)

I n d i a

P h i l i p p i n e s

I n d o n e s i a

H o n g K o n g

S i n g a p o r e

U n i t e d K i n g d o m

B r a z i l

C h i n a

O E C D m e m b e r s

L o w

i n c o m e

R u s s i a n



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Four Policy Choices that India Faces

Centre versus States

The onus of success of ‘Make in India rests as much with the States as with the

Centre, as several decisions pertaining to land and labour are State subjects. Further,

States have innovated with unique business practices benefiting industry at large,

which can be replicated on a national basis.

Labour Management Solutions by Maharashtra: Designed to provide businesses

an online interface with the Labour Department such that license applications and

renewal of applications can be applied online. It has led to 50-75% reduction in the

service delivery timelines along with greater transparency and accountability.

Land related interventions in Gujarat: Gujarat Industrial Development Corporation

(GIDC) has been entrusted to oversee and ensure reduction in complexity across all

processes in getting land. GIDC has been able to bring down the days taken to

provide land possession to less than 45 days from the date application. Further, Landallotment increased by 4 folds with the launch of online portal in 2010.

Measured or Ambitious Integration

One of the fallouts of the recent proliferation of regional / bilateral Free Trade

Agreements has been the inverted duty structure (that makes domestic products

less competitive against imported products) which has adversely impacted Indias

manufacturing industry. While some of the inverted duty issues were addressed in

FY15 Budget (certain chemicals, battery waste and scrap, coal tar among others)

and more recently in FY16 budget (electronics and several raw materials), several

sectors (aluminum, steel , tyres) still continue to suffer from Inverted Duty Structure.

Given the limited success of FTAs so far, on the front of international trade, India has

two policy choices in the form of measured integration or ambitious integration.

India must carve its space in global value added chains by forging measured regional

integrations, but strategizing its policy keeping in view the progress of TPP (Trans

Pacific Partnership) and TIPP (Trans-Atlant ic Trade and Investment Partnership).

Skilled versus Unskilled jobsThe experience so far shows that India has not been able to reap its comparat ive

advantage in labor albeit for skilled labour. Industries especially services-

oriented such as IT, Business Processing Outsourcing have shown tremendous

growth over the last two decades. Against this backdrop, the obvious question

arises as to whether India should focus on developing a comparative advantage

in unskilled (labour) intensive sector or continue focus on skill-intensive sector.

The answer lies in a dual policy mandate, which focuses on education and

skilling along with the ‘Make in India program. Such an approach will allow the

current inelastic supply of skilled labour to become more elastic while ensuring

that ‘Make in India absorbs the countrys large unskilled labour workforce – its

biggest comparative advantage.

Make for India versus Make for the World

There is a rampant economic debate whether India should produce for itself or

for the global markets. Given the slowdown in global growth, replicating an

export oriented growth strategy aka East Asian Economies might be difficult for

India. India must develop as a manufacturing hub, but cater to both domestic and

external demand. Import Substitution and satiation of domestic demand must

be accompanied by Export Optimism. A low share of India in global trade leaves

ample scope for tapping global markets.



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Analysis of Key Sectors:

Short, Medium and Long Term Measures

5.

In order to actualize the Government's 'Make in

India' objective and to build Confidence,

Conviction and Growth in the Indian economy,

ASSOCHAM launched the 'Believe in India'

National print media campaign in May 2014,

focused on reviving key sectors of the Indian

economy that can act as engines of growth, with

huge job creation and income potential, such as

Affordable Housing, Urban Infrastructure, Food &

Agribusiness, MSME, Tourism, Manufacturing,

Defence, Education, Railways and Renewable

Energy, amongst others. Through this campaign,

A S S O C H A M e n d e a v o u r s t o p a r t n e r t h e

Government on policy imperatives for driving

growth in aforementioned priority sectors to

further create a multiplier effect on India's

economic growth. The campaign has appeared

nationally in leading publications such as The

Economic Times, The Times of India, Hindustan

Times, MINT, Hindu Business Line, Business

Standard, The Indian Express and The Financial

Express as well as prominent business magazines

in India such as BusinessWorld, Business Today

and Business India.

MANUFACTURING: Actualizing ‘MAKE IN INDIA’MANUFACTURING: Actualizing ‘MAKE IN INDIA’


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OPPORTUNITIES

DIRECT BENEFITS FOR THE INDIAN ECONOMY

Vital Reforms in Business Regulations

Review Land Acquisition, Rehabilitation & Resettlement Act, 2013 and Companies Act,2013 to align with industry

Improve ease of doing business by setting up single window clearance through eBizplatform in the Centre and all States

Clarity in FDI/FII policy across sectors with better Centre-State coordination to stimulateinvestments and improve business confidence

Capitalize on Domestic demand

Reduce duty on raw materials and components vis-à-vis finished goods to strengthendomestic value addition

Implement nationwide GST while allowing for input tax credit, and reduce MAT Create a vibrant labour market - reform existing 44 Central and 160-odd State labour laws

Develop industrial corridors with regional mapping of strengths and capabilities, andinvestment regions (FTZs) to build manufacturing scale and competencies

Develop domestic manufacturing base for power equipments to ensure consistent powerat competitive prices

1 Manufacturing projected to generate 100 million new domestic jobs and contribute 25% of national GDP by 2025, from existing ~15%

6 Reduction in manufacturing imports from USD 127 billion in FY14 to USD 40-50 billion possible in next 5 years

4 Productivity improvement to boost skill intensive manufacturing in India by 2025

One of the top 2 low cost exporters in auto components, power equipment, pharma

Among the top 5 low cost exporters in machinery, electronics, automobiles, textiles7

28 million new jobs in hi-tech and electronic hardware sector to cater to USD 400 billion domestic market by 2020

REFORMS IN THE MEDIUM - LONG TERM: RECOMMENDATIONSREFORMS IN THE SHORT TERM: RECOMMENDATIONS

OPPORTUNITIES


REFORMS IN THE SHORT TERM: RECOMMENDATIONS REFORMS IN THE MEDIUM - LONG TERM: RECOMMENDATIONS

1 2 3 4 5 6 7Source: National Manufacturing Policy – 'Make in India'; Deloitte Survey; DGCI&S Data 2013-14; McKinsey Quarterly Report; ASSOCHAM Internal Study; YES BANK Analysis; Department of Electronics & IT

Corporate Office: 5, S. P. Marg, Chanakyapuri, New Delhi – 110021 | Ph: +91 11 4655 0555 | Fax: +91 11 2301 7008 | E-mail: [email protected] | www.assocham.org

We invite valued inputs from bankers, bureaucrats, economists, industry leaders and regulatory agencies to make India a Global Manufacturing Hub. Do write to us with your advice.We invite valued inputs from bankers, bureaucrats, economists, industry leaders and regulatory agencies to make India a Global Manufacturing Hub. Do write to us with your advice.

MANUFACTURING: Actualizing MAKE IN INDIAMANUFACTURING: Actualizing MAKE IN INDIA

Driven by Creative DESIGN and INNOVATION for Domestic & Global Markets Driven by Creative DESIGN and INNOVATION for Domestic & Global Markets

1 Manufacturing sector growth rate of 12-14% targeted in the medium term

2 India ranked 4th in Global Manufacturing Competitiveness Index (2013)

3 Capitalize on strong domestic demand and expand geographical base of manufacturing exports to reduce reliance on the US (12%) and UAE (10%)

4 Scope for 4-5 times increase in labour productivity, and 50% increase in capital productivity

5 Exports to rise by USD 64 billion annually if India captures 20% share of low-end exports, where China is losing advantage

Prioritize Sectoral approach Help create strong brand - geographic appellation for Indian products and trustmarks & traceability in key sectors

with globally competitive capabilities

Integrate Foreign Trade Policy with ‘Make in India to promote sectors with high domestic value additioncomponent as textiles, electrical goods

Facilitate growth of exports in labour intensive sectors akin to capital intensive sectors for higher employmentgeneration driven by MSMEs

Incentivize investments in IT, Electronic hardware manufacturing with special financial packages and dedicatedindustrial clusters

Increase private sector involvement in aerospace and defense value chains to reduce import dependence(currently ~70%)

Build private sector capabilities in manufacturing through public linkages Empower 3P India - build robust PPP framework with clear dispute resolution mechanism to encourage private

sector participation in ‘Make in India

PPP to augment skill development capacity through dual program of ITI training cum industrial apprenticeship

Improve R&D capabilities to Design and Innovate with greater industry-academia collaboration - encourageinternational tie-ups for technology transfer

Stipulate offset program in capital goods production to promote domestic vendor-supplier ecosystem

A strong manufacturing sector

driven by a creative innovation and

design ecosystem will be a gamechanger to revive the investment cycle

and accelerate economic growth and

job creation. With its buoyant

consumption patterns, India offers a

very large domestic market for value

added manufactured goods in addition

to the export markets.

BUSINESS REGULATIONS: vital REFORMSBUSINESS REGULATIONS: vital REFORMS


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India ranked 142 out of 189 countries in Ease of Doing Business Index 2015. While India ranks high (No. 7) on Protecting Minority Investors,1simplifying the business regulations can hugely improve India's overall rank.

Huge untapped potential to attract FDI across manufacturing, infrastructure, agribusiness and services.2 During 2004-13, India received USD 258 billion net FDI inflows, compared to USD 1.65 trillion by China .

Progressive tax regime for efficient resources allocation, and to reinvigorate the manufacturing sector.

Overhauling the labour laws to act as an important enabler for industrial development and employment generation.

e-Governance initiatives remain unexplored in important areas like Legal and Judiciary, Telemedicine, Healthcare, amongst others.

OPPORTUNITIES

Clarity in FDI/ FII policy across sectors, with better Centre-State coordination to stimulateinvestments and improve business confidence.

Review and update 105 archaic laws and business regulations to make them relevant to6the current business context and boost investments.

Improve labour market vibrancy by rationalising laws to create a conducive businessenvironment

Reduce multiplicity of legislation by grouping laws under 4 broad categories:industrial relations, wages, employment standards and social security.

Review laws on process for rationalizing workforce and factory closure.

Reduce the number of procedures and approvals involved in starting and doing businessby creating a single window approval mechanism in each state.

Prioritize key reform-oriented bills in the Winter Session of the Parliament to improvebusiness sentiment, including Insurance Laws (Amendment) Bill, 2008, The Factories(Amendment) Bill, 2014, amongst others.

Replicate best practices of IT and ITeS sectors in ongoing e-Governance projects throughPublic Private Partnership models.

Implement 3P- new agreement for implementing sectoral contractual frameworks, andbidding guidelines for infrastructure acceleration.

Simplify the land acquisition process for investors by creating land banks and reorienting the Land Acquisition,Rehabilitation and Resettlement Act, 2013 Act, with support from State Governments.

Expand Industrial clusters/corridors model in all states with dedicated land and tailored laws for a particularcluster.

Create online government to business (G2B) interfaces at the State level with the eBiz platform as a template.

Roll out a single Goods and Services Tax (GST) through consensus of all states, as well as reorient the DirectTaxes Code to create a business friendly tax structure.

Avoid retrospective application of tax laws and strengthen the scope of advance ruling mechanism for crossborder transactions to improve investor confidence.

Foster swift and transparent dispute resolution mechanism, including further developing e-courts and e-rulings.

Create an enabling regulatory environment across all states to effectively implement the “Swachh Bharatcampaign by calibrating existing environmental laws.

Develop deeper equity and debt (both corporate & structured) capital markets to facilitate increased FDI and FIIinflows.

Ensure effective People-Public-Private-Partnership for governance and development through empoweredagencies with powers to authorize key investment projects.

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Expeditious and timely approval process, including forest and environmental clearances, will expedite on-ground execution of projects, revive theinvestment cycle and result in huge job creation.

3 0.9-1.7% potential increase in GDP annually and 3.2-6.3% y-o-y gains in exports estimated through a comprehensive rollout of GST alone.

4 Over Rs. 1 trillion of taxes locked up in litigation in indirect taxes . A comprehensive plan to reduce litigation and expedite dispute resolution will

tremendously boost investor sentiment.5

Each 1% increase in FDI inflows can add about 0.4% to India's GDP growth.

Improved governance interface between Government and industry will boost entrepreneurial activity through simplified procedures.

A refreshed, strong and stable

regulatory and business environ-ment is

critical for revitalizing the Indian economyand boosting investor confidence. A

dedicated focus on building trust, trans-

parency, clarity, consis-tency and

predictability in the laws of the land

and business regulations, will hugely

encourage investors, both foreign and

domestic, to invest in the India growth

story and help actualize the 'Make in

India' initiative combined with Create in

India.

REFORMS IN THE SHORT TERM: RECOMMENDATIONS

We invite valued inputs from regulatory agencies, bureaucrats, economists, industry leaders and bankers to improve the ease of doing business in India. Do write to us with your advice.

1 2 3 4 5 6 Source: World Bank; UNCTAD - FDI inflows, by region and economy, 1990-2013; National Council of Applied Economic Research; CAG (Mar 2013); Economic Times, Sep 23, 2014; ASSOCHAM analysis

US SS GU O S ta O SKey for Catalyzing Investments and Capital FormationKey for Catalyzing Investments and Capital Formation

REFORMS IN THE MEDIUM - LONG TERM: RECOMMENDATIONS


TAX SIMPLIFICATION FOR BETTER GOVERNANCE


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1 Widen individual taxpayers base from 3.6 Crore to over 5 Crore in the short term and increase tax revenues

Single and unified GST as indirect tax for efficient resource allocation and to boost the manufacturing sector

Progressive and reoriented Direct Taxes Code (DTC) to consolidate all direct taxes and simplify the taxationstructure

Promote infrastructure development and investments in Power and Housing sectors through increased tax incentives

Opportunity

Direct Benefits for the Indian Economy

Streamline indirect tax regime through a pan-India Goods and Services Tax (GST) rollout through:

Concurrence of all states for the rollout

Nationwide uniform rate to prevent tax arbitrage

Mechanism to compensate states for tax revenue shortfall

Constitutional amendment to operationalize GST

Revisit the DTC bill by rationalizing taxes to create a more investor and businessfriendly environment and improve tax collections

Provide tax relief to corporates for mandatory CSR spend

Institute an efficient arbitration mechanism for speedy resolution of tax disputes

Extend tax holiday by 5 years under Sec 80-IA of the Income Tax Act to encourageinvestments in the Power sector and help realize the vision of 24x7 electricity for all

Treat infrastructure projects, particularly water, roads, power at par with SEZprojects to

YES BANK - ASSOCHAM Knowledge Report - Make in India - Presing the Pedal

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