The One Big Bang Reform That Can Establish "Make In India"

The One Big Bang Reform That Can Establish ‘Make In India’

Prime Minister Narendra Modi has often said his number one priority is to create millions of new jobs for the young people of India. To do this he has emphasised manufacturing and has spent the last nine months drumming up investment interest from some of the leading countries in the world.

The reason for his doing so are simple-the government or private sector in India does not have the amount of money required for the scale of increase that is envisaged. But while the pledges have come, most would-be investors want a number of reforms before they make their investments in India. Mostly they envisage an easing of rules and regulations, lowering of taxes, reformation of labour laws, provision of adequate land, utilities and connectivity.

But to get them going without prevarication, we need to become not only the fastest growing economy in the world, but the most attractive investment destination for long-term capital.

The present share of manufacturing in the GDP is at a national average of around 12-17 per cent, depending on how it is calculated. Modi wants to take it up to 25% which, if it is 12% currently, is a neat doubling. This may be ambitious but not far-fetched, when our defence manufacturing needs alone easily tops $ 100 billion.

The same conundrum confronts infrastructure development, because again we do not have the dollar billions, if not trillions, it will take. And in this sector of roads, ports, power plants, solar and nuclear installations, mining, railways, airports etc. the gestation periods are long, and the returns tend to be modest.

So most of the money to come into this sector has to be institutional funding from entities such as the World Bank, the ADB, BRICS Bank, the Sovereign Funds, and so on. The execution however can be done by joint ventures with foreign companies, particularly from China and Japan, who have the ready interest, as well as the expertise and know-how.

But manufacturing, less capital intensive, can attract corporate interest and self-funding provided the Government of India (GOI) makes it attractive, as China did, in its time, 30 years ago.  The trouble is that it will take a visionary intervention from the Prime Minister himself, his own Kamal Ataturk moment as it were, to make it happen, as it took Deng Xiaoping, mentor extraordinaire, to do so in China. A bold move of this type cannot come from anywhere else.

The GOI needs to declare a total tax holiday on all FDI against its ‘Make In India’ call, for a period of ten years from the first day production commences. And it might need to stay in perpetuity as well based on a review at the end of the time. It should cover any and all forms of taxation and excise, including import duties on equipment, state and municipal taxes etc. The finished products from such joint venture technology transferred entities should also be exempted from each and every Indian tax. In short, this is a call for FDI fuelled, tax-free manufacturing, with total freedom to repatriate profits at any time.

This policy should apply to all manufacturing with a FDI component of 49% or above, right up to 100%. Of course, where the majority holding of 51% is in Indian hands, they too will be incentivised by the tax-free status. The tax moratorium for 10 years from commencement of manufacturing should apply to each and every FDI funded new manufacturing unit established in India on or after May 16^th 2014, the day the Modi Government won the general election.

If any FDI promoted manufacturing units are established by already existing players, who have expanded capacity or added facilities after the commencement date of May 16^th 2014, they too should benefit from this incentive.

Before the nay-sayers are allowed any play, it needs to be pointed out that there is no tax loss to the exchequer from a zero manufacturing tax on FDI collaborations, as we stand today. Almost none that would qualify under this proposal exist today.

There is therefore no need to block it before it can begin. Even though this is exactly what happened when it was proposed, in the run up to the general elections, that income and corporate taxes should be abolished in favour of a minute expenditure tax on each and every bank transaction. The argument advanced then was was that it would be cumbersome to administer to the point of impracticality, and that the Government could not afford the loss of tax income it might engender.

If this tax-free manufacturing proposal is adopted however, Modi’s pledge to create millions of new jobs from his ‘Make in India’ vision would be well on its way to success. It can form part of the upcoming budget or be announced as a stand-alone adjunct to the Make in India policy which is attracting a great deal of foreign attention already.

For: NitiCentral

(818 words)

February 15^th, 2015

Gautam Mukherjee