Is India equipped to go the whole distance and become a global manufacturing hub? We take a look at what is being rolled out and what needs to be done.
India's potential as a manufacturing destination is being marketed on a large scale at a global level since the launch of the "Make in India" campaign in September 2014. Prime Minister Modi's slogan to "Sell anywhere in the world, but Come, Make in India" has given hope to a new programme designed to facilitate a buoyant investment atmosphere and build world-class manufacturing infrastructure in India. Is India equipped to go the whole distance? We take a look at what is being rolled out and what needs to be done.
In 2006, when Nokia announced its decision to set up its manufacturing plant in Sriperumbudur, Chennai, it turned the world's spotlight on India's manufacturing prowess. Eight years later, the script has definitely taken a different turn. After a peak of manufacturing more than 15 million phones per month and employing over 8000 employees working in three shifts, the company was saddled with tax evasion claims from the Income-Tax Department in India. With the entry of smartphones and an inability to adapt to the changing dynamics of the mobile/technology market, the Finnish telecom major shut down its largest manufacturing plant on 1st November 2014. While the Nokia story is a complex one leading to loss of employment of thousands of employees, what lingers on is India's reputation as an ecosystem facilitating business and investment building on its traditional advantage of a low-cost skilled workforce.
While availability of a low-cost labour pool is a key for multinational companies to choose India as a manufacturing destination to begin with, factors like infrastructure, communications, regulatory environment and a clear legal and tax regime also influence the final decision. Let's examine the state of India's infrastructure readiness in the light of various challenges that an infrastructure project faces before and after it takes off.
The main objective of an infrastructure project needs strong support and commitment from its stakeholders and the public at large. Today, with the infrastructure sector being largely driven by political intervention and illegal kickbacks at various stages of its implementation, projects are rarely chosen on the basis of 'requirement', thus risking crores of rupees that get parked in its implementation. An infrastructure project made without a real requirement gives rise to risks of completion and depletion of human, financial and other resources. The concept of sky-walks in the city of Mumbai was initially conceptualised as a cross-over bridge for the convenience of pedestrians but when implemented on clustered and narrow roads (without much requirement), it only caused more inconvenience to moving vehicles, pedestrians and local retailers. The thought of climbing 50 steps without automated escalators to get on the other side of the road has also dampened the whole concept per se - a classic example of a project that failed to even cater to the real demand of pedestrians. Secondly, infrastructure projects must be studied closely to ensure their 'commercial viability'. A commercially unviable project only raises the implementation risks and fails to attract the much-required commercial investment besides failing to address the demand in an economical and environmentally sustainable manner.
The need of the hour is to begin on a correct footing and ask a few basic questions to explore the commercial viability and the environmental and social impact of the project: Will the project be supported by the public, government agencies and private interests? How will the threats of political instability and special interests be handled? Are legal and regulatory frameworks in place to support the project structure, and do those frameworks address risks appropriately? The answers to these questions may demand a detailed study to assess the associated risks but will ensure an effective decision making process followed by a smooth implementation of the project. It will also help to strike a balance between viability, welfare objectives and public policy needs.
Most of the Private Public Partnership (PPP) contracts are not designed to accommodate diverse formats of a PPP model. The contract structures adopted are more or less standard rather than being tailored to the needs of a particular sector or project. Also, the multi-layer structures of larger projects make it complex for the parties to effectively comply with its provisions. Contractual protections tend to favour the government party involved making it extremely one-sided and onerous for the private party. In most cases, the contracts are neither equipped to provide a definite procedure to deal with practical roadblocks at each stage of the project nor have a defined procedure for implementation in place.
What needs to be understood is that each stage of an infrastructure project (especially in India) has its challenges and opportunities for risk management and risk-mapping has to be undertaken at the project ideation stage itself. Apart from having definite performance related provisions in the PPP contracts, it is also crucial to have clear back-end provisions like warranties, indemnities, limitation of liability, choice of law and an effective dispute resolution mechanism.
Complex regulatory structure
The existence of multiple Central and State laws governing an infrastructure project leads to multi-layer approvals, clearances and compliance requirements from several authorities and departments. Further, the arduous and long drawn-out process (riddled with uncertainties) in acquiring land in India causes loss of confidence, invariable delay in project implementation and unprecedented cost escalation. Also, absence of e-Governance leads to excess dependency on over-the-counter formalities which are driven by illegal kickbacks.
With labour falling in the concurrent list of the Constitution of India, myriad Central and State labour laws exist governing the setting up and running of factories and industrial disputes. This leads to multiple compliances to be adhered to with multiple government bodies at any point in time.
The state of SEZs in India
What started with a big bang to turn India into a manufacturing powerhouse is now in a dismal state. The rationale to set up SEZs was creating zones of free trade with tax incentives to promote exports. While zones were created in small isolated pockets, little attention was paid to development of infrastructure outside the zone. Also, the economic slowdown of 2008-09 leading to the shrinking of the market for exports vis-a-vis domestic demand and the shift in foreign trade policy sealed the growth story of SEZs.
How to Make India?
The "Make in India" campaign promises to usher in an attitudinal shift in how India relates to investors, from a regulator to a true business partner. The new government has also followed up its campaign by easing sectoral caps for foreign direct investment (FDI) in defence and construction as also allowing FDI in specified rail infrastructure projects. We can also expect further liberalisation measures in the days to come. New initiatives aimed at de-licensing and de-regulation with a focus on e-governance if applied with vigour, may well change the traditional way of doing business in India.
Implementation of a single-window clearance system for seeking approvals and necessary permissions needs to be put in place, which reduces the time taken to secure permissions, cuts down on the procedural delays and allows parties to seek the requisite permissions in a time-bound and rational manner. Secondly, the existence of a single regulatory authority to overlook and supervise a project take-off saves the hurdles of chasing multiple authorities for the endless list of approvals. Infrastructure rightfully figures quite high with plans to create smart cities, industrial clusters and industrial corridors to facilitate seamless movement of goods and services. However, this has to be followed up with the amendments to the Land Acquisition Act, 1894 and adopting holistic measures across the spectrum ranging from availability of 24/7 power, telecommunications, highways, connectivity to ports and airports if the goal of increasing the manufacturing sector's share to 25 per cent (from the present 15 per cent) of India's gross domestic product over the next decade is to be achieved.
Being a democracy, while we enjoy a stable political climate compared to other developing nations across the world, what is the need of the hour is clarity in the tax and regulatory regime across the country. With countries like Vietnam, Malaysia and Thailand besides the ever-present China wooing foreign investment, "Make in India" definitely has great potential to be a success at home and with foreign investors. What needs to be given heed is the need to 'Make India' first with tangible measures focused on providing a business ecosystem balancing the interests of various stakeholders.
This article has been authored by Ramesh Vaidyanathan, Managing Partner, Advaya Legal and Pooja Thacker, Associate, Advaya Legal.