steps to make indian industry competitive

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With forex reserves piling up rapidly and the rupee strengthening,import tariffs should be cut substantially so that the industry becomes globally competitive. The fact is that in India high tariffs were required by and permitted the existence of various distortions that were introduced by government for a variety of reasons. The problem is even more vexing for tariffs on agricultural products, where our tariffs are more defensive than protective. The high levels of subsidies given to agriculture by developed countries makes us uncompetitive despite our comparative advantage.Tariff reduction in India, must wait upon subsidy reduction by the developed countries if we are not to be suicidal.As far as our balance of payments position is concerned, the favourable conditions obtaining today are simply a reflection of the unacceptably low levels of investment in the economy. Estimates suggest that any reasonable recovery of the growth momentum will put pressure on the balance of payments, and it would therefore be prudent to keep the tariff instrument in a state of readiness. Indias import tariffs must drop sharply to reach Asean levels soon so that industry becomes more competitive There is a lot of pressure on the rupee to appreciate. A combination of less appreciation and more tariff reduction is ideal at this moment. This will help both exporters and importers. The underlying strength of the external sector has been established. It is also very clear now that in order to move to a much higher trajectory of growth, say, 7-8%, we will have to import much more than now and at lower duties. So given the underlying strength of the external sector, the most logical step is to speed up opening up of the economy. Former finance minister Yashwant Sinha had committed to bring down peak tariff to 0% by 004-05. The government must stick to this at the very minimum.Infact there should be an even sharper cut in peak rate to 10% by 006. Lower tariffs will improve competitiveness because users outnumber producers in the economy, even though the former are scattered and unable to present a unified lobbying voice. There should be just one customs tariff rate for both raw material and finished product because this will at once remove all confusion in regard to classification. Often a finished product can be treated as an intermediate and vice versa, creating negative duty protection in many sectors. For instance, import of cars can be treated as an input for a domestic travel or courier service. A single tariff will also at once remove a host of existing anomalies where the raw material duties are higher than those for finished products. The Indian industry is currently facing stiff international competition, both in domestic and export market. The slow process of domestic tax reforms is making many domestic units unviable with the falling tariff barriers and removal of quantitative restrictions. The government should eliminate the cascading effect of taxes on cost of domestic manufacture and remove trade barriers within the country so that Indian industry is not at a disadvantage.

. Again continuing in the same direction ,we know that the total tax incidence of Central and State taxes on goods manufactured in India is very high and generally ranges between 0 to 70 per cent of the cost of production. This high incidence is because of the narrow tax base. Indirect taxes are largely collected from the manufacturing sector. Moreover, even in the case of excise & customs, there are numerous exemptions. High tax incidence restricts demand for tax paid goods and consequently, the industrial growth and employment generation.Thus the following steps could be implemented

a) Moderation in the excise duty rates on manufactured goods & discontinues special excise duty currently on several products.

b) Central Sales tax should be abolished to make India a one common market and remove cascading effect of tax on inter-state transactions. This would enable Indian industry to achieve economy of scale in manufacture and gainfully use technology to reduce their manufacturing & distribution cost.




c) Replace the existing state specific sales-tax structure by integrated national VAT in a shortest possible time frame so that Indian industry can effectively compete in the emerging highly competitive world market.

d) The duty drawback structure should be modified to include sales-tax and other state taxes suffered by the export goods.

e) Service tax should be made full cenvatable to reduce its cascading effect.

f) Ladder system of custom duty structure should be ensured to strengthen Indian industry by keeping the custom duty on all the raw materials at 60% to 70% level fo the duty rate on finished goods in which these are used.

. The integration of world market post establishment of WTO has provided us an opportunity to increase our exports. India, with its large pool of skilled manpower, abundant entrepreneurship, natural resources and lower operating cost, is in an advantageous position to become sourcing hub for manufactured goods. To promote Indian industry as a global hub, we now require conducive fiscal environment and flexible labour laws, which promote investment,. We would recommend the following measures in this connection -

a)The fiscal laws & procedures should be simplified and these should be in consonance with the international law.

b)There should be stability in the tax structure. The tax incidence and implementation should be predictable for business decisions

c)The recent legislation on transfer pricing has created apprehension among foreign investors. The straight jacketed formula under transfer pricing regulation with its irrational concept like arithmetic average, certification of price by separate agencies, rigid documentary requirements and draconian penalties would discourage trans-national companies. The government should recognise that business conditions are dynamic and therefore rigid and inflexible approach to such tax legislation would discourage investment in India.

4. The government has the major responsibility of making Indian industry globally competitive.One of the most suggestive things the government itself can do is to attempt more e-governance to provide a boost to the industry’s economy and competitiveness One of the action points identified for the government is to utilise information technology in all areas of governance in order to improve efficiency, bring about transparency and accountability.Some key departments like the tax department could be in the forefront of implementing e-governance.The government should ensure that it establishes the required infrastructure and evolves the required legal framework .Also it should effectively manage cultural issues that may arise due to adoption of e-governance and finally implement the process of e-procurement for the government.The CII & the government can work jointly to put the Indian industry on a global map.Some of the areas on which it can closely work with the government so that it can boost the reform momentum and enhance the industry’s competiitveness are WTO and global trade issues,enhancing FDI inflows,financial & agricultural sector reforms,passage of important economic legislations,revival of manufacturing sector and simplification of procedures in small and medium enterprise sector.

5. The economic slow down & recessionary conditions in many countries has also affected Indias exports. The Indian exporters now face stiff competition and high currency risk. The slow process of domestic tax reforms have also imparted the cost competitiveness of India industry.The effect of the above factors has led to the deceleration of exports during the current year. This trend is likely to continue unless the Government take urgent measures to promote exports within the framework of IndiaS commitment to WTO. The Indian exporters should be encouraged and reassured on the fiscal implications of thier exports.The export industry is vast and have a direct impact on the Indian industry,thus to raise the level of competitiveness of the Indian industry the export industry should undergo some reforms. The exporters should be allowed to create a currency fluctuation reserve to take care of thier exchange risk out of the profit earned from exports. This would minimise the financial impact of exchange risk. A fixed percentage of each years profit can be transferred to this reserve account, subject to a monetary limit on the aggregate amount of such reserve not exceeding the foreign exchange exposure. The annual contribution to such reserve should be tax deductible at the time of transfer of amount to reserve account,. After a fixed period of, say, 5 or 8 years, such amount transferred to reserve account can be released on payment of tax. The tax deferment will provide financial support to the exporters to meet any foreign exchange risks, which may arise and improve their margins to some extent. AT the same time, the government will get its tax revenue, though after a specified period. A similar incentive mechanism was operating earlier for investment in plant & machinery as Development Reserve. Since the above export incentive only allow deferment of tax, it cannot be treated as a tax subside under WTO agreements and therefore it is WTO compatible. The impediment in the dedicated export unit u/s 10A(0 &10B() should be removed. This provision make an export unit disqualify export incentive given under these respective section if there is a merger, de-merger or transfer of such unit, In the case of domestic manufacturing unit eligible for similar incentive u/s 80-IB, there is no such hassles or disqualification. The harsh provision of the present guidelines under the Transfer Pricing regulations should be modified alteast for export business such as arithmetic average for determining price, lack of flexibility in the form of internationally accepted range in price comparison, excessive requirement for documentation and harsh penalties for any difference of opinion between the tax department and the assessee including the disallowance of export incentive de-motivate exporters from taking any investment risk for manufacturing in India for global sourcing.India has inherent capability of becoming a manufacturing hub for export to developed countries if favourable fiscal environment is created. It is strongly recommend tat the application of transfer pricing regulations in the case of exports should be deferred for atleast years until the tax department gain adequate experience of administering these new provisions. In the case of export prevision, the cascading effect of domestic taxes should be completely removed including the element of central sales tax, cess on export raw materials like tea, input state taxes etc. The Government should persuade state taxes to zero rate export provision.

6. One of the area of development should be the SSI(small scale industries).This should include special focus on areas such as technology upgradation, infrastructure assistance through cluster approach, timely availability of credit, adoption of modern management practices, use of electronic infrastructure and other IT applications to face the emerging challenges of trade liberalization.The SSI’S should have easier access to credit, availability of collateral free composite loan up to Rs.5 lakh, capital subsidy for technology upgradation and improved infrastructure. The SSIs should make efforts to match prices of domestic products with world prices by adopting waste reducing techniques, making improvements in designs, use of better materials, improved inventory management etc.; innovate/design new products and upgrade product quality to ensure that the consumers are not diverted towards imported products; adopt international/Indian product standards; ensure better package for domestic and export markets; ensure compliance with pre-determined delivery schedules; obtain patents for their products; expand the industrial units vertically by installing modern machinery rather than starting another small unit; explore areas for ancillarisation and develop linkages with other enterprises; restructure management and marketing practices; look for collaborations and tie-ups with foreign firms, which will take care of export marketing through their established channels and provide financial support; and improve productivity of labour.

7. As India is predominantly an agricultural country the agricultural industry and it’s growth is of prime importance in enhancing the competitiveness of Indian industry as a whole.Indian agriculture faces several challenges both internal and external. Ignoring the challenges will be perilous because the livelihood of two-thirds of the population is dependent on agriculture and allied activities.WTO’S trade policy review was marked by pressure on the country to reduce duty such as countervailing and special additional duty on imports. It is clear, there are external forces that challenge Indian agriculture and agribusiness. The intention is to crack open the one billion strong Indian market to highly subsidised foreign goods.Obviously all stakeholders in the country have to guard against India becoming a dumping ground for subsidized agriproducts. What can India do? Given the challenging internal and external environment and considering the fact that the fortunes of three-fourths of the population are directly dependent on our countrys farm-related policies, the need of the day is to strengthen domestic agriculture. India has all the factors of production � land, labour, sunshine, water and agro-climatic zones � except appropriate policies for an efficient management of resources. Input management is the most critical part that needs serious attention. Quite apart from supply of quality seeds, fertilisers and agro-chemicals, scientific management of scarce water resources deserves the highest priority. Flow of credit and delivery of credit needs special attention. # Budgetary outlay for agriculture related programmes and schemes has been shrinking. Funding for agriculture has to be raised and at the same time, an effective monitoring mechanism to ensure application of funds and value-for-money should be evolved. Rural infrastructure is non-existent. The money being wastefully spent on storage of unconscionable levels of foodgrain stocks as buffer should be better utilised for creating rural assets in the form of warehouses, roads, market yards etc. The private sector should be encouraged to go in for backward integration. Grant of some fiscal and other concessions may not be out of place to induce private investment in farming. Integrating resource poor farmers through contract farming can go a long way in addressing a number of production and marketing related issues. In many of these promotional activities, State governments have to take interest. They have to be pro-active and evolve policies that are friendly to both primary producers and processors. Under the Constitution, agriculture is a State subject. States should become accountable. The above recommended steps will in some or other possible way will boost the agricultural industry and will thus account for the growth and achievement of competitive excellence of Indian industry as a whole.To make this possible there has to be a unified vision and a collective approach so that the Indian industries are on a global map.

8. Apart from looking at recommendations and steps to achieve competitiveness the Indian industry should also focus on the competition from other countries and the study the threats and problems so that a common consensus is achieved for example the threat from Chinese products flooding Indian markets has received much media attention. It has been observed that Chinese imports are in the low tech, undifferentiated and value-for-money category. The Chinese set up world class manufacturing facilities and simultaneously kept labour costs low. Their expertise in large-scale quality manufacturing and high productivity is reflected in some of their products -- TVs and appliances -- closely matching Japanese and Korean companies in quality and price. The skill and productivity of an average industrial worker in China are better than his Indian counterpart because of the experience curve effect and the dedication of the workers. There have been reports of even prisoners being roped in to provide free labour. This results in decreased costs and the prisoner acquires skills enables him to earn a livelihood at the end of serving his sentence.This option though at small extent is a feasible option for India to look upon. Increasing the scale of operation through greenfield or brownfield (M&A) projects or a combination of the two may have to be contemplated speedily. In the latter case, the strategy of the pre- and post-integration process will require delicate handling, as miscarriages in mergers are a common phenomenon. Undoubtedly much attention will have to be directed at reducing waste, improving co-ordination with vendors, reducing the down time of machines, full capacity utilisation and better bargaining with buyers and traders. Simultaneously, it is critical for firms to focus on internal process improvements and improve efficiency, effectiveness and productivity. Each nation has its areas of competitive advantage and the time has come to make a strategic choice. The need is to foster such industries where India has a natural advantage, achievable critical mass of requisite managerial skills and technological capabilities to achieve international standards of design, quality and service parameters. The Chinese challenge is real. Careful reasoning and strategic analysis should determine the competitive advantages of Indian industries for making them internationally competitive.

. Some of the general recommendations to improve the standards of Indian industry would be the emphasis on infrastructure and regulatory reform.Besides,cross-subsidization,especially by private entrepreuners to various sectors have to be stopped.The CII also has some major responsibility to make the Indian industry globally competitive.The CII should set up a national taskforce on capital markets, which would review problems and loopholes in stock and securities markets, examine quality of regulation in SEBI and suggest reforms to bring transparency and investor confidence. The other initiatives in the financial sector would include a study on debt markets, banking reforms and privatization, pension reforms and troubled debt restructuring. The CII, should focus on four other important areas in order to pursue a competitive sustainable growth rate. These, would form the five-pronged action plan of CII and would include ‘‘increasing competitiveness, Focus on bank and capital markets, Governance, privatization and labor and Learning to play the WTO game. On the internal front, the CII should strengthen its corporate advisory services. These involve saving energy costs, TPM, TQM, lean production, QS 000, greening the supply chain, environment audits, and waste minimization. On the external front, CII should focus on detailed firm-level studies on competitiveness to get a clear quantitative fix on barriers, and thereby setting the stage for policy reforms. In addition, CII should also do a competitiveness ranking of states, suggest administrative and legal reforms to foster greater competition, and suggest direct and indirect tax reforms to remove impediments to competition. Indian industry should evolve a new paradigm of competitiveness based on entrepreneurship, innovation, leveraging existing resources, creating new markets and global orientation instead of focusing on problem areas like resource shortage, poor infrastructure and inflexible labour laws, among others. . Indian industry should learn to reduce its debt- equity ratio. With the service sector contributing to 5 per cent growth of the gross domestic product (GDP) and the manufacturing and agriculture sectors contributing each a little more than one per cent, the economy should be able to achieve eight per cent growth.Proffesionals and industrialist should impart CHANGE MANAGEMENT as the most crucial element foe achieving competitive excellence. Priority should be given to public investment in education, including primary and higher education, and the private sector given a bigger role in higher technical education.



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