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To boost manufacturing, two policy areas deserve attention, in addition to infrastructure, skills and the ease of doing business – restricted FDI in retail and undirected government procurement. In these, we do not have any international commitments and have policy space.

There has been public discussion on permitting FDI limits in multi-brand retail. This is expected to facilitate development of the cold chain, increase efficiency in movement from farm to market and reduce the gap between what the farmer gets and what the consumer pays, which in India is much too high. Investments both at the farm level as well in the supply chain and food processing would be substantial and geographically dispersed. Apprehensions regarding the impact on small stores could be mitigated by initially permitting a limited number of outlets and that too only in the metros and tier-1 cities. Further calibrated opening up could be considered after review of experience.

The proposal of Ikea illustrates how FDI policy can be leveraged to promote manufacturing. Its stores across the world provide stylish furniture, furnishings, crockery and cutlery at reasonable prices. Ikea wanted approval for 100% FDI and were not willing to come in with 51% that is permitted in single-brand retail. In lieu of that, it was willing to develop vendors so as to achieve in five years at least 50% value addition in India overall for the goods that its stores would sell.

Once it was able to source supplies in India, these would naturally be good enough for their global supply chain and Indian manufacturing would become globally competitive in products like furniture, crockery and cutlery. It would have to undertake vendor development in the way Maruti did – which eventually created a globally competitive Indian auto component industry.

The condition of value addition within India for FDI in multi-brand retail can act as a fairly effective instrument for giving a push to globally-competitive manufacturing.

Public procurement is the other lever that can be used selectively in strategic areas to create manufacturing capability. The US had the condition of ‘Buy American’ for the use of the stimulus funds provided for the recent economic crisis to create jobs in America. One instance where this approach is being tried is the bulk tender for super critical thermal power plants by NTPC with the condition that the successful bidders should do manufacturing in India. This would have the added benefit of promoting private sector manufacturing in addition to public sector Bhel and creating a competitive industry structure.

Another example is the solar mission. Recognising the enormous scale effect being created by the installation of a thousand megawatts in the first phase and its potential for lowering costs and nurturing a competitive manufacturing industry, the guidelines stipulate that in the first year modules and in the second year, modules and cells should be made in India for plants being put up by private developers. These plants have been assured attractive tariffs for 25 years. In the absence of such a requirement, the story of the telecom sector would have been repeated where, notwithstanding the size of the Indian market, manufacturing capacity has eluded us. Our large solar mission may well have been based largely on imports without creating national capacity, despite huge subsidies.

The policy of defence offsets is another policy instrument for leveraging government procurement. The benefits from defence offsets would now start as our military equipment modernisation process gathers pace. The recent inclusion of civil aviation and homeland security in defence offsets has been a sensible move to realise positive spin-offs across a wider spectrum of critical manufacturing. The idea of increasing FDI limits for defence manufacturing could also be seen in terms of possible commitments to making India part of the global supply chain, with value-addition increasing over time.

There have, of course, been enormous benefits from global competitive tendering and this should continue to be the norm. India was wise in not only resisting protectionism but also in helping forge the worldwide consensus against protectionism at the time of the global economic crisis. The need to create favourable conditions for manufacturing and to address investor concerns must remain the central focus of our efforts. Capital is mobile and there is no substitute to nurturing a favourable ecosystem for manufacturing. But we must also not shy away from selective interventions to nurture specific manufacturing capacities.





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