By Mriganka M Bhowmick
The surprising festive bonanza doled out by Finance Minister Nirmala Sitharaman to India Inc has already created widespread enthusiasm in Indian industry. The grappling business sectors are terming it as much-needed oxygen amidst slowdown, with a hope that they will sail through the low tide of Indian market seeing declining domestic demands. But one of the most positive impacts of the tax cut is that it boosts India’s prospects to become a major player in the global supply chain, provided other issues of Ease of Doing Business can be managed effectively. A tax reduction from for any new manufacturing entity which will commence production by 2023 has slashed more than 12 per cent with effective tax rate 17.01 per cent with no Minimum Alternative Tax (MAT).
Evidently, if any global organization which was contemplating establishing its manufacturing unit and assembly operation in India before this tax cut announcement, will now find this huge tax arbitrage as a major incentive for their capital expenditure, and evidently economies of scale for the final finished product can be achieved effectively. India aspires to become manufacturing hub of Global Supply Chain (GSC). So it is expected that many more structural reforms will take place in future to ease out of doing new business.
In liberalized economy, global supply or production chain is a well-known business strategy for multinational corporations to minimize the production cost and augment the productivity, where intermediate inputs are originating from different countries. One needs to remember that the low labour cost is not only the deciding factor to establish a delocalized production unit. It has been observed that the economic policy of a developed country looking for growth model and job creation continue to fine-tune the policy towards Global Supply Chain to integrate with global market for bigger share of value. However, GSC has emerged as a potential pillar of economic development of a developing country looking for export led development. GSC adds values to the country to develop new technology, skill, productive capacity and diversification of exports. India being a country with low labour cost along with modern technology know-how surely will have major plays along the value chain of fragmented production process.
The Government of India rolled out Make in India to give a push to make India a global manufacturing hub. It was a defined shift of policy from promotes India a global service hub based on IT and IT enabled process outsourcing. The present Government may have realized in its early days that high value jobs and employment of semi skilled man power can be achieved through manufacturing activity. In advent of forth industrial revolution of Artificial Intelligence, Internet of Things, the jobs of service sector may be taken away through technology innovations. The policies rolled out in Make in India were thus creating a road map to boost manufacturing sectors with intent of ease of doing business. It has charted out an unambiguous FDI policy, Intellectual Property Right (IPR) Administration along with transparent tax regulations and Corporate Insolvency Resolution Process. All these have effectively addressed the previously opaque policies and make the rule of the game straight as per world standard. Now the ball has rolled into the domain of business mathematics of feasibility and profit to make India a manufacturing hub.
This huge incentive through reduction of corporate tax for new manufacturing unit is directed towards that effort to make the manufacturing business a positive sum game. It is imperative to mention here that creating huge manufacturing facility does not happen overnight as there are substantial capital expenditure and a business entity needs to take a conscious call after whole lot of deliberations. But any growth activity which gives pain at inception will result in long term fruit of prosperity.
Without comparing India to china, if one can concentrate on India’s feasibility to integrate with global supply chain of manufacturing, it will be more apt to understand the prospect of India. First of all India is progressing every day towards better infrastructure with ports, airports and highways connecting not only cities but rural India too. A clear cut road map is there to set up a new manufacturing entity with Single Window Clearance System for foreign companies. Many states have already adopted industry friendly land acquisition policy and are easing it out further. India has huge demographic advantage of young population and wage level is lower than other Asian Countries. Technical education in India is progressive and it would not be tough to produce semi skilled work force in large number with support of government initiatives in a short span of time. Moreover, India has a huge domestic market of consumption albeit the current demand curve is down. A rational Local Content Rule will only help the global corporation to make the finished product more price-attractive.
If one takes all the above input parameters along with reduction of tax of around 12 per cent from the previous tax rate as introduced by new corporate tax and develop a mathematics around these to establish a manufacturing facility in a democratic country like India, it makes whole lot of sense for capital expenditure with an incremental bonanza of advances of technology and infrastructure in coming five year. India can be a choice for serious manufacturing facilities of subassembly in global supply chain with sales expectation in many countries, not merely a distribution centre of final product assembly. There is India’s chance to create a standalone model to become a manufacturing hub. (IPA Service)