New Delhi: No 100% subsidiaries for foreign manufacturers. No special economic zones. And no so-called ultra mega power projects.
These are some of the radical changes suggested by a group set up by Prime Minister Manmohan Singh to review the country’s manufacturing policy.
Other recommendations made by the National Manufacturing Competitiveness Council, or NMCC, and submitted to Singh on Saturday include the creation of a central fund for acquisition of foreign firms and assets across sectors to secure long-term raw material supplies for India.
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The recommendations, if implemented, would require significant changes in existing policies. Current policies allow 100% foreign investment in most manufacturing businesses. In defence, however, the investment is capped at 26%.
NMCC says that these changes are a must if India has to grow its manufacturing sector by 12-14% a year, almost double the current 7%.
The recommendations were initially welcomed by industry lobby groups but a representative for one later said they needed to be discussed. An investment and tax expert, however, said that it was unlikely that the government would be able to force companies to form joint ventures.
NMCC has suggested that a body to carry out these recommendations be created and housed within the Prime Minister’s Office, or PMO. NMCC is an autonomous body headed by V. Krishnamurthy, former chairman of Steel Authority of India Ltd.
“I have not seen the report. But the Prime Minister will definitely consider the recommendations and will take the necessary steps. We will either formulate a legislation that encompasses the recommendations or required steps will be taken to implement them. Action will be taken anyway on the recommendations,” said Prithviraj Chavan, minister of state in the PMO.
One recommendation by NMCC said the government’s mega power plant scheme (plants with generating capacity of more than 1,000MW) needs to be scrapped because it allows duty-free import of power equipment and has resulted in a flood of imports from China.
India’s junior power minister Jairam Ramesh said he agreed with the recommendation and had discussed it with NMCC. “This is to be implemented for prospective projects and not retrospectively and would apply to ultra mega power projects (too),” he said.
The ultra mega power projects have a capacity of 4,000MW and the government has already awarded three of them.
NMCC has also suggested that the government create a high-level technical committee to review the current FDI (foreign direct investment) policy from the point of view of transfer of technology as well as considerations of national security.
“The aim is not to stop FDI inflow, but to ensure that technology transfer takes place to India as this is one of the major spin-offs of FDI. The present policy only gives foreign companies access to our market without ensuring any value addition,” said V. Govindarajan, member-secretary, NMCC.
“We totally agree that technology transfer should be linked with FDI in this sector. As the future is in high-technology intensive manufacturing, our focus should be on domestic value addition,” said Chetan Bijesure, manufacturing team leader at industry lobby group Federation of Indian Chambers of Commerce and Industry, or Ficci.
“Our view is that 100% FDI should be allowed in manufacturing and at the same time technology in strategic sectors should also come to India,” said Sarita Nagpal, deputy director, Confederation of Indian Industry, or CII.
Nagpal declined comment on NMCC’s recommendations on special economic zones and said she would need to discuss this and other issues internally.
“It’s wishful thinking to suggest that a holding company will make a step-down investment based on gaining tax advantages rather than a commercial consideration,” said Sanjeev Jain, a foreign investment and tax expert at consultant Ernst and Young, explaining why foreign companies prefer 100% subsidiaries.
The other problem, Jain said, is whether foreign companies would partner with small and mid-sized firms at a time when India’s intellectual property rights regime is still evolving.
“When the world is opening up, this will be difficult to implement. It will be good for Indian companies, but as a government policy, it will send a wrong signal,” said the managing director of a leading automobile company who did not want to be named.
Liz Mathew and Utpal Bhaskar contributed to this story.