New Delhi: Less than a fortnight ago, the National Manufacturing Competitiveness Council, or NMCC, a high-level group set up by the Prime Minister, submitted a critical review of the country’s manufacturing policy and suggested an overhaul that would, among other things, restrict 100% subsidiaries to only those foreign firms that guarantee technology transfer, and revisit even marquee policies such as special economic zones, or SEZs. Ever since it was set up in October 2004, NMCC, whose chairman has the rank of a cabinet minister, has been providing frequent policy inputs to the government. The latest instance being its recommendation in January this year that the government should not lower peak customs duties below 10%, especially at a time when interest rates are on the rise, as it would erode domestic competitiveness. This year’s Union budget did not, in fact, lower duties any further. The chairman of NMCC, V. Krishnamurthy, spoke to Mint about the report and his thoughts on the ideal blueprint to raise Indian manufacturing to the next level. Edited excerpts:

We wanted to begin with the central premise of your report that has advocated a new manufacturing policy...

For the past four years, we have been working on how to improve the competitiveness of Indian manufacturing. Both in terms of competitiveness and volume of activity in manufacturing, there is a cause for concern. For a country where the manufacturing share in GDP (gross domestic product) should be around 35%, it has been hovering around 15-16% for the past 15 years. Certainly, we are not exploiting our resources adequately.

(Click here to watch the video interview)

d6850b10-93bb-11dd-bc2e-000b5dabf613.flvAnd if you want to improve the share, it should be by increasing domestic consumption, and also increasing our international trade. Trade can be increased only through increasing our manufacturing and the volume of the products that we produce, and that can happen only when we make ourselves competitive. We worked with various departments of the government of India, identified certain focus areas, worked on it for three years and brought up the rate of growth of manufacturing from nearly 6% to 12% by the end of 2006-07. And afterwards, for a variety of reasons such as inflation and government efforts in curbing inflation, there is a certain amount of deceleration. Rate of growth of manufacturing has come down. I think the concern of the Prime Minister was what we need to do in order to have a sustained growth of manufacturing. This is where they asked the group (NMCC) to suggest measures that would ensure more balanced and sustained growth in manufacturing.

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But what you have suggested is very fundamental. You have not only revisited what happened in the past 15-16 years but also recommended several fundamental changes. So where is the motivation for this?

Better late than never: V. Krishnamurthy says India should move fast to secure strategic minerals resources abroad. Harikrishna Katragadda / Mint

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Isn’t it a bit late for these changes? Should it not have happened 10 years ago?

Talking of security, in your report you talk about the ultra mega power policy which allowed duty-free imports that has led to Chinese equipment coming in, in a big way. We spoke to the minister of state for power (Jairam Ramesh) and he also said this should not have happened. Do you think policies such as those on ultra mega projects and the special economic zones are introducing distortions in the economy?

In terms of power equipment, we have tried to bring home the fact that for a country that has for the past 25-30 years met its requirements on its own, today more than 20% of our requirements are imported and that too from one source (China), the outflow being some $20 billion (Rs95,000 crore). We thought we should bring it to the attention of everybody. And when organizations like Larsen and Tubro are waiting to serve the needs of the country, we go on and give zero duty for imports. That’s why we thought it is time to bring it to everybody’s notice.

But when we talk of national security, we are talking of a variety of other issues, for instance, our strength in aerospace, our strength in ship building, our strength in the capital goods industry and our strength in electronics. If we went to war, we should be able to defend ourselves. Anything that has to do with national security has a tremendous amount of electronic content, and if those industries are not taken care of, we think our national security is jeopardized.

As a quasi-government body, it is for the first time that NMCC has made an overt statement that the country should have a war chest for foreign acquisitions towards building its own resource capabilities. How do you think it will go down as regards the rest of the world?

While we think we have a reasonable endowment of raw materials, when it comes to some strategic minerals in adequate quantities, we do not have that. We see other countries cornering raw material sources available in Africa and other countries. Our fear is, at some point of time, you will have no source left. So the country should take the initiative at this stage, provide the necessary funds, go and invest in terms of securing those resources and raw materials that are required.

Going back to the previous question, isn’t it late in the day to suggest this?

But, better late than never. We are also suggesting (creating) another war chest saying that some of the smaller and medium enterprises may not be able to acquire (technology) on their own. We should take the initiative of acquiring those technologies and disseminate it to a large number of small and medium enterprises. These are the two initiatives we have suggested.

But one interesting recommendation in your report is that the government should create an entity, may be even the NMCC, as a permanent body within the Prime Minister’s Office. Why would you suggest housing it in the PMO as opposed to getting the parent ministries do what they should normally do?

If you look at some of the problems faced by Indian manufacturing, they are not specific to any particular ministry, and some of them involve coordination among three-four ministries. Our studies in the past three-four years have shown that wherever such coordination is involved, things get delayed and very often things don’t get done.

To a large extent, NMCC has been able to play that role to coordinate, and through our own personal efforts we were able to bring the different wings of the government and the industry (together). What we have suggested is, on a permanent basis you should have machinery and (it should be) credible enough.

First of all, credibility can be brought by bringing in men of the highest integrity and leadership. The alternative is to place it in the PMO (which) has the necessary authority to coordinate, and once they take a decision, that becomes final. I personally believe that in the present context such machinery is necessary, that coordinates all these activities. We have lost some time and if we have to gain, some quick action is required, and we believe that such a body within the PMO will be able to give better results.

One of the recommendations you have made is that 100% foreign direct investment (FDI) in manufacturing should be allowed in a perspective manner if companies ensure transfer of technology. Why would global firms agree to those terms?

We had different systems in the past. The compulsion during my days was that you should have a phased manufacturing programme. Don’t get us wrong. We believe FDI should be encouraged and no restriction should be there. But at the same time, the purpose of getting FDI is that technology should be passed on to India. And it should also result in additional manufacturing operations in the country.

I feel that whatever may be the best of intentions with which we allowed this, there have been many cases where FDI has not produced this kind of results. So I thought there should be overseeing of this aspect so that the original objective is not lost. It is very often misunderstood that, possibly by this suggestion, we are asking another government machinery to oversee...there are no such intentions. In our report we have said that a technical group should study how this original objective can be achieved without imposing any more bureaucratic control. And this is a matter which concerns us and needs to be studied further.

How do you look at the current decline in manufacturing as evident from the industrial output data? Does it need immediate attention or do you think the government can wait till inflation comes under control?

For a variety of reasons, the government has made imports easier. In a situation like this, when we don’t have additional investments, when we don’t provide the type of drive towards Indian manufacturing, it will result in tremendous amount of imports, and these imports will directly affect the SMEs (small- and medium-scale enterprises).

Import statistics show that the Chinese imports have gone up to Rs120,000 crore or more compared with Rs9,000 crore three years ago. These are items manufactured traditionally by SMEs. So, either employment has been lost or additional employment has not been generated. So if the government doesn’t act immediately, this trend will continue and we will have a much more difficult situation.

So are you saying we should have stricter import policies?

I am not suggesting that. I am talking about positive policy to promote conditions in India. We are not saying stop imports or protect the Indian industry. We are calling for giving Indian manufacturers the necessary framework to grow. We are suggesting that Indian manufacturing be made competitive to grow at a faster rate so that it takes care of domestic needs.

You also don’t seem to be favouring free trade agreements (FTAs)?

On FTAs, all that we have said is, before it is approved, go through a more critical examination that how far it is likely to impact certain vulnerable sections of the industry. Without a study, do not rush into it. I think that principle has been accepted for long.