Interactive Session Interactive Session withwith

Shri P ChidambaramShri P ChidambaramHonourable Union Minister of FinanceHonourable Union Minister of Finance

5th July 2006 – New Delhi5th July 2006 – New Delhi

Presentation byPresentation by

Saroj Kumar PoddarSaroj Kumar PoddarPresidentPresident

Federation of Indian Chambers of Commerce & Federation of Indian Chambers of Commerce & Industry Industry

on on Achieving 12% Manufacturing GrowthAchieving 12% Manufacturing Growth

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OBJECTIVESOBJECTIVESCreate 5 million new jobs per year Create 5 million new jobs per year

in manufacturing in manufacturing

Increase employment elasticity of Increase employment elasticity of manufacturing from the present .33 to manufacturing from the present .33 to 1 1

Accelerate manufacturing growth to Accelerate manufacturing growth to 12%12%

Increase share of manufacturing in Increase share of manufacturing in GDP from the present 17% to 30% GDP from the present 17% to 30% by 2020by 2020

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OBJECTIVES OBJECTIVES …. contd.…. contd. Share of manufacturing in GDP for different Share of manufacturing in GDP for different

countriescountries

Share (%) of Manufacturing in GDP3

1

34

35

19

17India

Mexico

China

Thailand

Malaysia

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AFFIRMATIVE ACTION BY INDUSTRYAFFIRMATIVE ACTION BY INDUSTRYCreate more jobs for SCs, STsCreate more jobs for SCs, STs

Promote Special Manufacturing clusters Promote Special Manufacturing clusters in in Districts with high population (over 40%) Districts with high population (over 40%) of SCs/STs of SCs/STs

Provide fiscal concessions Provide fiscal concessions to promotors of to promotors of these Special Manufacturing clusters – these Special Manufacturing clusters – similar to those available to SEZ similar to those available to SEZ

Provide 150% weighted deduction to Provide 150% weighted deduction to corporates investing in Government corporates investing in Government promoted ITIs in these special clusterspromoted ITIs in these special clusters

FICCI has identified 27 districts along with FICCI has identified 27 districts along with potential industries for such special potential industries for such special clustersclusters

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FISCAL REFORMS ….. 1FISCAL REFORMS ….. 1Fiscal Reforms Fiscal Reforms

Reduce revenue deficit to increase public Reduce revenue deficit to increase public investment in infrastructure and social investment in infrastructure and social sectors – stimulate demandsectors – stimulate demand

Direct Tax ReformsDirect Tax ReformsAccelerate investment in manufacturing Accelerate investment in manufacturing

either through reduction in corporate tax either through reduction in corporate tax rate / or through investment allowance rate / or through investment allowance and free depreciationand free depreciation

Bring stability in tax laws, long-term fiscal Bring stability in tax laws, long-term fiscal Policy for 5 yearsPolicy for 5 years

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FISCAL REFORMS ….. 2FISCAL REFORMS ….. 2Direct Tax Reforms …. Contd.Direct Tax Reforms …. Contd.

Encourage R & DEncourage R & D

Provide grant up to 35% on R & D Provide grant up to 35% on R & D OROR Weighted deduction of 150% should be Weighted deduction of 150% should be

extended to all sectors on long-term basis, to extended to all sectors on long-term basis, to be reviewed every 10 yearsbe reviewed every 10 years

Tax incentives for infrastructure sectorTax incentives for infrastructure sector Current policy of tax exemptions for Current policy of tax exemptions for

infrastructure and viability gap funding infrastructure and viability gap funding should continueshould continue

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FISCAL REFORMS ….. 3FISCAL REFORMS ….. 3

Direct Tax Reforms …. Contd.Direct Tax Reforms …. Contd.

To accelerate rural development To accelerate rural development and growth of Agro & Agro and growth of Agro & Agro processing industry provide tax processing industry provide tax incentivesincentives

• Allow 100% depreciation for private Allow 100% depreciation for private investment in cold storage, warehouses, investment in cold storage, warehouses, refrigerated/ insulated transport facilitiesrefrigerated/ insulated transport facilities

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FISCAL REFORMS ….. 4FISCAL REFORMS ….. 4 Indirect Tax ReformsIndirect Tax Reforms

Incidence of indirect taxes ranges from 30% to 44% Incidence of indirect taxes ranges from 30% to 44% in India whereas in China incidence is only 15%in India whereas in China incidence is only 15%

Indirect Tax Reforms Indirect Tax Reforms …. Contd.…. Contd. Fix incidence of National VAT/GST at 20% Fix incidence of National VAT/GST at 20%

Reduce CENVAT from 16% to 12%Reduce CENVAT from 16% to 12% Cap State level VAT at 8%Cap State level VAT at 8%

State VAT taxes should be harmonised across State VAT taxes should be harmonised across sectorssectors

CST should be phased out at the earliestCST should be phased out at the earliest All local taxes such as octroi, entry tax etc should be All local taxes such as octroi, entry tax etc should be

made made VatableVatable Clear road-map for National VAT/GST requiredClear road-map for National VAT/GST required Simplify and rationalise all tax laws to reduce cost of Simplify and rationalise all tax laws to reduce cost of

compliance to developed countries’ levelcompliance to developed countries’ level

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FISCAL REFORMS ….. 5FISCAL REFORMS ….. 5

Indirect Tax Reforms ….. Contd.Indirect Tax Reforms ….. Contd.All inverted duty structures to be replaced All inverted duty structures to be replaced

by 3 or 4 Tier duties in both custom & excise by 3 or 4 Tier duties in both custom & excise

Some examples of inverted dutiesSome examples of inverted duties

Rubber good industry, tyre – custom duty on tyre is Rubber good industry, tyre – custom duty on tyre is 12.5% whereas on natural rubber duty is 20%12.5% whereas on natural rubber duty is 20%

Custom duty on catalysts and chemical Custom duty on catalysts and chemical consumables for fibre manufacture is 12.5% while consumables for fibre manufacture is 12.5% while on fibres it is 10% on fibres it is 10%

Inverted duty structure on synthetic fibres and yarn Inverted duty structure on synthetic fibres and yarn needs to be corrected by lowering PTA/MEG excise needs to be corrected by lowering PTA/MEG excise duty to 8%duty to 8%

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FISCAL REFORMS ….. 6FISCAL REFORMS ….. 6

Indirect tax reforms Indirect tax reforms …. …. Contd. Contd.

Levies & taxes constitute Levies & taxes constitute substantial part of ex-factory substantial part of ex-factory price of cement – reduce price of cement – reduce these levies these levies

Rationalise duty structure on Rationalise duty structure on capital goodscapital goods

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FOREIGN TRADE POLICYFOREIGN TRADE POLICYFTAs should not create unfair FTAs should not create unfair

competition for Indian manufacturingcompetition for Indian manufacturingFTAs should not encourage movement FTAs should not encourage movement

of investment to other countriesof investment to other countriesDrawback rates to neutralise the Drawback rates to neutralise the

incidence of all central, state and incidence of all central, state and local levies (currently only Central local levies (currently only Central duties are neutralised) duties are neutralised)

New scheme replacing DEPB should New scheme replacing DEPB should be comprehensive duty neutralisation be comprehensive duty neutralisation schemescheme

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INFRASTRUCTURE AND ENERGY ….. 1INFRASTRUCTURE AND ENERGY ….. 1 Accelerate creation of world class infrastructureAccelerate creation of world class infrastructure

Power, Ports, Railways, RoadsPower, Ports, Railways, Roads Create world class infrastructure for industrial Create world class infrastructure for industrial

clustersclusters Promote public-private partnership to build Promote public-private partnership to build

infrastructureinfrastructure Government should offer readymade large Government should offer readymade large

infrastructure projects - post-all approvals infrastructure projects - post-all approvals & with pre-feasibility studies done – to & with pre-feasibility studies done – to competitive biddingcompetitive bidding

Reform land laws for faster acquisition, usage Reform land laws for faster acquisition, usage and transferand transfer

Eliminate state barriers for free movement of Eliminate state barriers for free movement of goods – one Indian marketgoods – one Indian market

Cross subsidies in rail-transport be phased-outCross subsidies in rail-transport be phased-out

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INFRASTRUCTURE AND ENERGY INFRASTRUCTURE AND ENERGY ….. ….. 22Accelerate power sector reforms, Accelerate power sector reforms,

implement Electricity Actimplement Electricity Act

Eliminate power and petroleum Eliminate power and petroleum cross-subsidization, so that energy cross-subsidization, so that energy is available to manufacturing at is available to manufacturing at globally competitive ratesglobally competitive rates

Liberalise captive power generation Liberalise captive power generation and coal mines – remove and coal mines – remove restrictions and levies on captive restrictions and levies on captive power generation by State power generation by State GovernmentGovernment

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INFRASTRUCTURE AND ENERGY INFRASTRUCTURE AND ENERGY ….. ….. 33

Abolish electricity duty on captive Abolish electricity duty on captive power generationpower generation

Allow private investment in Allow private investment in nuclear powernuclear power

Give infrastructure status to Give infrastructure status to renewable energy projects of renewable energy projects of wind, solar, biomass etcwind, solar, biomass etc

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LABOUR LAWS –1 LABOUR LAWS –1 Extend Government’s policy of National Extend Government’s policy of National

Rural Employment Guarantee Rural Employment Guarantee Programme to manufacturingProgramme to manufacturingPrivate sector willing to partner with Private sector willing to partner with

Government to guarantee 100 days of Government to guarantee 100 days of employment in a year on contractual basis employment in a year on contractual basis in labour intensive manufacturing sectors in labour intensive manufacturing sectors such as apparel, leather goods, etc – where such as apparel, leather goods, etc – where there is seasonality of ordersthere is seasonality of orders

Reform labour laws – introduce labour Reform labour laws – introduce labour flexibility as in ASEAN countriesflexibility as in ASEAN countries

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LABOUR LAWS – 2 LABOUR LAWS – 2

Amendments in Contract Labour Amendments in Contract Labour (Regulation & Abolition) Act 1970 – (Regulation & Abolition) Act 1970 –

Allow loss-making unit to close after Allow loss-making unit to close after reasonable compensation to workersreasonable compensation to workers

Relax norms of Industrial Disputes Act - Relax norms of Industrial Disputes Act - keep units employing up to 500 people keep units employing up to 500 people (presently 100) out of its purview(presently 100) out of its purview

Amend Industrial Employment Act to Amend Industrial Employment Act to facilitate intra-enterprise or inter-facilitate intra-enterprise or inter-enterprise job transfersenterprise job transfers

Special focus on SEZs while introducing Special focus on SEZs while introducing flexible labour reformsflexible labour reforms

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REGULATORY REFORMS TO REDUCE REGULATORY REFORMS TO REDUCE TRANSACTION COSTSTRANSACTION COSTS

Benchmark entry and exit time for investors vis-à-Benchmark entry and exit time for investors vis-à-vis global levelsvis global levels

89 days to start a business in India, vis-à-vis 41 89 days to start a business in India, vis-à-vis 41 days in China - 2005 World Bank Report days in China - 2005 World Bank Report

Closing a business – time and cost required is very Closing a business – time and cost required is very high, delays reduce the recovery ratehigh, delays reduce the recovery rate

Provide freedom to close loss-making unitsProvide freedom to close loss-making units

Indicator IndiaRegional Average

OECD Average

Time (years) 10 5.2 1.7

Recovery rate (cents on the dollar)

12.5 21.4 72.1

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Speedy legal enforcement of contracts through special court or Speedy legal enforcement of contracts through special court or some fast track mechanismsome fast track mechanism

Set up a VAT like Empowered Group to review Set up a VAT like Empowered Group to review and implement time-bound rationalization and implement time-bound rationalization and simplification of all acts and legislation and simplification of all acts and legislation regulating manufacturing in States.regulating manufacturing in States.

Set up another Empowered Group to ensure Set up another Empowered Group to ensure time-bound, single window clearance for time-bound, single window clearance for investments in States.investments in States.

State Government should replace inspections State Government should replace inspections by filing of self-certification compliance by filing of self-certification compliance returns by manufacturing units.returns by manufacturing units.

Structured approach for joint clearance by Central and State Structured approach for joint clearance by Central and State Governments for large projectsGovernments for large projects

Greater need for coordinating the policy work of various Greater need for coordinating the policy work of various Ministries/Departments related to industrial sectorMinistries/Departments related to industrial sector

REGULATORY REFORMS TO REDUCE TRANSACTION REGULATORY REFORMS TO REDUCE TRANSACTION COSTSCOSTS

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FINANCE AND BANKINGFINANCE AND BANKING Accelerate financial sector reforms - reduce cost of Accelerate financial sector reforms - reduce cost of

capital to global levelscapital to global levels Government must sustain investor confidence in Government must sustain investor confidence in

capital marketcapital market Create mechanism to ensure availability of long-Create mechanism to ensure availability of long-

term financeterm finance Ensure better flow of credit to SMEs at lower costEnsure better flow of credit to SMEs at lower cost

SMEs pay interest rates as high as 11-12% - a clear SMEs pay interest rates as high as 11-12% - a clear spread of 4-5% between lending rates of large spread of 4-5% between lending rates of large enterprises and SMEsenterprises and SMEs

RBI directives for Collateral free loans may be RBI directives for Collateral free loans may be implemented implemented

AddressAddress Delay in appraisalDelay in appraisal Delay in sanction of proposalsDelay in sanction of proposals Delay in disbursementsDelay in disbursements Rigid complex procedures and documentationRigid complex procedures and documentation Insistence on higher margin moneyInsistence on higher margin money

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SMALL AND MEDIUM INDUSTRYSMALL AND MEDIUM INDUSTRY Eliminate all product reservations Eliminate all product reservations Incentivise technology development in SMEsIncentivise technology development in SMEs Create Common Testing, Design & Create Common Testing, Design &

Quality Control Centres for SMEsQuality Control Centres for SMEs Government should set up a large Government should set up a large

venture capital fund to assist innovation venture capital fund to assist innovation and technology development in SMEsand technology development in SMEs

Launch state-funded technology upgradation Launch state-funded technology upgradation programs for SMEs programs for SMEs

Technology Upgradation Fund of SIDBI should be Technology Upgradation Fund of SIDBI should be strengthenedstrengthened

Refer to Hernando De Soto Refer to Hernando De Soto

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MINERALS AND MINING POLICYMINERALS AND MINING POLICY Lack of availability of minerals at competitive price Lack of availability of minerals at competitive price

is emerging as a key constraint to the growth of is emerging as a key constraint to the growth of manufacturingmanufacturing

Reform mining laws - make them investor-friendly, Reform mining laws - make them investor-friendly, encourage private investmentencourage private investment

Ensure faster clearance of investment proposalsEnsure faster clearance of investment proposals Reform coal sector to increase investment and Reform coal sector to increase investment and

productionproduction As recommended by Dang Committee - captive As recommended by Dang Committee - captive

mining of iron ore at least to major Steel plants mining of iron ore at least to major Steel plants should be given priorityshould be given priority

No reservation of minerals for state exploitationNo reservation of minerals for state exploitation Grant/acquisition of surface rights, forest Grant/acquisition of surface rights, forest

clearance be made easy & expeditiousclearance be made easy & expeditious A regulatory body to monitor availability, import & A regulatory body to monitor availability, import &

export of natural resourcesexport of natural resources

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MANPOWER & TRAININGMANPOWER & TRAINING Serious gap between the needs of the industry and availability Serious gap between the needs of the industry and availability

of skilled manpowerof skilled manpower

Large investment required for modernization and expansion of Large investment required for modernization and expansion of vocational & technical training facilitiesvocational & technical training facilities

Give fiscal concession to private sector interested Give fiscal concession to private sector interested in managing and investing Government-run ITIs – in managing and investing Government-run ITIs – allow allow 150% weighted deduction (as in case of R&D) on 150% weighted deduction (as in case of R&D) on long term basis.long term basis.

Encourage private sector to set up vocational Encourage private sector to set up vocational training institutes.training institutes.

Improve quality of technical education - introduce standards for Improve quality of technical education - introduce standards for facilities and academic proficiencyfacilities and academic proficiency

Reform the education sector to facilitate investment for rapid Reform the education sector to facilitate investment for rapid expansion of higher educationexpansion of higher education

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GLOBAL KNOWLEDGE LEADERSHIP THROUGH GLOBAL KNOWLEDGE LEADERSHIP THROUGH TECHNOLOGY AND PRODUCT DEVELOPMENTTECHNOLOGY AND PRODUCT DEVELOPMENT

Create a National Fund for promoting Create a National Fund for promoting development of advanced technologies development of advanced technologies through public-private partnership. This fund through public-private partnership. This fund should enable Indian companies to acquire should enable Indian companies to acquire hi-tech manufacturing companies abroad.hi-tech manufacturing companies abroad.

Establish technology parks in partnership Establish technology parks in partnership with IITs and reputed engineering with IITs and reputed engineering institutions.institutions.

Create Public-Private Partnership in Defence, Nuclear Power & Create Public-Private Partnership in Defence, Nuclear Power & Aerospace Applications having high potential both for domestic market Aerospace Applications having high potential both for domestic market and exportsand exports

User friendly access for private sector to technologies developed in all User friendly access for private sector to technologies developed in all Government research establishments/ laboratories – for direct or joint Government research establishments/ laboratories – for direct or joint useuse

Government research establishments/laboratories should actively Government research establishments/laboratories should actively promote/market their capabilities to industrypromote/market their capabilities to industry

Facilitate private sector participation in joint technology development at Facilitate private sector participation in joint technology development at Government research establishmentsGovernment research establishments

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THANK YOUTHANK YOU