Capital Goods: The New India Advantage
The 21st century has witnessed a phenomenal growth in industrialisation and urbanisation. With economic prosperity came material well-being and one sector which became an immediate beneficiary of this change was the capital goods sector. The capital goods sector (also referred to as the "industrial sector") includes companies that manufacture machinery used to create capital goods, electrical equipment, aerospace and defence, engineering and construction projects. The diverse and versatile nature of this sector makes it inextricably linked to the robustness of the manufacturing capacity of a country, thus making it strategically significant and economically indispensable. The scalability and sizeability of the capital goods sector have multiplier effect and have a bearing on the self-sufficiency and resource efficient nature of an economy.
The post covid era has been marked by global headwinds of geopolitical volatility, global supply chain disruptions, sensitive trade balance, rising energy prices along with a compounding climate crisis. It is here that India has proven to be a bright spot and fulcrum of stability in the otherwise tumultuous global scenario. With a steady GDP growth rate of 7.2% (FY22-23), it has achieved the milestone of becoming the 5th largest economy with 2nd largest working population of 522 Mn and a median age of ~28 years. This has resulted in India’s demand for goods and services increase commendably. The current focus on ‘Make in India’ has led to enhanced emphasis on strengthening the manufacturing capabilities which has brought the spotlight to the Capital Goods sector. Currently the sector contributes 12% of the total manufacturing output, and in turn manufacturing sector contributes around 17% to the GDP of the country.
As India marches towards the Amrit Kaal, the indispensability of the capital goods sector towards empowering the country and increasing its manufacturing sector’s contribution to GDP takes centre stage The visionary policy framework provided in the National Capital Goods Policy of 2016 was further intensified in the Scheme for Enhancement of Competitiveness in the Indian Capital Goods Sector of 2022.
Rampant urbanisation and development of logistic infrastructure in the form of railways, roadways, ports, etc. has been bolstered by initiatives like the Smart Cities Mission, National Infrastructure Pipeline, National Logistics Policy, and PM Gati Shakti that holistically targets efficient investments, productivity enhancement and global competitiveness of the domestic capital goods sector. These have been further bolstered by budgetary support where in the infrastructure portion in the Financial Budget 2023-24 for rose over three times from 2018-19 to INR 10 Lakh Cr ($122 Bn), constituting a staggering 3.3% of the GDP. The climate change catastrophe that is increasing at an alarming rate has necessitated the transitioning to cleaner infrastructure and technologies especially for a country like India whose capital goods industry is at a nascent stage and can adopt a greener course of progression. Environmental solutions for cleaner power generation and sustainable infrastructure have been major impelling force for expanding the production of capital goods. The focus on more energy-efficient and lesser emissions producer has created new opportunities for the capital goods sector.
Another prominent industry that opens a plethora of opportunities for magnifying the production capabilities of the capital goods is defence and aerospace. The clarion of Atmanirbhar Bharat has laid significant stress on domestic manufacturing of technologically advanced and capital-intensive defence equipment which entails comprehensive development of capital goods. The Production Linked Incentive (PLI) scheme for 14 sectors with a financial outlay of $26 Bn has been another revolutionary initiative for sectors like speciality steel, electronic products, auto components, IT hardware, etc. which have a direct bearing on the capabilities of the capital goods industry. This scheme is expected to give an impetus to competitive manufacturing in the country and attract investments.
The government is playing a key role in supporting the growth of the capital goods sector by elevating it and creating a favourable regulatory environment. The extensive efforts to enhance the conduciveness of the business ecosystem and attract global players can be seen through liberal FDI policy, new corporate tax code, reduction of 39,000+ compliances, duty concession for capital goods, FTAs with several countries and so on. The government's robust structural and institutional reforms have been remarkable, considering the need for significant investment and technological expertise needed by the capital goods sector.
The National Single Window System which provides a digital platform for all investor clearances was a potent step in that direction. 300+ reforms across 72 action points for state governments to develop investor friendly ecosystem under Business Reform Action Plan (BRAP) enhanced the capabilities of the state government and promoted centre-state coordination. With China’s apparent slowdown and an increase in the global companies’ inclination to establish manufacturing bases beyond China, India has emerged as the preferred alternative. The government’s efforts to encash on this opportunity only reinforces the growing importance that the manufacturing sector has been bestowed with. Endeavouring to achieve near negligible import dependence and becoming an export hub with globally competitive and qualitatively exceptional goods, the record high overall exports of $770 Bn in FY23 highlights that India is making strides in the right direction. The simplified labour reforms that rationalized 29 central labour laws into four labour codes8 to promote a regulated and formalised labour force will further augment the growth of the capital goods sector.
With the momentous task of transforming India into the ‘Factory of the world’ and to reach a production size of $112 Bn by 2025, a concerted approach is the way forward. With a population of over 1.4 bn, it offers a vast and diverse market which has huge untapped potential. India's highly skilled workforce, competitive labour costs, and government support make it a cost-effective manufacturing destination. Companies investing in India are provided with ample business opportunities assisted by the colossal mandate of Make in India led by Invest India. Prominent global players like ABB India, Siemens, Caterpillar to name a few have established significant presence in India over a short span of time highlighting the immense potential that the domestic capital goods space holds for the companies worldwide.
The capital goods industry is evolving from its fledgling phase to a dynamic one and has the potential to spearhead the task of making India into a global economic power. The cascading effects of having a booming capital goods industry will help provide insulation from the uncertainties of the world and truly transform India’s aspirations from ‘Make in India to Make for the World’. Progressive simplification and rationalisation of doing business in India along with investment potential that capital goods sector holds, provide global companies with access to new growth opportunities and contribute to their global expansion strategies.
This blog has been co-authored by Tripti Pandey.