Article about Insulating India against global trade wars

Insulating India against global trade wars Sudhir Mehta | Updated on November 29, 2019 Published on November 29, 2019

Domestic manufacturing should be given a fillip by creating mega plug-and-play industrial parks through PPP mode

Global trade wars have been making headlines almost every day in recent times. Uncertainty is looming over both developed as well as emerging economies making economic survival and viability unpredictable.

In its quest to become a self-sufficient nation, promote domestic production and discourage imports, the government has been aggressively promoting the ‘Make in India’ initiative.

Being a self-sufficient nation is an ideal situation but requires active government intervention and support. The MSME sector, considered to be the engine of growth for any nation, is currently facing multiple challenges in India.

Absence of adequate and timely organised finance, limited knowledge, non-availability of suitable technology, high cost of credit and over-regulation are factors impeding growth of this sector.

Adding to the woes, currently, banks, NBFCs and other financial institutions are facing severe turbulence, thereby further choking the liquidity pipeline and growth engine of the nation.

The government should initiate a massive programme to support plug-and-play infrastructure for new manufacturing units similar to what is available for IT companies. India needs to create “mega industrial parks” in PPP (public-private partnership) mode, wherein all infrastructure should be under control of a single entity.

The parks should provide common facilities such as STP, ETP, transformer, UPS, packaging, general utility support, logistics management, and storage facilities.

In this scenario, prospective manufacturing units would only need to set up their plant and machinery without worrying about land acquisition and related challenges. Land acquisition is one of the major stumbling blocks for most multinational companies.

The plug-and-play infrastructure facility should disaggregate assets like land, building, common infrastructure, services and plant and machinery, while allowing easy transfer of machinery if the project is not viable.

Globally competitive rentals in the mega parks should be considered to encourage more participation.

Traditionally, land was considered a good investment option as it was expected to appreciate creating an asset for the future. In fact, many fortunes have been made on old industrial land converted for commercial use. Contrary to this, in the current scenario, land prices are high, stabilised and not expected to appreciate in the near future, thus being a discouragement for many companies and entrepreneurs.

Land acquisition is anyway considered to be a challenge that most would like to avoid. The IT industry, despite being cash-rich, has preferred to grow on a leasing rather than purchase model. A proposed plug-and-play infrastructure model is presented in the Table.

The government should start by identifying one cluster for import substitution and emerging export industry.

Within the cluster, at least 10 per cent of the space should be reserved for common services like banks, logistics, R&D labs, packaging, product displays, staff transportation, etc.

It should provide interest subvention of 5 per cent for all investments in these specified clusters and support developers to enable rent under viability gap funding model.

Will reduce costs
Data show that availability of plug-and-play facilities for manufacturing can have an overall reduction of around 28 per cent in project funding requirement as well as reduction in project gestation period by one year, having an impact of around 15 per cent reduction in finance cost.

The proposed model will help in reducing funding requirement, improve IRR for units, make it simpler for banks to assess project reports and help in easy closure or relocation of manufacturing units. The model will help in increasing employment for local communities by 2x-3x times as compared to standalone industrial units.

The plug-and-play model will have the flexibility of expansion and change as per business demand since there would be minimal constraints of land and building availability. A cluster approach will support the development of ancillary units as well as help reduce logistics costs and time-to-market.

A huge fillip to employment can be provided as each cluster has the potential to generate almost 200,000 new jobs. The cost of viability gap funding for the government will be more than recovered from the additional GST revenues and other taxes in the medium to long term.

Many construction jobs will also be created for the building of these mega industrial parks.

As compared to owned and mortgaged properties with legal issues, these assets would be easily transferable leading to reduction in NPAs (non-performing assets) and a 25-35 per cent reduction in capital requirement by SMEs.

To transform our nation from a trade deficit to a trade surplus one and insulate it from the growing global trade wars, the government needs to encourage growth in domestic manufacturing capacities. It should consider providing facilities like plug-and-play infrastructure that would help entrepreneurs, manufacturers and global companies set up manufacturing units in India.

“Make in India” is a strong initiative and needs to be supported not only by ‘ease of doing business’ or finance facilities, but should also be backed by easily available, hassle-free and value-for-money infrastructure.

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