What new Capital Goods Policy means to India

India's prime minister-headed Union Cabinet on Monday approved the country's first-ever National Capital Goods Policy (NCGP) for a sector that produces durable and heavy goods which in turn form the mainstay of goods and services produced for end-user consumption.

The country currently produces capital goods worth Rs. 2.3 lakh crore, which the policy aims to more than triple to Rs. 7.5 lakh crore by 2025. It will also help realise the vision of 'Building India as the World class hub for Capital Goods', besides bolstering the country's manufacturing, identified as a key pillar of Make in India initiative.

In a draft submitted in 2015, capital goods sector was reported to contribute 12 percent of India's manufacturing output, in turn translating into 2 percent of India's gross domestic product (GDP). Its multiplier effect on overall economic growth, by way of providing the durable secondary consumption goods, was noted as significant. A globally competitive and dynamic capital goods sector is to bear a similar effect on India's manufacturing, said the draft's preamble.

India's manufacturing contributes approximately 2 percent of the world's gross value added and 17 percent for its own economy. To sustain its economic growth over the coming decades, manufacturing is identified as critical and also a prerequisite to employ millions of youth entering its labour market every year. However, successive governments have acknowledged the capital goods sector as the cog in the value added manufacturing wheel.

The newly approved policy also aims to propel India's direct and indirect employment numbers to 300 lakh in 10 years from the existing 84 lakh in the capital goods sector today. The draft had noted that the sector directly employed around 15 lakh people.

With India's capital goods sector imports hovering around $20 billion of its overall trade-deficit of nearly $138 billion in 2014-15, the policy also envisages increasing exports from the current 27 percent to 40 percent of production. This, in effect, will increase the share of domestic production in India from 60 percent to 80 percent, thus making India a net exporter of capital goods.

Growth in Capital Goods Sector

In the 12th Five Year Plan period (2012-2017), the rate of growth in production of capital goods was only 0.3 percent per annum (in last 3 years), as against the target of 16.8 percent. This, coupled with India's increasing imports, presents a threat to India's self-reliance, noted the draft. It added that despite a well developed domestic capital goods sector, India's share of global capital goods exports remained much lower and unable to effectively tap the global opportunity.

Identifying issues and challenges, the policy aims to facilitate improvement in technology depth across sub-sectors, increase skill availability, ensure mandatory standards and promote growth and capacity building of micro small and medium enterprises (MSMEs).

The newly approved policy in essence aspires to be a game changer for India's capital goods sector. It envisages to unlock the sector's potential to increase the share of manufacturing to 25 percent of gross value added.