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Leading the Way: Capital Goods

1 Year agoThe Capital Goods sector is a robust, multi-level, diversified segment of the Indian industry environment, playing a critical role in driving growth, creating jobs, and boosting exports.

India’s Capital Goods manufacturing industry serves as the strong base for its engagement across sectors such as engineering, construction, infrastructure, and consumer goods. Today, the Capital Goods sector is a robust, multi-level, diversified segment of the Indian industry environment, playing a critical role in driving growth, creating jobs, and boosting exports.

The Capital Goods sector, a USD32 billion industry in India, covers several subsectors in the Indian manufacturing space.

The industry is dominated by the Heavy Electrical and Power Plant Equipment Segment which constitutes about 69 per cent of the aggregate production. Significant manufacturing is carried out in the subsectors of Process Plant Equipment and Construction Equipment sectors as well.

The growth of the Capital Goods sector in India has been led by increasing demand, and sectoral production has expanded by a multiple of 2.5 in the ten years from 2004-05 to 2013-15.

India’s overseas engagement in the Capital Goods sector has been robust in the last decade, led by facilitative Government policies and aggressive companies. Imports rose rapidly at a multiple of close to 6 times, aggregating USD18.46 billion in 2013-14 and meeting about a third to two-fifths of total demand.

Likewise, exports too have expanded robustly by more than four times to total USD8.57 billion in 2013-14, about half of which belong to the Heavy Electrical and Power Plant Equipment.

The Indian Capital Goods sector is notable for increasing diversification, rising value added production, and growing competitiveness. Several companies have shifted their strategies for greater geographical and sectoral diversification. Indian companies are stepping into the international tenders market for projects to great success. Equally, the domestic market is home to many global majors, which are taking advantage of the Indian ecosystem.

Growth Drivers

The Indian Capital Goods sector benefits from multiple engines that would propel its growth in coming years. These include rising demand for infrastructure, robust and facilitative policy support, encouragement to exports, and competitive players. Consider this:

  • $ 4.7 trillion worth of investments are required in the next five years at current market prices
  • Manufacturing investment needs are pegged at $1.35 trillion
  • Infrastructure investment requirement is estimated at $1.07 trillion
  • Capacity addition in the power generation sector has expanded by over 6 per cent annual average in the last five years and aspirational targets for 24x7 power capacity have been set for coming years, including 20 gigawatts in ultra mega power projects and 175 gigawatts in the renewable sector by 2020.
  • The Government is taking steps to double coal production in India by 2020 and e-auction of over 200 coal blocks is underway.
  • The Indian construction equipment market is set to expand by seven times between 2012 to 2020 to over $22 billion.
  • The market size for the electrical equipment industry would cross $100 billion in the next seven to ten years.
  • Engineering R&D revenues are projected to reach $45 billion in 2020 from $11 billion in 2012.
  • Competitive wage and cost structures are expected to remain the India advantage for the medium term.
  • In an increasingly knowledge-driven Capital Goods space, India benefits from its large output of skilled engineers and technical graduates. India has the third largest higher education system in the world with a network of roughly 640 universities and over 35,000 colleges with around over 30 million students enrolled
  • India enjoys a huge pool of software professionals engaged in creating value solutions for embedded technologies. With over 3 million professionals working in the Information Technology sector, it is faster and cheaper to source specialized software for increasingly technology driven machinery and equipment.
  • India’s strengths in scientific research and development are bolstered by its strong laws in protection of Intellectual Property Rights. It is fully compliant with obligations under TRIPS and has enacted Trademarks Act, Copyright Act, Designs Registration Act, Geographical Indications Act and Protection of Layouts for Integrated Circuits Act in the last few years.

Policy support

Under the economic reforms period, a number of steps have been taken with huge positive impact on the overall manufacturing scenario including the Capital Goods sector in India. Crafted over the years, a strong supportive architecture helps companies strategize for meeting the domestic and export demand for Capital Goods.

  • All sectors, bar a few pertaining to national security, have been opened up for participation by the private sector, including Foreign Direct Investments.
  • In most sectors, 100 per cent FDI is permitted under the automatic approval route.
  • Tariffs on capital goods and equipment have been lowered to nil or 5 per cent in general.
  • Tax incentives are applicable such as 15 per cent exemption on tax to manufacturing companies that invest more than Rs 100 crore ($18.4 million) in plant and machinery.
  • Public sector enterprises are being encouraged to leverage their funds for investing in large projects.
  • To make the Capital Goods sector globally competitive, advanced centers of excellence for R&D and technology development are in the process of being established in academic institutions.
  • In the export sector, India has entered into a number of free trade agreements with ASEAN, Japan, Korea, Malaysia, Singapore, and others.

New initiatives

The Indian Government has initiated several critical strategies in the last year which open up new avenues for the Capital Goods sector.

  • Make in India for taking the share of manufacturing to 25 per cent of GDP and creating millions of new jobs to cater to the large number of youth entering the workforce;
  • 100 Smart Cities for urban redevelopment and creation of world-class new urban agglomerations to absorb rising city population;
  • Swachh Bharat for a new approach to preventive public health, including by changing toilet habits, improving waste management and curbing pollution;
  • Clean Energy, a campaign for increasing renewable energy power capacity by 2020;
  • Clean Ganga for spreading intelligent water management and upgrading cities alongside the major rivers of India;
  • Digital India, a campaign that converges universal access to digital resources;
  • Housing-for-all that aims to build 20 million urban dwellings and 40 million rural dwellings in the next eight years; and
  • Skill India mission, an initiative to raise the skill penetration of the country.

Opportunities for EU companies

Under the ‘Make in India’ initiative, the Government aims to attract foreign capital into industrial corridors and hubs for manufacturing projects. For this, a number of policies have been taken to improve the business climate, strengthen the infrastructure for Intellectual Property Rights, and raise permissible limits for FDI. With the growth of the Indian economy expected to cross 7 per cent for the coming couple of years, as well as strong policy action, India emerges as a profitable investment destination for EU companies.

Infrastructure: Apart from construction machinery and power equipment, India requires technology and equipment for particular infrastructure sectors. For example, the opportunities in Indian Railways itself would be considerable as a long list of sectors has been opened up to 100% FDI under different PPP models. Key areas include construction, operation and maintenance of suburban corridors, high speed train, dedicated freight lines, rolling stock, etc. In the ports sector, cargo handling equipment, security equipment, and dredging machinery, among others would be required. Inland waterways are also proposed to be stepped up as a key mode of transport.

Energy and renewable energy: With high unmet demand and an estimated market size of 900 gigawatts by 2032, India’s power generation, transmission and distribution systems are undergoing transformation in capacity and technology absorption. A Smart Grid is being proposed, while thermal, hydro and nuclear power capacity will continue to remain high on the agenda. Additionally, the Government has targeted 100 gigawatts of solar energy and 60 gigawatts of wind energy capacity by 2020, a huge jump from the current levels.

Mining: The mining sector in India has received a big boost with new legislation aimed at increasing private sector participation in explorations and extraction. Drills, crushers, loaders, safety equipment, and so on would be in high demand, and EU companies can consider strategizing to fill the gaps.

Construction and real estate: The Smart City initiative aims to upgrade and build 100 cities stressing urban mobility, low-cost housing and sanitation and sewerage in particular. These would open massive opportunities for construction machinery, sanitation equipment, waste and water management equipment, and other capital goods.

Green capital goods: With its committed mission for clean and green products, India requires machinery and equipment to assist companies, especially small and medium enterprises, for reducing their pollutants and waste. Effluent treatment, water management, carbon mitigation and air pollution control are some of the areas where investments can be made for production.

 

Mr Vipin Sondhi
Chairman, CII National Committee on Capital Goods and Engineering
Managing Director and CEO, JCB India Ltd