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ManufacturingPost-budget sectoral point of view
Union Budget 2015Inspiring confidence,
empowering change in India
Table of contents
1. Context
2. Key policies/fiscal and tax proposals
3. Unfinished agenda
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
Context
Where are we The Indian manufacturing sector contributed ~15 per cent to the country’s GDP in 2013-141 and comprises a share of only two per cent in the world’s manufacturing output2. To boost the manufacturing sector, the government has set a target to increase manufacturing’s share in the GDP to 25 per cent and create about 100 million jobs by 2022.3 To achieve the set target, the government introduced the ‘Make in India’ programme in September 2014 which emphasise on cutting down delays in manufacturing project clearances, developing adequate infrastructure, driving labour reforms and making India a viable and easier option for companies to do business with.
In FY14 the Indian manufacturing sector has shown a mixed performance with increasing FDI inflows and exports, offset by declining manufacturing output. Total FDI inflows in manufacturing sector increased by 24.5 per cent to reach INR7,458 billion in FY14.4 Also, the manufacturing sector exports increased by five per cent to USD192.2 billion in FY14 contributing 61.5 per cent to the total exports of India5 and 7.6 per cent to INR837 billion in 2014-15 (April-Nov), compared to the same period, contributing 65.8 per cent to the total exports of India.6 Despite increased exports and government initiatives, financial year 2013-14 has not been very promising for India’s manufacturing sector as its contribution to the GDP declined by 0.7 per cent as compared to FY13.7 Primary reason for this has been reduction in the manufacturing output followed by a decline in investment, particularly by the private corporate sector. Apart from that, India also fell down in the ranking of World Bank’s ‘Ease of Doing Business’ index from 140 in 2014 to 142 in 2015.8
Key issues/challenges• Gap in electricity production and demand, along with lack of adequate transport facilities are some
of the major infrastructural challenges.
• Time intensive procedures for project approvals and clearance leading to a non-friendly business environment.
• Restrictive and rigid labour laws inhibit smooth performance of the manufacturing sector and hence prevent further investment from the companies.
• Increase in imports from China leads to tough competition from low cost Chinese products.
• Less focus towards research and development.
• Lack of government initiatives and reforms for small and medium-sized industries.• High cost of capital leading to lesser fund allocation to the manufacturing sector.
What was expected• Investments in infrastructure to enable movement of raw material into the country and transporting
the finished products out of the country
• Incentives and support to the Small and Medium Enterprises • Announcements to attract investments into focus sectors
• Introduction of tax incentives to boost local manufacturing, along with a substantial reduction in corporate tax rate to make manufacturing globally competitive
• Reduction of Minimum Alternate Tax (MAT) rates, including reforms in inverted duty structure
• Introduction of Direct tax Code (DTC) and Goods and Services Tax (GST)
• Further labour reforms and positive amendments in land acquisition • Enhancing export benefits by decreasing special additional duty (SAD) rate from the current four per
cent
• Postponement of General Anti Avoidance Rule (GAAR) at least by two years.
1 Industrial performance, Economic Survey 2013-14, accessed February 2015 (page 172) 2 Manufacturing: An Engine for Growth, KPMG Analysis, accessed February 20153 www.makeinindia.com4 RBI press release, February 2014; RBI press release, February 2015; KPMG analysis
5 India’s Foreign Trade: 2013-14, RBI article, published August 2014, accessed February 20156 Statistical Appendix, Economic Survey 2014-15 (page A-94)7 Industrial performance, Economic Survey 2013-14, accessed February 2015 page 1608 Doing Business 2015, World bank Group, accessed February 2015
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4
Key policies/fiscal and tax proposals
ImpactLack of adequate infrastructure, poor ranking in ease of doing business and high tax burden were some of the major issues of the manufacturing sector in India. The government has focussed on all these issues and has kept “Make in India” in focus by increasing the infrastructure investment and addressing the inverted duty structure. Funding and liquidity for MSMEs is a welcome move. The provisions in the budget for entrepreneurship, support to start-ups and innovation are very limited in their scope.
Summary• Increase in infrastructure spend by INR700 billion as compared to the previous year, introduction of
tax free infrastructure bonds for projects in the rail, road and irrigation sectors, corporatisation of ports are positive moves from a long-term perspective. The investments in road and rail infrastructure will improve supply chain speed and efficiency and strengthen the ‘Make in India’ campaign
• Thrust on the housing sector is a welcome step for related manufacturing sectors such as steel and cement which have been struggling for the last few years
• Access to funds through MUDRA bank/TReDS will be a big relief for MSMEs. Allowing foreign investment and tax ‘pass through’ in Alternate Investment Funds will improve investments into the manufacturing sector
• Ease of Doing Business has been focussed on, through announcements on a bankruptcy code, resolution of commercial disputes and a pre-existing regulatory mechanism to replace the need for multiple prior permissions
• Reaffirming GST implementation from 1 April 2016 and deferring GAAR by two years is expected to have a positive impact
• To provide technology benefits to small companies the government has proposed to reduce the rate of income tax on royalty and fees for technical services from 25 to 10 per cent. Also, the government has allocated INR10 billion to technology driven start-ups.
• Reduction in the rates of basic customs duty on raw materials, semi finished goods will address the inverted duty structure and is expected to make manufacturing in India more attractive
• Since employment opportunities is also a function of employability of people, giving emphasis on skill building through the National Skills Mission is a positive step forward
• Overall, a positive for manufacturing in the long-term but may not result in huge dividends in FY15-16
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5
Unfinished agenda
What remains • While five new UMPPs and enhanced target for renewable energy capacity have been announced,
this may not be sufficient to address the power requirements of the manufacturing sector
• A lot was expected from this budget on labour reforms which would revive manufacturing and support the 'Make in India' campaign. No new announcements on labor reforms is therefore surprising. The announcements last year are peripheral, at best, and the core issues of multiplicity of labour laws remain
• While corporate tax rates are being rationalised over the next four years, the rationalisation/removal of various tax exemptions, along with an increase in the surcharge by two per cent and excise duty by 0.14 per cent, which overall seems to make a minute difference in the taxes being paid by manufacturers
• No introduction of any new incentives for the manufacturing sector.
• No reform on Minimum Alternate Tax (MAT)
• Not much focus was given on the exports of goods
What is expected going forwardThe government is expected to resolve all pending aspects of the GST Bill to adhere to the target date of 1 April 2016 for implementation
Improvement in land acquisition policies which is an important parameter of ‘Make In India’ and which was in focus before the budget has not been touched upon by the Finance Minister. However, it is expected that the government will push to pass the Land Acquisition Bill without too many dilutions. Similarly, it is expected that important factors such as ease of acquiring permits for construction will be focussed on, going forward.
Various policy announcements are expected to be followed through with a detailed action plan to enable the manufacturing sector
More focus on innovation and R&D and broad basing funding support to start-ups will be required to create a multiplier effect in job creation
Finally, the manufacturing sector is in need of a thorough brand building exercise to put Indian manufacturing on the global map. The government is expected to take steps in this regard.
The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavour to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of
KPMG International.
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