India Intelligence Report



   Inadequate Response to NMCC Recommendations

  National Manufacturing Competitiveness Council (NMCC) has recommended that a new National Manufacturing Initiative to further 20 key labor-intensive sectors that net USD 10 billion from domestic markets alone to facilitate a quantum jump in the near future.

National Manufacturing Competitiveness Council (NMCC) has recommended that a new National Manufacturing Initiative to further 20 key labor-intensive sectors that net USD 10 billion from domestic markets alone to facilitate a quantum jump in the near future.

The sectors included IT, drugs, leather, chemicals, ports, food processing, biotech, cement, steel, and metals. The NMCC includes who's-who in industry cited lack of proper infrastructure as the major impediment to manufacturing.

Commerce and Industry Minister Kamal Nath revealed that the Government is planning to set up seven to eight manufacturing investment regions (MIRs) that host world-class infrastructure at competitive rates. Predicting an inflow of investments of Rs. 100,000 crore (USD 21.73 billion) into these areas, he said growth rates will accelerate from 8% to 12%. Only 2 states have displayed interest to host such areas and have contributed 150 square kilometers.

It is inconceivable how Nath is able to predict such large investments when there are only 2 states which are interested with only 150 square kilometers. Given that he is not even sure of how many such areas he wants created, this plan is at best very preliminary and hardly an appropriate response to industry leaders who contribute over 50% of the GDP, bring in the most foreign direct investment, and provide a good chunk of a good employment.

Meanwhile, Pharmaceutical and Steel Minister Ram Vilas Paswan revealed a Government plan that would enlist 354 "essential medicines" and force a price reduction by about 10%. Additionally, he also talked about a discussion with Steel Manufacturers where they were pressurized to find ways to check spiraling steel prices. Paswan did not say how he expected them to cut prices "in the interest of the customer." If the companies took an artificial margin cut, it will create artificial jitters in the choppy stock market and send it reeling further. Since the Government controls only 1/3rd of the steel produced in the nation, Paswan can only appeal or use backroom tactics to force an arbitrary, old-world, non-market driven prices. A previous such attempt by Nath caused cement prices to fall through the floor  and the stock market has never recovered since.

Paswan claims that his latest ploy to control pharmaceutical and cement prices is merely complying with Supreme Court orders and honoring the {United Progressive Alliance's (UPA)} Common Minimum Program (CMP) to protect consumer interest. He dismissed fears from the drug industry asserting that only a 8% increase to 33% of all medicines will be controlled in the new plan as 25% of the drugs are already on the list.

The UPA Government is under immense pressure from communist allies wanting action to reduce inflation. Often, consumer price inflation is caused by supply side issues while heavy industry items such as steel is caused largely by global oil price pressures and crisis in West Asia. Inflation is a key element that can push up interest rates and compromise a close to 8% growth rate. The communists often want inflation contained without market-based pricing, cuts in social spending, and without economic reform. In Kerala, rightfully portrayed as a state with most literacy, most of its "development" was funded by state and central borrowings. Annual interest payments have gone times to 25% of its total revenue and 35% as ratio of the states gross product. The per capita debt spiked from Rs. 4090 in 1998 to Rs. 9,248 in 2003 against a national average of Rs. 6,531. The average debt to gross domestic state product is 22% to 28%. While unbridled market-based pricing is clearly not the answer, this is completely the wrong model to follow.

The Government plans to hold fiscal deficit at 3.8% of GDP compared to 4.1% of last year and revenue deficit at 2.1% compared to 2.6% last year. Reports say that unplanned populist programs are demanding expenditure while budgeted programs are not moving forward. Despite increasing evidence of out of control revenue deficit, the Finance Minister has been consistently advising the investment community on meeting the fiscal deficit numbers. The two routes advised by many agencies is to control fiscal deficit and increase investment in infrastructure and also reform investment environment to attract more foreign direct investment. Unfortunately, the Government is unable to move on either because of threats from regional and communist allies.

Tinkering with nascent industries with huge strategic and revenue potential for India is a dangerous trend. The Indian pharmaceutical industry is growing rapidly is in fact leading the world in mergers and acquisitions. Furthermore, the nation is trying to boost bilateral trade and cooperation fielding pharmaceutical sector on the frontline. The Comprehensive Economic Cooperation Agreement with Japan  and closer cooperation with Philippines may be compromised by such knee-jerk policies.