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A Chinese touch to Indian economy - Views on News from Equitymaster
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  • Jan 12, 2011

    A Chinese touch to Indian economy

    India has come a long way from being an agri centric third world nation to a services centric developing economy. Shrugging off the aftermaths of global economic crisis, India is now on her way to achieve a GDP growth rate of 9%-11%. Services may bring India closer to the double digit growth rate. But for the growth to sustain, there needs to be growth in manufacturing output as well. For a country that hopes to enter the league of developed nations, the share of manufacturing sector to GDP at 16% is gross low. This is one the key factors that could derail India’s growth story . Here we are not under-estimating the value of service sector. But one must acknowledge that it relies heavily on outsourcing. We cannot lean on it too much due to rising wave of protectionism from developed nations.

    The above concerns set a perfect scene to switch to a new manufacturing policy (NMP). The policy will propose a stock exchange that will focus on getting funds for small and medium scale enterprises (SMEs). Through FDI and private funds, NMP will bring life to cash starved SMEs.

    Under the NMP, national manufacturing and investment zones (NMIZ) will be set up. These will be large areas that will be developed and managed by special purpose vehicles. The NMIZ will be facilitated with strong infrastructural support that has been a bottleneck in manufacturing sector. Also, it promises huge economies of scale, progressive exit policies and technologies. In addition, environment friendly procedures, flexible labor laws and simplified regulations and approvals could set the ball rolling for new ventures very quickly. The NMIZs will serve not just the export oriented but domestic industries as well. Besides, they will offer large production and consumption base.

    However, the law is not without its share of flaws. It does not offer a level playing field to the units that are not a part of NMIZ. This can stifle them and can be a setback to the whole purpose to boost manufacturing. The same happened to private oil retailers when the Government compensated only the PSUs for fuel subsidies. Also, while interest and tax exemptions will boost profits of units within the zones, there is no surety that they will lead to increase in the industrial output. In the name of flexible labor laws, it will not come as a surprise if the labourers are exploited due to huge demand supply mismatch in the job market.

    Any delay in adopting NMP, however, could postpone India’s rise to super power status. It will mean a waste of an opportunity to employ the growing population of youngsters productively. The challenges exist and will remain. This approach has worked very well for China. If implemented well, the success story can be replicated back home.



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