Capital Goods Policy: Game Changer?

Fri, 27 May Pre-Open

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The Union Cabinet recently approved India's first ever National Capital Goods Policy (NCGP). The policy aims at creating game changing strategies for the capital goods sector.

Before discussing the practicalities, let us first understand the groundwork of the policy.

The policy seeks to reduce the reliance on imported equipment by promoting domestic production. In the process, the policy aims at creating crores of jobs in India.

As stated in Economic Times, the policy seeks to increase the production of capital goods from Rs 2,300 billion in FY15 to Rs 7,500 billion in 2025. It envisages increasing exports from the current 27% to 40% of production. The policy also looks to raise direct and indirect employment from the present 8.4 million to 30 million.

In all, the policy is the first ever focused policy for the capital goods sector. It addresses some of the key issues such as availability of finance, raw material, innovation and technology, productivity, etc.

The policy, apart from the capital goods sector, is said to have a spiral effect on the economy over the long term.

Capital goods sector produces durable and heavy goods. These goods further form the mainstay of goods and services that are produced for end-user consumption. With a rise in production in capital goods, Indian will be less dependent on imports. Along with this, the policy will also promote exports from the country that have been falling for the 17th straight month as of April. All of this will also lessen the current account deficit (CAD) concerns for India.

The policy will boost up the present abysmal productivity levels in the manufacturing sector. With this, the policy will go a long way in achieving the objectives of 'Make in India' initiative.

Further, the policy is said to improve the technology depth across sub-sectors, improve skill availability and increase employment levels, all of which are the need of the hour for India.

Moving on to the investment sphere. With the approval of NCGP, many biggies from the capital goods space have seen their stock move up sharply this week. The capital goods sector index closed up by 8.78% yesterday. We believe investors will be better off by investing in fundamentally strong companies in this space whenever available at beaten down valuations.

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