🧐 A New Law to Boost Manufacturing?
India has been trying various ways to boost manufacturing. Here's a look into the latest move we're trying out to do so.
Ever wondered how China has managed to become a global superpower and a major exporter while we are still struggling?
There is one notable difference between us and China: it has focused on manufacturing while our manufacturing sector is steadily declining.
And to boost this sector the government is planning on drafting the Development of Enterprise and Service Hubs law.
But why is the sector declining and what is the new law about?
⚡ The Manufacturing Problem
China's manufacturing boost has helped the country increase exports, create more jobs and increase economic productivity.
In fact, since the Industrial Revolution, it is a country's ability to manufacture goods that plays an essential role in its development.
Now, while India has managed to grow its services sector quite impressively, we're still lagging behind in the manufacturing space.
Manufacturing still makes only 14% of our GDP. The sector employed over 5.1 crore Indians in 2016-17, but this number has tanked 46% to reach 2.73 crore in 2020-21.
The government has been trying for years to increase this capacity.
For this several projects and initiatives have been launched like the Make In India initiative, Startup India initiative and more.
One such initiative is the Special Economic Zone Act, which was launched in 2005.
Under the act special economic zones were built to promote manufacturing exports.
These areas are like foreign lands within the country where the same rules do not apply.
You see, to boost business in these areas the government takes no income taxes on export income for the first 5 years. For the next 5 years after this, only 50% income tax is exempted. And for the next 5 years 50% of the tax on ploughed back profits (profits invested back into the business) is exempted.
The government believed this would invite more foreign investment, more businesses to increase capacity in the country thanks to the ease of business and promote overall growth.
And this plan worked for a while. SEZ exports grew 3300% from 2005 to 2020.
But this growth is now fizzling out.
Earnings from SEZs have declined from Rs 7,96,669 crores in 2019-20 to Rs. 6,10,301 crores in 2020-21.
This could be because of new and more restrictive SEZ rules that were introduced in 2020.
The government not only imposed a minimum alternate tax on companies that were in these Special Economic Zones, but also announced that the income tax exemptions would only be applicable for companies that started production before June 2020.
So, the popularity of these SEZs is going down.
Plus, extra compliance issues with state and the central government, full customs duties laid on any domestic sales and many more such problems meant that the SEZ model hasn't been so successful here anyway.
Which is why 336 SEZ units have exited during the last 4 years and over 20,000 hectares of SEZ land is unutilised.
But the government is learning from its flaws.
Which is why it is now introducing a new draft law which will replace SEZs.
And even if these flaws didn't exist, the government would still have to overturn this law because the World Trade Organisation claimed that subsidising exports (by giving companies benefits for exporting) was an unfair market practice (basically cheating).
🤓 The New Law
The new law, the Development of Enterprise and Service Hubs Bill, will convert these SEZs into hardcore manufacturing hub, removing earlier restrictions that were placed on them.
This means the companies in these hubs won't have to pay taxes on goods sold in the domestic market, an incentive that could help more companies enter these hubs and boost production.
This will reduce imports and increase exports.
Plus, companies will no longer have to deal with multiple authorities to set up base inside these hubs. The government has promised to give them a single window clearance, meaning no travelling from office to office for permits.
The move would be especially beneficial for upcoming semiconductor and other tech factories that are being set up.
These companies are anyway getting production linked incentives, and more possible incentives could help them get to the same level as foreign manufactures.
However, it is still unclear what kind of tax benefits, if any, the companies inside these hubs will get.
But most probably they will be getting subsidies and incentives from the states as well as the centre, seeing as the government is really keen on taking the manufacturing sector's revenues to 25% of GDP.
Seems exciting, right?
But that's what people had thought about the SEZ bill as well and look how that turned out.
So, guess we'll have to wait and watch how this works out.
⚡ In a line: India is introducing a new law to make functioning easy for businesses so that they can boost manufacturing.
💡 Quick question: Do you think one law can fix our manufacturing issues?
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