Syllabus
GS Paper III – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context
To capture India’s capital goods market in the global electronics revolution, we must embrace the same innovative spirit that fueled the Industrial Revolution.
Indian Capital Goods Sector
Introduction
The Indian capital goods sector plays a pivotal role in the country’s economic landscape. It encompasses industries that manufacture machinery, equipment, and components used for production, infrastructure development, and engineering projects.
Capital Goods Sector
- The capital goods sector, also known as the industrial sector, plays a crucial role in manufacturing and serves as the foundation for various industries.
- Definition of Capital Goods
- Capital goods are tangible assets used to produce consumer goods or services.
- Examples include buildings, machinery, and equipment.
- These items are durable and contribute to production processes.
- Core Capital Goods
- Core capital goods refer to a specific class that excludes aircraft and goods produced for the Defense Department.
- Notably, some capital goods, such as airplanes used by airlines and certain consumers, can also be considered consumer goods.
- Significance of Investing in Capital Goods
- Investing in capital goods reflects a nation’s ability to innovate, produce, and lead.
- It enhances exports and enables global competitiveness in international markets.
Key aspects regarding Capital Goods Sector
- Contribution to Manufacturing:
- The capital goods sector contributes approximately 12% to India’s overall manufacturing output.
- It serves as the backbone for various industries, including engineering, construction, infrastructure, and consumer goods.
- Recent Developments:
- Budget 2024 Impact: Recently, capital goods stocks experienced a sharp decline (up to 8%) on the Bombay Stock Exchange (BSE) after Finance Minister Nirmala Sitharaman maintained the capital expenditure target at Rs 11.11 lakh crore for the fiscal year. This decision sparked both fears and excitement in the market, with experts analyzing its impact on India’s economic growth and job creation.
- Global Giants’ Strategy: Global companies are adopting a ‘China Plus’ strategy to safeguard their supply chains, leading to increased interest in India’s capital goods industry.
- Government Push: The Indian government is planning substantial infrastructure and manufacturing investments, further boosting the sector.
- Export Subsectors:
- The leading export subsectors within capital goods are heavy electrical and power equipment, earthmoving and mining machinery, and process plant equipment. These segments collectively account for 85% of India’s total capital goods exports.
- Growth Targets:
- By 2025, India aims for a capital goods production size of $112 billion.
- The electrical equipment industry, including generation and transmission equipment, targets a size of $100 billion.
- The transmission and distribution (T&D) equipment segment aims for a size of $75 billion.
- Foreign Direct Investment (FDI):
- India allows 100% FDI in the capital goods sector under the automatic route, encouraging foreign investment and technology collaboration.
Synergy Between India’s Capital Goods Sector and the Electronics Industry
- Capital Goods and Electronics: A Symbiotic Relationship
- Significance: Capital goods play a central role in realizing the vision of expanding electronics production.
- Efficiency and Scale: They enable efficient and large-scale production of high-quality electronics.
- Global Electronics Industry Outlook
- Market Valuation: The global electronics market, currently valued at $4.5 trillion, is projected to reach $6.1 trillion by 2030.
- India’s Electronics Production Milestone
- Impressive Growth: India’s electronics production has surged to approximately $115 billion in FY24, nearly quadrupling over the past decade.
- Promising Projections: Expectations for the next five years indicate a potential fivefold increase in this figure.
- Robust Capital Goods Sector: A Necessity
- Increasing Demand: As India targets a fivefold growth in electronics production, advanced manufacturing technologies become crucial.
- Domestic Capital Goods: A strong domestic capital goods sector is essential to meet this demand.
- Current Contribution and GDP Impact
- Sector Contribution: The capital goods sector presently contributes 12% to total manufacturing output.
- Overall Impact: Manufacturing, in turn, contributes around 17% to India’s GDP.
Challenges faced by capital goods sector
- Infrastructure Deficiency
- Issue: Insufficient transportation and logistics networks impact the efficiency and cost of manufacturing and delivering capital goods.
- Financial Constraints
- Challenge: Limited access to affordable finance hinders investment in new technologies and capacity expansion.
- High Borrowing Costs: The elevated cost of borrowing exacerbates financial constraints.
- Policy and Regulatory Uncertainty
- Challenge: Frequent changes in government policies and regulations create uncertainty, making long-term planning difficult for businesses.
- Institutional Support Gap
- Issue: Inadequate and untimely financing, insurance, and marketing support for capital goods exporters, particularly for MSMEs.
- Skill Mismatch
- Challenge: A disconnect between available jobs and the workforce counters India’s demographic dividend.
- Skills Gap: The workforce lacks the necessary skills for the evolving capital goods industry.
- Shrinking Demand in Traditional Markets
- Issue: Established markets for Indian capital goods, such as the US and Europe, experience low growth and reduced investment.
- Impact on Exports: This situation affects the export prospects of the sector.
- Escalating Export Transaction Costs
- Challenge: Increased time and financial resources required to export capital goods from India due to high transaction costs.
Way forward
- Bridging the Demand-Supply Gap
- Objective: Close the gap by meeting both domestic demand and targeting the export market.
- Establishment of an Innovation Center
- Proposal: Create a dedicated center with a substantial corpus (minimum ₹1,000 crore) focused on capital goods innovation.
- Potential Location: Consider housing this center at the Central Manufacturing Technology Institute (CMTI).
- Strengthening R&D Ecosystem
- Strategy: Promote a robust research and development ecosystem.
- Goal: Develop indigenous technologies that not only meet international standards but also set new benchmarks in quality and efficiency.
- Fund Allocation for Capital Goods Acquisition
- Initiative: Create a dedicated fund for acquiring and enhancing capital goods, including second-hand equipment.
- Industry-Academia Collaboration
- Approach: Foster strong collaboration between industry and academia.
- Purpose: Ensure research aligns with industry needs and drives innovation.
- Supportive Government Policies
- Policy Framework: Formulate policies that incentivize research and development.
- Ease of Doing Business: Facilitate a business-friendly environment for the capital goods industry.
- Eco-Friendly Technologies and Processes
- Adoption: Encourage the use of environmentally sustainable technologies and processes.
- Embracing Digitalization
- Efficiency Enhancement: Leverage digital technologies for more efficient and cost-effective production.
- Addressing Technology and Skill Gaps
- Critical Focus: Tackle technology and skill gaps to support India’s ambitions in the electronics sector.
- Global Joint Ventures
- Collaboration Strategy: Form joint ventures with global leading firms to facilitate skills and technology transfer.
Conclusion
In summary, the Indian capital goods sector stands poised for growth, driven by government initiatives, global interest, and a strong manufacturing base. As the country continues its journey toward becoming the third-largest economy globally, capital expenditure remains crucial for job creation and sustained development.
Source: The Hindu
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Practice Question
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