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Manufacturing sector feels left out

— FILE PHOTO

TACKLING RUPEE RISE: The weaving unit of a textile mill in Tamil Nadu.

“Much will depend on what policies are used to induce the corporate sector to move into more labour-intensive sectors. The outcome would be distinctly positive if corporate expansion takes place in an environment in which new markets are created through rapid and widespread economic growth and through expansion of exports.” That was what the approach paper to the XI Five-Year Plan said. The Planning Commission and the United Progressive Alliance government at the Centre have pledged to work for inclusive growth. But the manufacturing sector, which covers the traditional industries of the country, feels ‘neglected,’ notwithstanding the relief package announced for exporters hit by the appreciation of the Indian rupee.

Leading the pack of manufacturing industries, the textile units are perhaps complaining the most about losing their competitive edge because of the rupee appreciation. Not only has there been a steady decline in textile exports during the past six to nine months, but the industry has also been hurt financially because of the corresponding depreciation of the U.S. dollar. Most international trade is carried out against the greenback, and prices are fixed well in advance for the exports. As a result, the exporting units have also taken a beating on the price front, affecting their profits. Most of the textile industry sources attribute the rupee appreciation problem to the “liberal policies followed by the Centre with regard to foreign institutional investors (FIIs).” According to an industry spokesman “Our current policies with regard to FIIs is causing a runaway appreciation of the rupee. This has been the root cause for the labour-intensive manufacturing sector becoming unremunerative.”

He says the Government has chosen to offer special incentives to FIIs to invest in the stock market — facilities not provided in most developed or developing countries, including China. Because of this “special treatment to FIIs” over $16 billion has come into the market in just the past six months, as against a mere $1.6 billion in the same period last year. “These are unique benefits enjoyed by the FIIs. But who has benefited from it? Just the cream of the market players and the top companies have enjoyed a great degree of market capitalisation. Look at the impact of the withdrawal of these funds once the FIIs have made their kill. The markets crashed. This is why foreign investments must be channelled into productive sectors, so that the fruits of growth reach the people,” he argues. Now, even the commodities market is to be opened to foreign direct investment (FDI).

Industry sources explain that there are definite ways to check the rupee appreciation and regulate the flow of FII funds. They prescribe a minimum ‘lock-in period’ for these investors — something they are exempt from now. Further they have no tax beyond one year, and more recently a PN facility too. Whereas, in some countries that faced a similar situation, the governments went in for additional taxation — called the Robert Tobin tax — on the funds brought in by the FIIs.

Another problem being highlighted by the manufacturing sector relates to imports. The procedure of allowing free trade finance for import of goods to be sold in the domestic market without the necessity to take forward cover on the exchange has made imports cheaper and attractive. The appreciation of the rupee and the difference in the interest rates has made imports cheaper by about 16 per cent, according to some importers. About $150 billion has come in through this route of import financing.

The argument of the manufacturing sector, especially the textile industry, is that these factors have rendered their exports of labour-intensive goods non-remunerative. The goods become non-competitive in the domestic market too. Consequently, many of the textile units have shed jobs, instead of creating more employment opportunities in the rural areas. They are already facing a stiff competition from the cheaper labour markets in Southeast and East Asia.

“If the benefits of the 9 per cent growth in GDP should reach the rural poor the Centre must review its policy on FII investments and take concrete steps to encourage the manufacturing sector, without offering just some sops,” the spokesman says. The industry prescription seems simple: scrap the State-level taxes and refund the cross subsidies to the exporters; Revisit the incentives granted to FIIs and look at alternative taxation tools such as the Robert Tobin model to arrest further appreciation of the rupee; check the availability of finance at negative interest rates for imports not related to exports; and revive the labour intensive manufacturing industries across the country.

V. JAYANTH

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