Make in India: Moving from why to how

(Please refer to our update

on Make in India dated

September 27, 2014)

The question, ‘Why Make in India?’ has been answered comprehensively in various

forums. A quick rundown: (1) very low share of manufacturing in India, (2) global

competition, (3) higher trade deficit, and (4) need to employ 15m addition to labor

force every year. The question of the moment is: ‘What are the preconditions for

the success of Make in India?’ We discuss three.

Doing business parameters:

Most of the difficulties related to doing business in

India pertain to the state governments. At the outset, the attitude towards the

private sector needs to change. A pragmatic approach is required to deal with

logjams. For example, an easier solution for the land question could be to

release the huge land available with the public sector (notably, the Indian

Railways). The PPP framework, which has been tried only in the infrastructure

sector, can be extended to manufacturing, with the government playing a key

role in setting up facilities but staying away from operation and maintenance.

High speed trains can be explored vigorously instead of prohibitively costly

bullet trains. A suitable IPR regime may be put in place, balancing India’s

considerations. Tax sops, however, barely provide long-term sustainability and

should be avoided.

Nation-wide mobility:

This essentially involves two aspects – robust logistics

support through improved transportation and creating a unified market by GST

implementation. India is making significant progress on ports and railway freight

infrastructure to address the logistics issue.



Ports in India present a huge opportunity,

given its 7,500km coastline.

Volumes handled are set to grow at 6% per annum in the next 20 years.

Putting in place the necessary evacuation infrastructure through rail

connectivity would not only enable efficient cargo handling but also lead to

development of industrial corridors and smart cities.



Work on the

Dedicated Freight Corridor (DFC)

is ongoing, with INR300b

contracts to be awarded in the next one year. DFC would enable one train to

run in every 10 minutes and also reduce transport time between Delhi and

Mumbai to just 18 hours from the current 60 hours. The project is likely to

be substantially completed by December 2018. Strikingly, the cost would be

lower too, with marked improvement in the operating ratio despite the

overhead of a new network. Four more corridors are being explored in

addition to the western and eastern corridors already under

implementation.



A simplified, rule-based, pan-India

Goods and Services Tax

(GST) is being

implemented. India would become a common market, enabling free

movement of goods across the country. This would reduce tax cascading,

lower compliance and legal costs, homogenize tax laws, and enable IT-based

administration. The Constitutional Amendment Bill has already been

introduced in Parliament.

Click here

February, 2015

Capability:

A whole lot of labor reform has been initiated recently both through

legislative initiative to impart greater flexibility but also through the launch of

skilling and training programs. This would help India build on the low cost of labor.

While a whole lot of strength can be built on ‘frugal engineering’, India has also

demonstrated its capabilities at the higher end of technology. The opening up of the

defense sector has provided a lot of opportunity at the cutting edge of technology.

Indian manufacturers are producing advanced weaponry, substantially reducing

import dependence. Facilitating this process are measures such as (a) deserving

projects from ‘buy global’ categories, (b) embedding quality considerations in the

bid process, moving away from just L1, and (c) significant step-up in defense orders.

In this backdrop, we recently hosted the ‘Make in India’ conference in Mumbai, with

participation from key sectors like Defense, Railways (Dedicated Freight Corridor),

and Port logistics apart from experts in the areas of doing business, taxation and

labour. The speakers included both bureaucrats and industry experts.

February, 2015

Imperatives, Challenges & Opportunities

Represented by:

Dr. Ajay Dua

Ex-Secretary, Ministry of Heavy

Industries & Commerce

Key takeaways

Needed pragmatic steps for ‘Make in India’ to work

With a new and more assertive government in place, many measures can be taken

to improve the ‘ease of doing business’ parameters.

The background to Make in India Campaign:



Stagnated share of manufacturing.



Formal employment crunch, 15m addition to labor force every year.



Increase in capital intensity of manufacturing.



Rising import bill.



The new government’s contribution:



A more assertive majority powered government.



Return of investors’ confidence.



Foreign investors started having a relook.



Identification of 25 verticals for Make in India push.



How to improve upon ease of doing business parameters?:



Deteriorating rank every year; 52 ranks below China.



Most of the challenges related to doing business pertain to State

governments.



Attitude toward private sector need to improve.



A lot of land with public sector (notably Railways) can be released.



PPP should be tried not only in infrastructure but also in manufacturing.



Government has to play a role in setting up of facilities. However, operation

and maintenance should be exclusively in private sector domain.



Commercial viability of a bullet train is under question but DFC would

succeed.



IPR regime needs to be appropriate for FDI to succeed especially in the area

of railways and defense. However, need to resist bullying on IPR by

advanced countries.



No tax sops should be granted, as no sustainable advantage can be built

through that.



Need to provide good facilities and ensure low cost of energy.



Build upon India’s strength in low labor cost, frugal engineering.



Attempt at massive skill building of workforce (only 10% of the labor force

found to go beyond primary schooling)



Covering analyst(s)

Dipankar Mitra

+91 22 3982 5405

Dipankar.Mitra@MotilalOswal.com

February, 2015

Indian Defense: Make in India emerges as important priority

(Please refer to our update on

Indian Defense sector for a

complete listing of the various

projects cleared by the

government

recently

and

positioning

various

companies)

Key takeaways

With new government in place, Defense sector has witnessed a strong sense of

urgency to accelerate project award and Make in India has emerged as a key

priority. Several large orders earlier reserved for ‘Buy Global’ category have been

shifted to

‘Make and Buy Indian’

category.

Key change in approach post the induction of new government



Proactive interactions with the industry, including meeting private sector

delegations every month.



Policy change expected shortly towards moving to L1-T1 approach for project

awards (taking into consideration both financial and execution superiority)

versus just L1 method earlier which was the key lacuna in defense

procurement).



Streamlining the defense export policy.



Several large projects earlier reserved for ‘Buy Global’ category have been

shifted to ‘Make and Buy Indian’ category; also, for the first time, projects worth

INR400b have been reserved exclusively for the private sector.

Short and medium term plan in place to develop domestic defense sector



The next 1-year plan is to initiate the process to launch ~25 acquisition

programs per year under the ‘Buy Indian’ and ‘Buy and Make Indian’ categories.

The five Defense Acquisition Council meetings since August 2014 have cleared

INR1.4t of projects. As these projects get awarded, the industry will get a robust

pipeline of orders over the next 1.5-2 years. Government budget on defense

entails cash flow accounting and capital spend of INR950b could mean projects

of INR5t+ in progress, given that a typical project takes 5-8 years to be executed.



The medium-term plan (~3 years) is to launch 8-10 ‘Make’ category projects

every year. These are projects where development would be carried out in India

by consortiums that are technically pre-qualified, with the government financing

80% of the development cost and award of production orders in the ratio of

70:30 (between L1/L2 bidders). Since initiation in 2006, no ‘Make’ category

projects have been awarded. Policy review is expected shortly, and three large

projects are in advanced stages: (i) Tactical Communication System: INR200b

(Bharat Electronics and L&T-Tata Power-HCL Technologies are the two

consortiums), (ii) Battlefield Management System: INR400b (Bharat Electronics,

Rolta-L&T, and Tata Power), and (iii) Future Infantry Combat Vehicle: INR500b

(Tata, Mahindra, and L&T, among others).

Key projects pipeline for the domestic players



The six nuclear submarines (Project 75i) entail a cost of INR530b; this is the

largest project cleared for award to the Indian industry. Based on our

interactions with various industry experts, we believe that the entire order

could be awarded to a single yard. Mazgaon Dock is already constructing six

submarines in India and economies of scale do not justify more than two yards

manufacturing submarines in India. Countries like the US and China have 1-2

Click here

Covering analyst(s)

Satyam Agarwal

+91 22 3982 5410

Agarwals@MotilalOswal.com

Amit Shah

+91 22 3029 5126

Amit.Shah@MotilalOswal.com

Nirav Vasa

+91 22 3982 5422

Nirav.Vasa@MotilalOswal.com

February, 2015



shipyards manufacturing submarines. Possible companies in the fray include

L&T, Pipavav, and consortium of Hindustan Shipyard – BHEL – MIDHANI.

Offset policy is coming up for review shortly. Offsets will be an important play

for mid-sized players in the Defense industry, as they can become part of the

global supply chain for various players.

February, 2015

Indian Railways: DFC an important Game Changer

Represented by:

Mr. Adesh Sharma

Dedicated

Freight

Corridor

Corporation of India Limited;

Managing Director

Key takeaways

Dedicated Freight Corridor (DFC) promises to be a ‘game changer’ for improving the

competitiveness of Indian manufacturing. DFC plans to run freight trains in India on

time tables. Travel time for goods transportation between Mumbai – Delhi would

decline from 60 hours currently to just 18 hours. In addition, there will be multiplier

effects by setting up various Industrial Corridors through the route length.

Key Highlights of the DFC program



DFC promises to be a ‘game changer’ for improving the competitiveness of

Indian manufacturing. The share of Indian Railways in freight traffic has declined

to just 36% (v/s ~70% in several other countries) and the Dedicated Freight

Corridor Corporation of India (DFCC) intends to improve the ratio to 50% over

the next few years.



One of the key advantages of DFC is that freight trains in India could be run on

time tables similar to passenger trains currently; the frequency can be

theoretically increased to one train in 10 minutes. As a result, travel time for

goods transportation between Mumbai and Delhi would decline from 60 hours

currently to just 18 hours. Setting up of various industrial corridors along the

route length would result in a multiplier effect.



Despite being a greenfield network, freight charges in the system will not

increase. DFCC’s operating ratio would be just 45% against the Indian Railways’

98%. Also, DFCC’s maintenance and operational costs would be just 33% of

Indian Railways’ current costs primarily driven by ‘Faster-Longer-Heavier’ trains,

which would significantly increase operational efficiency.



Post the western and eastern DFCs, four new freight corridors are being

planned: Delhi-Chennai (2173km; USD22b), Mumbai-Kolkata (2,000km;

USD21b), Kharagpur-Vijayawada (1,100km; USD12b), Chennai-Goa (890km;

USD10b). The surveys have been recently completed and suggest an IRR of

18%+ for several of these networks.

Covering analyst(s)

Satyam Agarwal

+91 22 3982 5410

Agarwals@MotilalOswal.com

Amit Shah

+91 22 3029 5126

Amit.Shah@MotilalOswal.com

Nirav Vasa

+91 22 3982 5422

Nirav.Vasa@MotilalOswal.com

Project Cost and timelines details



The intent is to complete the project by December 2018, and there is strong

confidence that deadlines would be met. The western and eastern (till Khurja)

DFCs would be completed by December 2018. The Khurja-Ludhiana section

would be completed by December 2019.



Total project cost for the western and eastern DFCs is estimated at ~INR820b, of

which construction cost (including civil, tracks, electrical, signaling) would be

INR560b. Contracts worth INR260b have been awarded (including ~INR90b to

L&T consortium, INR50b to GMR consortium, and INR33b to Tata Projects-led

consortium). The balance contracts of INR300b are targeted to be awarded by

March 2016, which entails a strong pipeline of project awards for equipment

suppliers.

February, 2015

Port logistics: Lifting the national trade

Company represented by:

Mr. Prakash Tulsiani

Managing Director,

Gujarat Pipavav

Key takeaways

Ports represents gateway for a country’s EXIM trade. Long coastline of India

provides opportunity to create enabling infrastructure to aid manufacturing growth.

Key ingredient in place



India has 7,500kms of coastline with 12 major ports and 60 non-major ports.

Seaborne trade accounts for 90-95% of volumes and 70% of total EXIM trade.

This compares with 2x long coastline for China, but with ~2000 ports.



India’s cargo traffic is set to treble over FY12-FY32, at a CAGR of 6%. However,

the acceleration in GDP could positively surprise.



Container traffic would grow from 10m TEUs in FY12-13 to 14m TEUs in FY17-18

and would continue to grow at 6% pa from thereon.



Port utilization is already high at 80-85% and 4 out of 12 major ports are running

at 100%+ utilization – suggesting urgent need to put enabling infrastructure to

realize manufacturing growth.

Challenges on evacuation, regulation key impediments



Evacuation infrastructure is a key for successful boost to cargo handling and

seaside capacity (mushrooming of port) will not help. Accessibility to hinterland,

faster turnaround of cargo is crucial for manufacturing boost.



Under investment in railways has led to stiff constraints on cargo movement.

Few corridors operate at 130%+ utilization and preference for freight train

movement is secondary.



Traffic has thus shifted to road network, which is not economical for long haul.

Moreover, the condition of road and network is poor further impacting swifter

movement.



Lack of standard policies and regulations on concession period, land acquisition,

clearance has further slowed down investment in building infrastructure.

Steps initiated, focus on smart cities important



DFC is vital step towards easing cargo movement. While important, it is facing

delays and thus, it calls for rapid action/monitoring on part of government.



Concept of setting up industrial corridors (Delhi-Mumbai), creation of smart

cities (Dholera) are steps in right direction. This would boost manufacturing

quotient.

GPPV best placed to leverage growth opportunity



Best evacuation (dedicated railway line with double stacking option), superior

efficiency (vessel turnaround and in crane movement) and availability of water

front opens up huge scope of growth for GPPV.



GPPV has initiated expansion of container capacity to 1.3m TEUs (from 0.85m

TEUs), while it is debt free as of now.



We currently expect GPPV to deliver 29% earnings CAGR over FY15-17E. Stock

trades at PER of 19x and P/B of 3.6x (RoE of 22%).

Covering analyst(s)

Nalin Bhatt

+91 22 3982 5429

nalinbhatt@motilaloswal.com

February, 2015

Enabling Indirect Tax Environment

Represented by:

Mr. Rajiv Jalota

Commissioner of Sales Tax

Maharashtra

Key takeaways



Covering Analyst(s):

Ashish Gupta

+91 22 3982 5544

Ashish.Gupta@MotilalOswal.com



Dipankar Mitra

+91 22 3982 5405

Dipankar.Mitra@MotilalOswal.com

GST – a revolutionary change:

The implementation of GST will be a

revolutionary change as it will reduce various shortcomings of the current

indirect tax regime, especially on cascading effect of taxes. It is estimated that

~10% of the existing tax collections are due to the cascading effect of taxes. GST

will also result in lower compliance and administration cost, consequently,

reducing the ultimate cost of the goods/services. Various forms in which

cascading effect of taxes is witnessed are:



Non-inclusion of certain state level taxes such as luxury tax and

entertainment tax under VAT.



VAT being levied on the price inclusive of excise duty, no credit available for

CST on inter-state transfer of goods, no credit of Cenvat (Excise and service

tax) for local dealers.



Different VAT rates for products under different states.

Proposed GST model:

Under the proposed GST regime, GST is divided into two

components: State GST (SGST) and Central GST (CGST). Further, taxes are

proposed to be levied on inter-state transfer of goods and services in the form

of integrated GST (IGST).

Proposed rate structure:

The government has proposed a GST Council which

will decide the likely Revenue Neutral Rate (RNR) under the GST regime. GST is

likely to be segregated into three different tax rates, namely:



Nil rate



Low rate



Standard rate

IT Infrastructure:

The most important task under GST lies in integrating all the

taxes and making it user-friendly through digitization. This has been achieved

through ‘GST-N’ (IT infrastructure of GST). The registration and filing of returns

across the country would be done through GST-N. A significant amount of work

has already been done under GST-N.

Major challenges/hurdles:



GST bill has to be approved by each House of Parliament with 2/3 majority

and 50% of the state legislatures.



Compensating the State governments for any loss of revenue on account of

shift to GST.

February, 2015

Measures being taken towards labour reform

Represented by:

Mr B K Sanwariya

Ex-Chairman,

Indian Labour Board

Key takeaways

Many measures taken recently toward labour reform

The new government has taken various measures to simplify labor laws aimed at

helping ease of doing business. Following are the examples.



Covering analyst(s)

Dipankar Mitra

+91 22 3982 5405

Dipankar.Mitra@MotilalOswal.com

Shram Suvidha Portal:

Unified web portal with the following four features to

benefit 0.6m-0.7m industrial units.



Unique labour identification number (LIN) to facilitate registration.



Filing of self-certified and simplified Single Online Return (in place of 16

separate returns earlier).



Inspection reports within 72 hours by the labour inspectors.



Timely redressal of grievances.

Labour Inspection Scheme:

To cut down over 0.3m inspection annually by way

of i) list of inspections to be computer generated randomly based on risk based

algorithm and ii) complaints based inspections to be determined centrally.

The Laws (Exemption …) Act, 1988:



Made applicable for establishments employing between 10-40 workers as

against the existing provision of 10-19.



To maintain only two registers (in place of one).



Allow maintaining registers in e-mode and submit return through e-mail.

Amendments in Apprentices Act, 1961:



Apprentices can be engaged in any trade within a % band of total workers.



Can engage apprentices in optional trades which are not designated.



Scope extended to non-engineering at diploma and degree level.



Penalties in the form of fine only.



Permission to outsource basic training in an institute of their choice.



Apprentices could also be from other states.

Employment and Training:

Raise apprentice training to 2m from current 0.3m.



Double the stipend to apprentices with 50% subsidy.



Scheme of National Brand Ambassadors for Vocational Training.

Initiatives in Progress:



The Factories Act, 1948 Amendment Bill referred to Standing Committee.



Comprehensive amendment to the Employees’ Provident Fund and

Miscellaneous Provisions Act, 1952.



Draft Small Factory Bill to regulate factories employing less than 40 workers



Codification of Labour Laws into five groups, i.e., i) industrial relations, ii)

wages, iii) social security, iv) safety and welfare, v) working conditions.

February, 2015

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February, 2015