Atmanirbhar India, the PLI schemes and import bans

 

Central Govt has brought three PLI (Production Linked Incentives)schemes so far- for Electronics Manufacturing, Pharma APIs and Medical devices- in order to give a big push for Make in India as part of PM Modi's aspirational theme "Atmanirbhar India".

Under PLI scheme for Electronics mfg. 4% to 6% is the incentive on incremental sales over the base year and the scheme has three sub-categories-Mobile phone (International Cos), Mobile Phones(Domestic cos) and Specified Electronic Components Mfg. The govt recently announced 16 companies under these categories which included the likes of Samsung, Apple's Contract manufacturers Foxconn Hon Hai, Wistron, Pegatron and also Rising Star. Under the Domestic companies, Lava, Micromax etc. and under Specified Electronics components, 6 companies have been approved.Over the next 5 years, this policy initiative is expected to lead to the production of over Rs.10.5 lac cr with a likely export of over Rs.6.5 lac cr out of this, as per the Ministry of Electronics & IT. 

Minister Mr.Ravishankar Prasad, exuded optimism that the Large Scale Electronics manufacturing would become successful under this PLI scheme providing huge employment opportunities and will set the right tone for all similar Atmanirbhar India schemes.The Cos. with an investment potential of Rs.11k Cr will be the torchbearers of this ambitious scheme which will put Make in India on a high pedestal in about 5 years' time.

Govt has also come out with PLI schemes for Pharma API and medical devices, which will entail a budgetary outgo of more than Rs.12K cr over the years.Since India is overdependent on China for Drug intermediates and APIs, this incentive scheme is expected to drive investments into these sectors making India self-sufficient in the years to come.This will give a fillip to manufacture of key starting materials(KSMs), DIs, and APIs and the scheme has been prepared to deliver Rs 7K cr as incentives for greenfield projects.Since India's pharma industry is the 3rd largest in the world and 14th largest in terms of value, this scheme has been designed to enhance the industry capabilities in terms of strengthening its value chain within the country with both backward and forward linkages.

All put together the Central Govt. has identified 10 sectors including the above. The other sectors like Battery storage, Solar PV modules, Automobile and auto components, textiles, food processing, white goods, telecom, and networking components.

The main aim of the scheme is to expand the manufacturing base of India in all these high potential niche products. However there are few criticisms by industry experts in smartphone manufacturing highlighting that this PLI scheme will only lead to an increase in domestic manufacturing value and not in increasing domestic value addition. This is explained by them saying that huge component imports from countries like South Korea and Taiwan and even China will continue. Since the focus is on phones which are priced Rs.15K and above ,which are mostly exported as against domestic mass consumption phones which fall under lower price category, they fear that this may be the picture on the ground. Some have also mentioned that even with this PLI, the Smartphone mfg. will still not be cost-competitive compared to China or even Vietnam. But the Govt strategy seems to be for incentivising the manufacturing within India and also for generating employment opportunities, so that value addition increase will happen over a period of time when the scale grows bigger and reaches the critical mass.

Now in order to support the Make in India under the overarching Atmanirbhar programme, Govt has chosen to ban the import of Pneumatic tyres, Airconditoners etc. This has been done not due to protectionist policies but in order to enable the nascent manufacturing to stand on its own legs and survive the vagaries of trade. The Govt. will have to be suitably cautioned not to persist with this policy of import restrictions for long beyond 3 years, since the flip side of it is poor quality and high price to the consumers.

With the above well laid out paths for manufacturing to take firm roots in this country, and with its contribution to GDP increasing from 14% at present,India is poised to compete with countries like China in the years to come.But the journey is forecast to be uphill and strenuous. An unshackled India can emerge victorious when pushed to a corner in a crisis like the prevailing one.

Altman Z score and RBI Kamath committee ratios.

 Edward Altman published the Z score formula for predicting bankruptcy way back in 1968. He said this formula can be judiciously used to find whether any company may go into bankruptcy within the next two years. It is a quick find formula to gauge the financial health for publicly held companies by using the P&L values and Balance sheet values through a mix of business ratios.

In simple terms Z =1.2X1+1.4X2+3.3X3+0.6X4+1.0X5, where

X1= Working capital/Total assets.i.e the ratio of liquid assets in relation to the total assets or size of the Co.

X2=Retained earnings/Total assets i.e the ratio of retained profit in relation to the total assets of the Co.

X3=EBIT/Total Assets i.e the ratio of efficiency of the operations without the impact of leveraging, in relation to the assets deployed in the Co.also signifying the importance of operating earnings for the long term financial health of the Co.

X4=market capitalisation/book value of total liabilities i.e the ratio of market price in relation to the total liabilities incl. borrowings are  considered as a reflection financial health;

X5= Total sales/ Total assets i.e the ratio of assets turnover indicating how well the assets are utilised to generate the sales.

There are some variations for privately held companies and for service cos.

What is the necessity for delving into this formula of bankruptcy now? RBI appointed KV Kamath Committee has come out with similar ratios for the use of banks in identifying distress among the Indian business companies with various ratio values depending on the kind of business the cos concerned are in.

The Committee came out with the following ratios, that were selected based on their relevance for Resolution Plan for the distressed cos. when their loans are put to restructuring by the banks. 

1)Total outside liabilities(TOL)/Adjusted Tangible Networth(ATNW)i.e Adjusted Net of investments;

2)Total Debt/EBIDTA ;

3)Current Ratio;

4)Debt Service Coverage Ratio (DSCR);i.e the ratio of the addition of the net cash accruals with interest and finance charges divided by the addition of the current portion of the long-term debt with interest and finance charges.

5) Average Debt Service Coverage Ratio (ADSCR) i.e average over the loan period.

All these ratios are highly relevant with a well-defined threshold for various industries of the domestic economy including that of services, for those looking at the financial health of the Companies. Many Credit Rating Agencies also use many of these ratios. Perhaps, the Altman Z score may also be included for evaluating the preponderance to bankruptcy among the Co.s  under the distressed category seeking their bank loans to be restructured.

Import Trade restrictions and Make in India-Atmanirbhar!

 Import Trade wall or barriers are not new to India. The country had very steep walls in terms of Tariffs, licensing ,quotas etc. all in the name of safeguarding the domestic industry. When the country gained independence, many of the industries were either nascent or anemic and in order to restore their health, Central Govt had no option but to erect some import restrictions so that local industries in the economy are nurtured. This grooming of domestic industry with level playing field took a new turn in the late 1960s and 1970s with widespread nationalisation of private enterprises, ushering in an era of erratic socialism all in the name of protecting the citizens from private profiteering.

This concept led to erecting walls within the country between the commanding heights of Govt. undertakings and the Private enterprises. The private sector was neglected and was left to fend for itself and scaling up an enterprise became a uphill challenge for private sector. Inorder to protect them from imports from manufacturing bases around the world with deep pockets several safeguard duties and tariff walls were made stiff .

But all this had a negative side effects as the local industry became flabby, lethargic,self seeking, ignoring Tech.upgradation, without stiff market competition on Quality , Cost and Delivery.All this was done with the good intention of making India self restraint through import substitution. But the unintended consequences of this led to high cost of manufacuring and poor quality product.This situation was reversed when GOI started reducing tariffs and import restrictions through some pragmatic steps inviting foreign direct investments in the early 1990s.

By the time we missed the bus and Chinese who started this in 1980s had a clear headstart over us. Our two steps forward and one step backward strategy in all these matters of import policy were designed by bureaucrats with the hidden intent of rent seeking politicians, businessmen and babus behind it.

Only after the advent of Japanese, US ,German and South korean companies started their manufacturing bases in India , Quality, Cost and Delivery gained attention and became the guiding lodetones of enterprises keeping them lean and mean. This tough market competition has helped India in achieving the pinnacle of success in Auto sector especially in becoming World's top two wheeler manufacturing base.

That said , now there is lot of discussion on Govt's announcement of Trade tariffs for imports from China and licesing and ban on import of defence equipments,  high end TVs etc. The heated debate of back to the moribund policy of import restrictions in the name of Make in India- Atmanirbhar Bharat is indeed a good one.  

Does this mean back to the future?

But there can be an argument in terms of supporting this policy of  import restrictions.

When fledgling industry is sought to be setup like in high end tech products, these specific products may require some sort of support or sops for a initial few years. When foreign direct investment is invited for huge sunrise industries, such import walls will be helpful but all but temporarily. If there is a sunset clause introduced for all these tariff or sops or subsidies, it should be welcome. Govt. should make it a point to insert a sunset clause for all these import walls except in very few strategic sectors which may not exceed five on the whole.Govt should not give an impression that it is interested in augmenting its tax revenue through these high import duties.

India has given a great fillip to Make in India- Atmanirbhar in some of the industries like Auto, Smartphones etc which has generated huge employment opportunities in the country. Inorder to give a temporary boost to this policy, Govt has done the right thing by introducing few Tariff walls in order to promote the above stated policy  and these Tariff barriers should neither be seen as a way of revenue rising, nor as a permanent fixture to protect the domestic industry.

India's research, design and manufacturing capabilities!

If you do a SWOT analysis of India's capabilities, certainly Software prowess will be among the top in the list in terms of technological leverage. Pharma will come next to it and there are others like leather goods, cotton textiles, garments etc.

There is one niche area where India has excelled in all- Research, Design and Manufacturing capabilities and that is two-wheeler production. Even though India borrowed the technology from Japanese manufacturers initially, now India has its own name in the world for 2 wheeler manufacturing competing and even outshining the best in the world.

Yesterday I was listening to a panel discussion on defence manufacturing. Two out of the four panelists predicted in about 5 to 10 years time, India will be among the first three in terms of Research, Design and Mfg. of niche defense equipment incl high-end weapons built on the cutting end technology. According to them ,it has been made possible by the coherent, calibrated and painstaking efforts of this Govt. starting from Manohar Parrikar as the Defence Minister.

One of the panelists being Air Vice Marshal(retd) knew what he is talking about in terms of Govt. policies and the dilly-dallying attitudes of bureaucrats in carrying the agenda of the Govt. forward. He said that the dance involving the Govt, bureaucrats, and the armed forces have got into synchronized steps with well thought out targets after listening to the Defence Mfg.Industry.

Apart from these industries, India is also looking at developing capabilities in semiconductors, smartphones, chemicals and high-end pharma, renewable energy power equipment production, Mobility solutions etc. India stands to gain by investing in cutting edge technologies in Nano, AI, Robotics, Space, IoT, ML, DL, etc. For these things, India's investment in Targeted Research and Development will have to be substantially scaled up as a percentage of GDP.

Alvin Toffler in his "Powershift" mentioned about Knowledge, Wealth and Power/Violence as the three dimensions (கல்வியா,செல்வமா,வீரமா?) of the society with Knowledge being mentioned as the most democratic of all levers.India has to use that lever to its advantage.

Then, India can leapfrog into Industrial Revolution 4, since India was forced to miss the first three Industrial Revolutions by design!