Hi Friends,

Even as I launch this today ( my 80th Birthday ), I realize that there is yet so much to say and do.

There is just no time to look back, no time to wonder,"Will anyone read these pages?"

With regards,
Hemen Parekh
27 June 2013

Saturday, 28 May 2016

Capital Goods Policy : Some Questions


On 25 May 2016 , NDA Cabinet approved Capital Goods Policy ( 2025 ) document


It is a very exhaustive and well-researched paper , providing a lot of statistics


These include following targets :


#  PRODUCTION

Rs 2.3 lakh*crore ( in 2014-14 ) to go up to Rs 7.5 lakh*crore in 2025

An increase of Rs 5.2 lakh*crore ( by the tenth year )


#  EMPLOYMENT

84 lakh ( in 2014-15 ) to go up to 300 lakh in 2025

An increase of 216 lakh ( by the tenth year )



Here are some " Back of the Envelope " type of calculations :


#  PRODUCTION PER EMPLOYEE

Rs 2.74 lakh ( in 2014-15 ) going DOWN to Rs 2.50 lakh*crore ( in 2025 )

Is this in to-day's RUPEE terms  ?  At today's SELLING PRICES   ?

If not , what would this figure be , if  NOT  adjusted for inflation  ? 




#  CAPITAL  OUT-PUT  RATIO

I believe , this is close to ONE , for most of the sub-sectors covered under Capital Goods Industry


If I am right , then the TOTAL CAPITAL EMPLOYED ( TCE ) currently in this industry , ought to be approximately the SAME as the value of production , ie : Rs 2.3 lakh*crore


Now , let us assume ( correct me if I am wrong ) that the INCREMENTAL CAPITAL OUTPUT RATIO ( ICOR ) for this industry is 4.0


That is , for each additional rupee of production , we need to employ , FOUR rupees of Capital


If so , to raise OUTPUT by additional Rs 5.2 lakh*crore , we would need to inject into the industry , Rs 20.8 lakh*crore worth of additional Capital , over a period of 10 years ( 5.2*4 )


In turn , this raises following questions :


Will private sector come forward to make such investments when the current Capacity Utilization of the industry is stagnating around 60 % only , for want of orders -  which , often need a lead-time of 2 years to execute  ?


And , when IMPORTS constitute nearly 40 % of the annual purchases of Capital Goods  ?


When capital goods manufacturers in the shrinking economies of Europe / Japan / China , are offering " deep discounts " to sell their products to Indian buyers ?


I know of a Machinery Manufacturer of Italy , who depends upon Indian Buyers for sale of 50 % of his factory output  !


When gestation period for setting up a factory to make Capital Goods , can easily take 3 years ?


I hope CII / FICCI / ASSOCHAM etc will conduct an ONLINE SURVEY of their Members and elicit their OBJECTIVE ASSESSMENT of the newly announced policy , in order to provide a QUICK FEEDBACK to the government


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29  May  2016

www.hemenparekh.in / blogs

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