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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