Editorial Today – India’s Capital Goods Sector Policy

Issue: Government approves capital goods sector policy.

Basic Economy: Capital goods and Consumption goods.

Characteristics of capital goods: They themselves don’t get transformed in the production process.

Relation between Capital and consumer goods:  There is a trade off between consumer goods and capital goods.

Background: The idea of a ‘National Capital Goods Policy’ was first presented  in the ‘Make in India’ workshop.

Vision of the policy: Increasing export, employment and Building India as the World class hub for Capital Goods.

Issue

• Government approves capital goods sector policy

Basic Economy

• All final goods produced in the economy are of two kinds:-

1. Consumption Goods

2. Capital Goods

Consumption goods

• Goods which are consumed to satisfy the present need of consumer are called consumption good. Human being must consume to survive and thus consumption goods sustain the basic objective of the economy. For example food, milk, car, shoe, pen, refrigerator, etc are called consumer goods because these satisfy immediate need of the customer. In short a consumer good is any good purchased for consumption and not later used for the production of another consumer good.
• Consumer goods are further classified as durable and non-durable goods. Durable goods are those which can be used again and again over a considerable period of time whereas non-durable goods are those which is utilised fully in a single act of consumption. For example car, shoe , pen etc can be consumed over a period of time but milk, fruit, etc are consumed immediately in a single act of consumption.
• It is important to note that it is not in the nature of the good but in the economic nature of its use that a good becomes a final good. A fruit bought at a grocery store and immediately eaten is a consumer good. An identical fruit bought by a shop to make apple juice is a not final good. The difference lies in its utilization.

Capital Goods

• Capital goods are durable goods which are brought for producing other goods but not for meeting immediate needs of consumer i.e. capital goods are repeatedly used in the production of other goods and services. Examples of capital goods are machinery and equipment.
• Of the total production taking place in the economy a large number of products don’t end up in final consumption and are not capital goods either. Such goods may be used by other producers as material inputs. Examples are steel sheets used for making automobiles and copper used for making utensils. These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods.

Characteristics of capital goods

• While they make production of other commodities feasible, they themselves don’t get transformed in the production process.
• They are also final goods yet they are not final goods to be ultimately consumed. Unlike the final goods (consumption good) that we have considered above, they are the crucial backbone of any production process, in aiding and enabling the production to take place.
• These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production.
• They gradually wear and tear, and thus are repaired or gradually replaced over time.

Relation between Capital and Consumer goods

• There is a trade off between consumer goods and capital goods. If an economy produces more of capital goods, it is producing less of consumer goods. Allocating scarce funds to capital goods, such as machinery, is referred to as real investment.
• To achieve long run growth the economy must use more of its capital resources to produce capital rather than consumer goods. As a result, standards of living are reduced in the short run, as resources are diverted away from private consumption. However, the increased investment in capital goods enables more output of consumer goods to be produced in the long run. This means that standards of living can increase in the future by more than they would have if the economy had not made such as short-term sacrifice. Hence economies face a choice between high levels of consumption in the short run and the long run.
• Thus every country wants to increase in capital goods production to increase productive capacity of the economy in future.
• India’s capital goods policy is a step in this direction.

Background of the Policy

• The idea of a ‘National Capital Goods Policy’ was first presented by the Deptt. of Heavy Industry to the Prime Minister in the ‘Make in India’ workshop held in December, 2014.
• The policy has been finalized after extensive stakeholder consultations with industry, academia, different ministries etc.
•  The key recommendations and elements of the policy have been formulated to support and boost development of this crucial sector.
• The Department of Heavy Industry had set up a Joint Taskforce with Confederation of Indian industry (CII) as an attempt to ensure that the formulation of the Capital Goods Policy is done in the most democratic manner and the recommendations would carve out a roadmap for Capital Goods sector to become a part of global value chains apart from mere supply chains.
• Key policy recommendations include strengthening the existing scheme of the DHI (Dept of Heavy Industry) on enhancement of competitiveness of Capital Goods Sector by increasing budgetary allocation for increasing scope to further boost global competitiveness in various sub sectors of Capital Goods.
• The aim is to enhance the export of Indian made capital goods through a ‘Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)’.
• Launching a Technology Development Fund , upgrading the existing and setting up new testing & certification facilities, making standards mandatory in order to reduce sub-standard machine imports are other measures envisaged.
• It also aims to provide opportunity to local manufacturing units by utilising their installed capacity and launching scheme of skill development for Capital Goods sector.

Vision and Summary of the Policy

• This is the first ever policy for Capital Goods sector with a clear objective of increasing production of capital goods from Rs.2,30,000 crore in 2014-15 to Rs.7,50,000 crore in 2025 and raising direct and indirect employment from the current 8.4 million to 30 million.
• The policy envisages increasing exports from the current 27 percent to 40 percent of production. It will increase the share of domestic production in India’s own capital goods demand from 60 percent to 80 percent, thus, making India a net exporter of capital goods.
• The new policy proposes measures to improve availability of finance and raw material, and promote innovation, productivity, quality and environment-friendly manufacturing practices.
• The policy will facilitate the use of technology across sub-sectors, increase skill availability, ensure mandatory standards, and promote growth and capacity-building in micro, small and medium enterprises.The heavy industry department will implement the policy provisions.
• The Policy will help in realising the vision of ‘Building India as the World class hub for Capital Goods’. It will also play a pivotal role in overall manufacturing as the pillar of strength to the vision of ‘Make in India’.
• The Policy will look to create 21 million jobs by 2025.

If these policy projections work out,  the size of the industry will become three times in about 10 years, which will take the growth rate of India to about 13%.