Capital goods: Outperformer in India’s export basket

• India’s capital goods export basket increased at a CAGR of 11.32% during 2006-16, the highest among the other categories.
• Exports from machinery grew at a CAGR of 12.52% and electrical manufacturing & equipment grew at a CAGR of 10.01% from 2006-18; emerging as major contributors to the increase in exports in the sector.
• Major products at 4 digit level are exports of turbojets, turbo propellers and gas turbines, telephone sets, parts and accessories of tractors, motor vehicles for the transport, light vessels and instruments and appliances used in medical surgery, dental or veterinary sciences.
• Government policies like National Manufacturing Plan (2012), Make in India (2014) and National Capital Goods Policy (2016) along with allowance of 100% FDI under automatic approval route played a significant role in boosting this sector.

TPCI-IBT-Business-Perspectives

India’s export has increased from US$ 181.26 billion in 2008 to US$ 323.06 billion in 2018. During the past 10-15 years, India’s export basket has undergone several transformations. An analysis of the growth trend across sectors between 2006-2016 shows that the capital goods sector has been the top performer in terms of export growth with a CAGR of 11.32%, followed by consumer goods, intermediate goods and raw materials.

Table 1: Product-wise growth in India’s exports

Product Compound annual growth rate (%, 2006-16) Export value in 2016 (US$ billion)
Capital goods 11.32 35.6
Consumer goods 8.23 117.5
Intermediate goods 7.24 84.7
Raw materials 5.85 21.7
All products 7.94 260.3

Source: WITS

The two main product categories in this sector are machinery and mechanical appliances and electrical machinery and equipment. Within machinery and mechanical appliances, exports of turbojets, turbo propellers and gas turbines were on top, growing at 56.31% from 2006-18. They were followed by 25.5% growth in taps, cocks, valves and similar appliance for pipes, boiler, shells, tanks etc.

Parts suitable for use solely or principally with internal combustion increased at 22.38% and exports of transmission in shafts grew at 38%. On dissecting the electrical machinery and equipment it can be found that exports in telephone sets grew by 45.19%, followed by electrical transformer at 23.48% and carbon electrodes at 23.11%.

Table 2: Growth of major products contributing towards the capital goods sector

Code Product label Compound Annual Growth Rate (%) (2006-18)
’84 Machinery, mechanical appliances, nuclear reactors, boilers 12.52
’87 Vehicles other than railway or tramway rolling stock, and parts and accessories 14.33
’85 Electrical machinery and equipment and parts 10.01
’73 Articles of iron or steel 6.76
’89 Ships, boats and floating structures 13.54
’90 Optical, photographic, cinematographic 12.4

Source: ITC Trade Map

One can also notice a significant contribution from the vehicles sector. The major components within this segment included in the capital goods group are parts and accessories of tractors, motor vehicles for transport (export growth of 26.43%) followed by exports in motorcycles and motor vehicles (export growth of 31.3%) from 2006 to 2018.

The Indian capital goods sector has shown a penchant towards increasing diversification, rising value-added production, and growing competitiveness. Several companies have reshaped their strategies towards greater geographical and sectoral diversification. Indian companies are also tapping into the international tenders market for projects with great success.

Government policies have extended a helping hand in enhancing the exports in this sector in last 10 years. Recognising the strategic importance of this sector, consecutive governments have come up with supportive measures such as National Manufacturing Plan (2012), Make in India (2014) and National Capital Goods Policy (2016).

National Manufacturing Plan in 2012 targeted to increase manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy and be able to contribute 25% of the national GDP by 2025. In 2014, the government introduced the Make in India initiative, which aimed to attract foreign investment into manufacturing and accelerate economic growth. In addition to these, initiatives such as opening major sectors to private players and allowing 100% FDI under the automatic approval route have triggered the growth along with tax incentives and lowering tariff on capital goods to zero or 5% in general.

The capital goods sector has also benefitted from demand within the Indian economy. Around US$ 4.5 trillion in investments are required in India’s infrastructure sector over the coming five years. Capacity addition in the power generation has increased by 6% annually over the past five years. The heavy electrical and power plant equipment sector accounts for around 69% of aggregate production capital goods within India.

The proportion of capital goods in India’s engineering exports has increased to 37% in 2017-18 as compared to just 12% in 1956-57, showcasing the increase in India’s competitiveness in engineering goods over the years. Moreover, market diversification has also played a major role, with the top 25 destinations accounting for 75% of India’s engineering exports in 2018-19. Exports are headed to destinations in both the developing and developed world led by US (15%), UAE (5.5%), Germany (4.1%), Nepal (3.8%), Bangladesh (3.5%) and UK (3.5%).

The government introduced the National Capital Goods Policy which was aimed at providing the much needed impetus to the sector and achieving the objectives of Make in India, The policy envisages increasing production of capital goods from Rs. 230,000 crore in 2014-15 to Rs. 750,000 crore in 2025. It envisages increasing exports from the current 27% to 40% of production while increasing share of domestic production in India’s demand from 60% to 80%, thus making India a net exporter of capital goods.

Even though the Indian capital goods sector has emerged as a major driver of export growth, imports in this sector are growing at a faster pace, hence making the sector less self-sufficient. Secondly, rise in imports from China is a cause of alarm, as Chinese companies are much more efficient due to various export policies. Lastly, the inverted duty structure discourages domestic value addition. Pitfalls of export promotion schemes need to be fixed as they are impacting competitiveness of Indian domestic companies. Besides this, lack of easy and affordable finance and infrastructure facilities are further playing spoilsport.

The National Capital Goods Policy recognises that Indian capital goods exporters still face significant non-tariff barriers in the international market. Moreover, small-scale players in particular suffer from a lack of understanding of requirements of overseas buyers. It aims to facilitate improvement in technology depth across sub-sectors, increase skill availability, ensure mandatory standards and promote growth and capacity building of MSMEs. Moreover, trade agreements will provide a major impetus, especially with developing countries, considering the growth in India’s overall exports to these regions.

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