Is real estate to blame, for the snail-paced growth of manufacturing in India? We examine the sector’s contribution to the ambitious ‘Make in India’ campaign
The slow pace of manufacturing growth in India is often a subject of criticism. Many argue that in spite of reasonable buying power, resources, technological know-how, and availability of funds, we are struggling to match countries like Vietnam or Bangladesh, in terms of manufacturing sector growth. Some even blame the real estate sector, for the snail-paced growth of manufacturing in India. This raises several crucial questions:
- Is real estate a victim or the cause of snail-paced manufacturing in India?
- Why has ‘Make in India’ been just rhetoric in Indian real estate?
- Is it only cost that is deterring the use of indigenous products or are there larger ecosystem issues?
- In all fairness, export volume and dependence on finishing products in real estate, have increased since 2014. If it was China yesterday, today, we have other global markets like Vietnam, Thailand, Bangladesh, etc., to import sanitary products and electrical items. Cost arbitrage is the reason why indigenous manufacturing is not making any headway. While foreign companies remain wary of setting up manufacturing bases in India, even local manufacturing companies find high corporate tax and low labor reforms a big hindrance.
How much does Indian realty contribute to ‘Make in India’?
Requesting anonymity, a developer involved in affordable housing projects points out that profit margins are hardly in double-digits nowadays. The price difference between Chinese products and the overall project profitability is the same. Cost arbitrage cannot be ignored and then, in India, GST on products is a further challenge. According to him, even with a small project, he is using export items even though not directly importing products from China. Quality, of course, is slightly superior in importing from the international market, says the developer.
Abhishek Kapoor, CEO of Puravankara, disagrees and wonders why we say that we have not moved ahead on Make in India. According to him, the civil structure is almost entirely done in-house; finishing, tiles, etc., are being manufactured in India; and most of the CP and sanitary factories are here. Hence, he doesn’t think there is any dependency, as far as construction is concerned, unless there is a big arbitrage over the product.
Recently, when there was arbitrage on steel, the government took corrective measures on customs duty. Similarly, when there was inflationary pressure due to fuel prices, the government took corrective measures as commodity prices affect us directly. The same is the case with aluminum and copper, UPVC pipes, or any product.
Nevertheless, the fact remains that there is a huge growth opportunity,‘Make in India’ and it is not just limited to real estate. The largest commodity of real estate – cement and steel – is mostly manufactured in India. So, manufacturing and Make in India should be definitely picked up, especially in the current geo-political scenario.
“In a growing country, you consume more and more resources. One of our largest trade deficits is with China. So, overall it is not that bad, as the country is growing and if you are importing to create more and more capital goods, you have to factor in the incremental demand in the country,” says Kapoor.
Naushad Panjwani, MD, Mandarus Partners, believes there is an additional angle of forex control. If this has restrictions on their investing abroad and investing in India is the compulsion, then, among other options, the land is the most lucrative. “It is inflation-proof, relatively safe from theft (apart from squatters), and circle rates in states like Gujarat, Andhra, and a few other states are intentionally kept low,” says Panjwani.
Indian realty’s manufacturing conundrum
- Developers import nearly USD 10 billion worth of building construction products and services every year.
- These imports not only include products like flooring, cement, and home automation but also services like technology, consultancy, and architects.
- Imports in luxury projects account for nearly 30%-50% of the total project cost.
- The Prime minister has called the sector to perform a cost and benefit analysis of ‘Make in India.
The road ahead
The question that remains is: ‘How can real estate consume more out of ‘Make in India’ manufacturing? However, the question in itself is flawed, if it is not in sync with the larger ecosystem. Setting up and making a manufacturing unit in India comes with its own challenges. Cheap labor alone would not give India any edge or cost arbitrage over the export items. ‘Make in India’ has to move beyond the rhetoric of nationalism and reforms have to be introduced at each and every level, ranging from lower corporate tax to labor laws and making the country a happy hunting ground for the manufacturers of the world.
Reforms needed to support local manufacturing
- Lower corporate tax
- Tax benefits to encourage exports
- Labor reforms
- Contract enforcement
- Commitment against retrospective taxation
Businesses are all about profitability and quality to the clients. If foreign manufacturers have an advantage in these two critical areas, why would anyone, including the builders, opt for a locally manufactured product? So, while Indian manufacturers are way behind their global peers in exporting local products, they are equally lagging in selling to Indian businesses. Hence, real estate alone cannot be blamed for problems that are a part of the larger ecosystem.