Protectionism not the answer for an Indian manufacturing sector in need of support and investment

How the government responds to industry complaints about cheap imports will reveal much about its plans for India’s manufacturing sector
New Delhi cannot afford to go slow in creating a better business environment or turn away firms looking to grow in the country

Charu Bahri

Published: 8:15am, 17 Jul 2023

Why you can trust SCMP

Sandeep Singh, the managing director of Tata Hitachi, called in June for a level playing field in the Indian construction equipment market. Tata Hitachi – a joint venture between Tata, one of India’s biggest multinational conglomerates, and Japan’s Hitachi – manufactures and sells excavators, loaders and other construction equipment.

Singh spoke of “unheard of” undercutting by Chinese players that was eating into the margins of domestic construction equipment brands, on the back of which he said Chinese brands had cornered nearly 20 per cent of the Indian construction equipment market. His comments come at a delicate juncture, on the heels of a crackdown on Chinese smartphone makers in India and at a time when India-China relations are “not normal”, as Indian Foreign Minister Subrahmanyam Jaishankar put it.

The Indian Construction Equipment Manufacturers’ Association (ICEMA), an apex industry body, said that the Indian construction equipment industry faces competition from cheaper imports in earth-moving, material-handling and other product segments. According to ICEMA, the Indian construction equipment industry is the world’s third-largest, after China and the US. But it is a distant third with a marginal share in global exports

Cutthroat competition in the Indian construction equipment market is an outcome of the sector’s impressive growth. Construction equipment sales grew 26 per cent year on year in the previous financial year, crossing 100,000 annual sales across all segments, a result of the government’s continued focus on infrastructure development and mining.

Singh said the construction equipment manufacturing industry had asked the central government to look into the matter and help ease the effects of the influx of Chinese players. He said he hoped there would be “a solution that will protect the interests of manufacturers” like Tata Hitachi, JCB, Hyundai, Volvo and Larsen & Toubro.

The government’s response will speak volumes about its long-term vision for the construction equipment sector in particular and, more broadly, for India’s development as the next global manufacturing hub. Protectionism might be a quick fix, but it is not necessarily the best way forward for India.

Workers stand on scaffolding at a flyover construction site in New Delhi on November 21, 2022. Photo: AFP

“Instead of resorting to protectionism, the government should address the manufacturing concerns of the construction equipment industry,” said Baldev Raisinghani, an industry veteran, adviser to Kram Infracon and former president of the Jaypee Group, one of India’s leading contracting companies. “Only the fittest will survive in a tough market, and to be fit, domestic companies need inexpensive core enablers of manufacturing. That’s where the government should step in.”

Logistics costs are 14 to 16 per cent of India’s gross domestic product, roughly double the 8 per cent global average. India has expanded its road network by about 30km per day during the past year while also focusing on creating waterways, a cheaper form of transport. Going forward, a national logistics policy and the PM Gati Shakti initiative are expected to cut logistics costs.

01:52

India inaugurates Delhi to Mumbai expressway amid infrastructure push to catch up with China

Other challenges facing the Indian construction equipment industry are rising interest rates, high steel and other commodity prices, and power shortages. Last year, high steel prices were implicated in elevated product costs and the lower-than-expected demand for construction equipment.

Another gap to be bridged is the localised content in construction equipment, which is only 50 per cent, according to the ICEMA. This suggests the industry is still dependent on imports for critical components.

While localisation is a gradual process for any company, full localisation covers both product and people. For instance, Zoomlion India, a subsidiary of a Chinese firm that produces mobile cranes, tower cranes, earth-moving, foundation and concrete construction equipment, started to localise in 2018 “after sensing a uptick in the business opportunities in India”, said the firm’s business director Danish Kamal Lari.

Zoomlion’s localisation started with training and appointing Indian staff to key technological positions in keeping with its vision of establishing “a local entity with local operations with the support of the Chinese principal”, Lari said. Now the focus is on localising products, with the firm moving to establish a manufacturing plant near Pune.

Raisinghani said localisation should be a government focus. To this end, “a dedicated production-linked incentive scheme for the construction equipment industry would encourage investment from domestic as well as global manufacturers, thereby helping the industry reduce import content and enhance capacity to meet the growing demand effectively and realise its full potential,” said Dimitrov Krishnan, ICEMA president and managing director at Volvo CE India.

A worker welds an iron machine at the construction site of a flyover in New Delhi. Photo: Reuters

In particular, encouraging investment in the development of more environmentally friendly products could help India achieve its commitment to cut its emissions to net zero by 2070. In May, Minister for Road Transport and Highways Nitin Gadkari called for the development of construction equipment running on alternative fuels or electricity.

Widening the portfolio of construction equipment made in India would plug gaps in the existing array as well as boost manufacturing, a highly desirable goal.

Manufacturing, which accounts for merely 17 per cent of India’s gross domestic product, has been floundering of late. It grew a paltry 1.3 per cent in the last financial year and 3.4 per cent in the last five years. Meanwhile, China accounted for 30 per cent of global manufacturing output in 2021, 10 per cent higher than a decade previously.

Scale is frequently cited as China’s strength. For India to achieve a similar scale – or for that matter, for it to evolve as an Asian alternative to Chinese low-cost manufacturing – it cannot afford to go slow in creating a more enabling business environment. Neither should it turn away brands with a vision to grow, in every sense of the word, in India, no matter where they come from.

Charu Bahri is an India-based journalist who writes on health, the environment, society and industry