India's Economic Position

India stands as the fastest-growing large economy globally, with projections indicating it will become the third-largest economy by FY30. However, this growth trajectory faces policy challenges that need to be addressed to sustain and enhance the country's manufacturing competitiveness. Tax reforms are required to make the playing field level for manufacturing in India.

Challenges for Investment in Manufacturing

Tax Uncertainty

The current GST structure creates significant uncertainty for manufacturers. The apparel industry, for instance, faces proposed rate changes that would restructure taxation across price segments. Under the proposed system, garments between Rs 1,500-10,000 would be taxed at 18%, while apparel above Rs 10,000 would face a 28% GST rate. Items under Rs 1,500 would maintain a 5% rate. This multi-tiered structure has raised concerns about potential impacts on consumer demand and industry employment.

Non-GST Tax Burden

Indian manufacturers face several taxes outside the GST framework that create additional cost burdens compared to regional competitors. These include electricity duty up to 25% of consumption charges, high duties on diesel fuel with multiple components, a coal cess of INR 400/ton, and Renewable Purchase Obligations at 29.91% for open access consumers. While exporters receive compensation through RODTEP, domestic producers bear these costs without offset. Importers do not face the non-GST tax burden thus creating a disadvantage for ‘Make in India’.

High Input Tariffs

The current tariff structure creates significant cost disadvantages for Indian manufacturers. Most raw materials face basic customs duty of 2.5-7.5%. Meanwhile, FTA partner countries often have zero duties on the same inputs, creating an uneven playing field for domestic producers. In the way “inverted duty structures” are measured, MFN rate are compared to MFN rates, sometimes ignoring the fact that most imports of the final product are coming from FTA partners at zero duty.

Trade Policy Misalignment

India's trade strategy raises several critical questions about its alignment with manufacturing goals. As the domestic Indian market grows India’s investment strategy would aim for backward integration to fulfil the rising demand for raw materials and intermediated in India. However, if they have not been put on the negative list when the FTA was signed, they are imported at zero duty. Given that input tariffs in India are higher and non-GST taxes are not borne by the importer, investing to produce in India is not attractive compared to investing in the FTA partner. The FTA strategy assumes that the production structure of the economy is static. It does not take into account planning for future investments, raising questions about long-term implications for domestic manufacturing capacity.

Recommendations for Reform

Creating a level playing field for manufacturing in India requires comprehensive reform across multiple areas. First, establishing tax certainty would create a stable and predictable environment for long-term business planning. Second, rationalizing the tax structure by moving toward a single-rate GST system would simplify compliance and reduce distortions.

The third crucial reform involves reducing input costs by lowering MFN import duties on raw materials to enhance competitiveness. Fourth, trade agreements need reform through the inclusion of sunset clauses to allow periodic reassessment of their impact on domestic manufacturing.

Path Forward

India's manufacturing sector holds immense potential, but realizing it requires addressing these structural challenges through comprehensive reforms. The success of these initiatives will be crucial in determining whether India can transform into a global manufacturing hub and achieve its economic aspirations. The way forward lies in implementing these reforms while maintaining a balance between promoting domestic manufacturing and ensuring international competitiveness.

The path to reform requires careful coordination between various stakeholders including government bodies, industry associations, and manufacturing enterprises. By addressing these fundamental challenges, India can create an environment that not only attracts investment but also sustains long-term manufacturing growth.