Capital goods refer to machinery and equipment used in the production of other items. These include machine tools, industrial machinery, construction & mining equipment, electrical equipment, and so on. The capital goods industry is the “mother” of all manufacturing industry and is of strategic importance to national security and economic independence. For this reason, industrial policy following Independence placed strong emphasis on the sector, with several huge public sector enterprises being set up to boost production, including Bhel, BEML, HMT and others. Today, the capital goods industry contributes about 12% to manufacturing output, and its progress is closely watched as it mirrors investment activity and forecasts the next growth cycle.
The capital goods sector has grown rapidly at over 14% CAGR from R1.6 lakh crore in 2005-06 to R3.1 lakh crore in 2010-11. It provides direct employment to 14 lakh persons. Almost all sub-sectors have outperformed the general industrial index growth during this period. The largest sub-sectors of heavy electrical and engineering goods have done well in the last five year plan.
However, the capital goods sector has lagged in recent years following slow growth in the world economy. In fact, the rate of growth in the sector for April-September of this year stands at a negative 13.7%. User sectors, such as infrastructure, construction, and so on, have cut down on capital expenditure and deferred orders. Users have also increasingly moved to importing capital equipment, given embedded technologies. Indian capital goods are subject to relatively high indirect taxes as compared to overseas manufacturers. At the same time, a 0-5% customs duty on imported capital goods encourages trading. Lack of finance deters small manufacturers.
If manufacturing is to grow at 12-14% as envisaged under the National Manufacturing Policy, the capital goods sector, the core of manufacturing, should grow at around 17-19%. The target for the 12th Plan has been envisaged as close to 17% to multiply turnover 2.5 times. At the same time, it is proposed to double the employment arising out of the sector and create an additional 14 lakh jobs by the end of the 12th Plan.
Various policy initiatives need to be put in place to build the competitiveness of the domestic industry. Industrial cluster parks, common facility centers, and cluster competitiveness can help to create an ecosystem for the development of the capital goods industry. A synergy of large and small enterprises would be needed to modernise and upgrade manufacturing facilities.