Budget 2024: Engineering sector seeks policies that ease liquidity woes, encourage R&D

Engineering firms are grappling with growing financial problems and the government should allocate budget funds to improve the sector’s liquidity, industry representatives say.

“Banks should provide liquidity to the engineering industry, especially SMEs, for purchasing new machinery, equipment and technological upgrades so that smaller engineering firms can produce world-class products, both in terms of quantity and at affordable prices, to compete internationally,” says Arun Shukla, managing director, Vikramaditya Engineering, an SME engineering firm based in Baddi.

He advocates for increased government incentives for capital goods and machinery; these are currently imported, which is a major drain on the working capital of engineering firms. “The finance minister should allocate significant funds for industrial infrastructure for SMEs, as China has done, such as shared sewage treatment plants, research labs, logistics centres, uninterrupted power supply, etc. Unnecessary statutory and regulatory burdens that hamper productivity must be removed. Moreover, labour reforms should be implemented rigorously so that exploitation can be curbed. SME clusters should be announced for products. Collateral-free finance should be made available at low interest rates for development, automation, R&D and expansion,” Shukla adds.

As the largest industrial sector in India, the engineering sector accounts for 27% of the country’s factories. It sees demand as there is expansion of manufacturing capacity in infrastructure, electricity, mining, oil and gas, refineries, steel, automobiles and consumer durables. The capital goods sector, a significant part of the engineering industry, contributes 12% to India’s industrial output and 1.8% to its GDP.

According to India Brand Equity Foundation (IBEF), the engineering market in India is expected to reach $125 billion by 2027, growing at a rate of 11.68% per annum from $52.98 billion in 2022.
Sorab Agarwal, executive director of Action Construction Equipment Ltd, says the finance minister should use the budget to ensure easy availability of credit and a uniform Goods and Services Tax (GST) for SMEs. Engineering Exports Promotion Council (EEPC), the apex body for engineering exports, says most of its members are SMEs.

Besides, says Agarwal, increased funding for green hydrogen, the “fuel of the future,” along with new financial incentives and subsidies, will propel Bharat towards a green hydrogen economy. “A greater focus on fair trade policies, especially those focused on combating China through anti-dumping policies, will go a long way in boosting the confidence of domestic producers,” he adds.

The government’s policy direction in this fiscal will have a huge impact on the stainless steel industry, says Anubhav Kathuria, Director, Synergy Steels Ltd. He advocates for continued emphasis on infrastructure spending, modernisation of rail infrastructure and a more targeted approach to stainless steel policy-making.

Shivdutt Das, executive director of Vishwa Samudra Group, recommends that infrastructure investment should be at least 10% of GDP. He believes the budget should have a strong focus on infrastructure development in key areas. “I expect a greater focus on India’s coastline and significant spending on urban mobility solutions,” he says.

Engineering export companies want easier compliance
Engineering exports from India play a major role in the country’s export structure. This sector is the largest contributor to exports, accounting for 24% of the total and about 40% of manufacturing exports. The country’s competitiveness in this area is growing. Interestingly, SMEs account for 35-40% of the total engineering exports and are key providers of employment.

EEPC India suggests restoring interest subsidy to 3% for 410 tariff lines and increasing the subsidy rate to 5% for MSME manufacturers exporting under any tariff line. Arun Kumar Garodia, chairman, EEPC India, points out that the repo rate has been increased from 4.4% to 6.5%. “Merchant exporters have low profit margins and the cost of credit significantly impacts their profitability. Hence, we have requested for extension of the interest equalisation scheme to merchant exporters with a subsidy rate of 3%.

The industry body said the popular interest equalisation scheme has been extended by two more months exclusively for SMEs. The policy directive also said that claims from non-SME exporters will not be accepted after June 30, 2024. The problem is that merchant exporters and large exporters were eligible for the scheme benefits for 410 tariff lines. Many of these industries are labour-intensive and have low profit margins, making them vulnerable to competition from global competitors. The EEPC maintained that denying the scheme to merchants and large exporters will hurt them greatly.

EEPC India has also proposed to restore the weighted deduction of 150% granted on R&D expenses and 100% depreciation of investment in case of solar power generation by MSMEs. Such deductions were earlier granted in case of wind power generation.

The apex body also came up with a proposal supporting 25% income tax bracket for partnership firms, LLPs, sole proprietorships, MSME manufacturing units, provided they invest 10% of the money in their business. This will give MSMEs an additional cushion to expand and improve their cash flow. To ensure that this 10% stays in the business, there may be a condition that partners can withdraw only up to 90% of the profits, it added.