Government has done a lot on ease of doing business compared to what it was few years back, but effective tax rates in India are still very high. This is not just about corporate tax.
TV Narendran, MD & CEO Tata Steel takes over as CII president at a time when the economy is in a trough but India Inc has turned in stunning results for FY21. Narendran tells FE’s Shubhra Tandon and Shobhana Subramanian the jobs will come once there is more construction, manufacturing and more economic activity in remote parts of the country. Excerpts:
Given capacity utilisation at just 65% and capex unlikely to go up, do you not think corporate India should pay higher taxes for two years at least to help the government with stimulus?
Any tax rate should be looked at longer term and not everyone in India Inc is profitable today. There were industries like steel which were stressed for the last 10 years and had the most NPAs, now suddenly it looks like they are making lot of money. So, to me these things will change, and one needs to take a slightly longer term view so that we attract investments.
How soon do you see investment cycle turning?
Even before the pandemic, demand was slipping. Private sector investments will come in when there’s both demand and profitability. Only demand without profitability may not make it affordable for the private sector to invest because everyone is sitting on a stretched balance sheet. But investments are already happening. For instance, the steel industry is seeing higher utilisations and prices have gone up. Between the major steel companies we have announced Rs 50,000-60,000 crore of capex over the next three years. Tata Steel itself is investing Rs 25,000 crore.
We need to look at it in an aggregate…
The way I see it, the starting point is what was announced in last year’s Budget when the government said it was going to spend lot on infrastructure. As money flows on to the ground you will see positive impact on auto, steel, cement, construction and mining equipment etc. So I would say that as growth comes back, vaccination picks up, you will see investment cycle start. Some of it is already happening with Ola building largest electric two-wheeler plant in the world, auto components for instance is also doing well.
In India, despite growth, jobs are a challenge. What is CII’s estimate for job creation in the next three years and which sectors would lose and which will gain?
It depends on where is it that you are getting growth. Infrastructure spend is a big multiplier, it creates jobs in all parts of India. Construction is an important sector to employ people who are transitioning from an agri to an industrial economy. India’s growth over the last couple of decades has been more services led, more urban India led, like the IT sector, which is creating jobs in the bigger cities and not in other parts of the country. So, if you want to have growth and job creation, you need manufacturing, you need construction and economic activity in remote parts of the country.
For India Inc, employee headcount has grown at CAGR of just 2.2% in the three years to FY20. Apart from financial services and IT, all other sectors have not hired on a net basis. Your views..
It does not mean you have not hired. In Tata Steel for instance, eight people might have retired but we hired four. In a global world you also need to be competitive. So, it is about creating more productive jobs, expanding capacity, creating jobs in the supply chain etc. Also, we need to see how much of it is formal and informal because even companies will have permanent employees and lot of contract workers.
If you were to change one government policy which one would it be?
Government has done a lot on ease of doing business compared to what it was few years back, but effective tax rates in India are still very high. This is not just about corporate tax. If you look at the mining industry, India is geologically so rich but we end up paying 65-70% as effective tax rate. Corporate tax rate is just one part of it. We need to look at corporate tax rate plus GST plus all the royalties and cess, which makes India one of the highest tax countries. If you take away all the money even before it hits the ground, where will you get investments? Also, infrastructure expenditure is long overdue. As much as we try to be as competitive inside the factory gates, if it takes 20 days for a ship to get a berth, or move goods from one place to another and cost of money in India is still high, it all adds to the inefficiencies in the system, where nobody gains. It is not a policy issue but its just a directional or mindset issue which we need to address.
Do you think the government’s attitude in not honouring international arbitration is hurting India’s reputation?
More than that, even the contractual issues which we have not honoured is a bigger damage. Indian investors can live with issues around contractual sanctity and policy certainty because they are used to it. However, foreign industry wants policy certainty. They say they can budget in high and low cost, but certainty is what they want so that they can invest for longer periods of time. As part of policy certainty I would say compliance to contracts, honouring contracts, which are not dependent on election outcomes is a must, which otherwise hurts India’s credibility.
How would you assess the government’s efforts to make sure these things don’t happen?
There is acknowledgement that this is an issue. However, not everything can be solved in Delhi, so there needs to be work done with the states in some cases. There may not be a solution yet, but the industry is being heard that these are important issues.
Does India Inc face challenges in terms of quality of talent, skills availability etc which is why the hiring numbers don’t look good and unemployment is so high?
It is an important issue and we have not handled it well as a nation, because we are not willing to pay a premium for good skills. We have not got that culturally right. As a society we are unhappy to send people to good vocational colleges and would rather go to some unheard of engineering college. It is not just about training people, I think industry needs to be willing to pay more for quality skills, like we do to quality engineers. Society needs to give that respect to the vocational skills, which we don’t give. So lot more needs to be done, I accept that.
Of the three scenarios for GDP growth –6.5%, 9% and 5%, which to you looks most likely given the looming threat of third wave of Covid and slow vaccinations?
For this year we have said that we are expecting 9.5% growth, but that is not saying much because we are just catching up with last year and going back to where we were two years ago. The vaccination drive is slow for now but what we feel is that in the next two months the supply will be sufficient but given the hesitancy towards vaccination in rural India there will be a challenge of how to get people vaccinated when there is enough of it. If we are not able to vaccinate all, then you are back to 5%-6.5% growth, which is not good enough. Not just for this year, but for the subsequent years, what we do in the next three to four months is very critical. So we are focusing on getting more and more people vaccinated, while right now its a supply issue, it will be a shifting bottleneck.
Does CII have a plan for corporates to create housing complexes for migrant labourers?
Between last year and this year lot of corporate India has been proactive in providing facilities for migrant workers, which is why the migration of last year was not seen this time around. The problem was more visible to everyone last year, and hence people were conscious that it needs to be done. Whether you look at large construction companies or large manufacturing ones, they took care of lot of migrant workers housing needs.
As sustainability is a theme for CII in the coming year, where does India Inc stand on spends and adoption of sustainability and what will be CII’s role?
The reason we put sustainability and technology in addition to competitiveness and growth is because latter two are hygiene issues, but sustainability and technology will be more and more dominant in our overall conversations both at the industry and national level. Everyone is waiting for India to make a net zero announcement. Once you take a position, then you need a policy roadmap to get there because it will be an expensive and complex transition. Also it will be an impactful socio-economic transition because coal is the centre of this discussion, so what happens to coal industry and thermal power plants in India will need to be discussed. So, the world is evolving and India needs to take a point of view and then evolve the regulation, which is where CII comes in. Secondly, look at global best practices, discuss with the government and play a role in shaping the policy, rather than change it after it is made. Third is to work with the industry because some of the larger companies with footprints outside of India especially in Europe are more conscious of what is happening. Many others think it is just a compliance issue. But it will impact business, because if you are not conscious of the laws evolving there, the companies will be at disadvantage. Cost arbitrage that we have on labour and all else will be negated with the carbon tax that you may have to pay to sell into Europe.
What trend will be most dominant in corporate India in the next 3-4 years?
Digitisation of all processes, which has not happened enough and is still evolving. The way we look at work processes will change. Work from Home is a case in point, which works and gives employees flexibility which means companies can attract better talent, give more flexibility and get the outcomes you want. It is not just about embedding technology but also re-thinking in multiple ways. We are just scratching the surface and India has a huge opportunity because India has a technology capability and we are creating manufacturing facilities, so while other industries are transforming to industry 4.0, we can create industry 4.0.
Does CII have a view or recommendation on hybrid work culture going forward?
Fundamentally it will depend on the sector and industry that members are in, and also maturity. Work from Home is not easy if you have not invested enough in IT. Given that 80% of our members are MSME, they may not have the ability to invest significantly in IT infrastructure, so we need to factor that in.