Shyamal Majumdar: Just before the Budget, you had said that it must deliver on economic inclusion, incentivise job creation and increase investment in education and skilling. Has it lived up to your expectations?
It has done a reasonable job of ensuring job creation by increasing spends on public infrastructure by over 30 %. It also incentivises States to spend on infrastructure by providing loan guarantees on borrowings from the Centre. My expectation on investment in health and education was low and predictably nothing much happened there. The education budget did go up by around 12% but I’m yet to figure out exactly where the increases are reflected. In fact, the percentage of the GDP that is being spent for health and education is lesser if you factor in the cess that has been introduced in recent years. So, when it comes to education and health, the cess has replaced spending in the regular Budget. This has happened in the previous as well as the present government. That’s unfortunate because we need to incrementally grow our spending on these two vital ways of including people in our growth story.
I agree there are limits to what the Union Budget can do because health and education are State subjects. But several Central schemes can always incentivise States to do the right thing. I hope that next month we will see something systematically coming through to incentivise States to take the right steps for education in particular. The New Education Policy (NEP) is a sensible document, it has many of the right ‘whats’. I’m more concerned about the ‘how’; how will we actually implement the new education policy when it comes to schooling and higher education? I think it needs a lot more attention from both the Union and State Governments.
Shyamal Majumdar: The recent SEBI decision, making the separation of roles between chairman and MD at listed companies voluntary instead of mandatory, came almost two years after the Uday Kotak Committee’s recommendation for a strict split in roles. Do you think corporate India’s decision to lobby against it was correct?
First, do we need such guidelines in terms of governance, separation of powers, oversight and so on? Second, the regulator should have decided earlier on the guidelines. Otherwise, you have the classic moral hazard where the regulator has no choice but to relent simply because nobody follows the recommendations in the first place. There is a weakening of both regulatory standards and power. But the bigger point that I’d like to make is on these guidelines themselves. To give you an example, the commitment of two per cent of company revenue for Corporate Social Responsibility (CSR) began as a voluntary guideline. If a company did not spend that amount, it needed to explain why in its annual report. There was moral pressure on companies and you could see them falling in line. Two years ago, we made non-compliance a criminal offence and it had to be withdrawn too. To me, guidelines are a way of ensuring good behaviour. Otherwise, we try to be very prescriptive. I’m much more in favour of actually saying what’s the spirit behind the regulation and hold companies accountable for not adhering to it rather than checking a box.
Anil Sasi: The Budget seems to be making this almost impassioned plea to the industry to invest in the capex programme. The Centre has done the heavy lifting in terms of spending for the last four years. Industry is yet to come on board. Do you see something changing this year?
At the end of the day, new capital stock will get created when the capacity is close to being exhausted. At what level does exhaustion kick in? My sense is that it kicks in somewhere between 70 and 80% capacity utilisation. If animal spirits are high, then it’s closer to 70%. If animal spirits are low, then closer to 80%. But if you look at total capacity utilisation, you know that consumption will be back to 97% of what it was two years ago. So, if it’s still only at 97%, you don’t need more capacity. That’s the fundamental problem. That’s why the first step is to create more jobs and put enough money into people’s hands so that they can spend. I hope the service sector bounces back, urban trades power the engine of informal employment and the travel and tourism sectors pick up because they are employment-intensive.
When that starts to happen, it will create that much more consuming power. When you get well above 100%, then you need to invest in more capacity. I read about how public investment in infrastructure creation would spur private investment and so on. I don’t understand how. Yes, in certain sectors, it might, but how does one actually lead to the other? It seems to me that the most fundamental requirement is that consumption needs to grow, and consumption will grow if more people have more money to spend.
Anil Sasi: The post-pandemic recovery seems to have this very deep cleavage in terms of the bigger companies growing and the smaller players being left out of the recovery process. Does this delay demand recovery?
It does. I imagine it’s economically sustainable but I don’t think it’s socially sustainable in the long term. How do you address this? After the first lockdowns and the reverse migration of labour, the industry is getting companies to voluntarily adopt a set of standards for all their contractors to ensure minimal protection like health insurance for labourers, a short-term unemployment insurance and a basic support network. This will give them confidence, security and keep consumption going. The fact that agricultural employment has gone up in these last two years is a dampening development story.
Sunny Verma: In September 2019, the Finance Minister announced a sharp reduction in corporate tax rate, hoping it would kickstart investments. Then the pandemic hit. Do you think that was an error?
I don’t think so. It’s good to remember what the actual logic was, lower tax rates combined with fewer exemptions. That’s the right direction to go in, including for personal taxes. Three years ago, corporate taxes were around 18% of profits. In other words, the actual collection was 18% of profits. And what we advocated at the time was to reduce the corporate tax rate to 18% and remove all exemptions gradually with no grandfathering. And if you did that, you would, on a like-to-like basis, end up taxing everyone equally. What actually happens is that smaller companies end up paying the full marginal rate of tax while larger companies find ways of taking advantage of exemptions. Then you have a kind of convoluted, reverse progressive, regressive tax system. There’s scope to do something similar in the personal income tax slab; reduce tax rates, exemptions and widen the net so that you can bring more and more people into the actual income tax-paying category. We have a very limited coverage of people in terms of the spread of the income tax collection.
Sunny Verma: We lost Rahul Bajaj, who spoke his mind and truth to power across governments. Can any other industry voice fill that void?
First, the place of Rahul Bajaj will remain vacant forever because it’s very difficult for any one individual to fill his shoes. He was one of a kind. Our best way of paying tribute to him is by behaving and thinking like him and following his ethos. That most certainly includes being more independent, articulate, clearer, franker and forthright.
Harish Damodaran: You are one of the few industrialists who says that Indian industry doesn’t need any protection. You have also made a very strong case for India joining the Regional Comprehensive Economic Partnership (RCEP) and signing up for Free Trade Agreements (FTAs). How are you basing your argument?
I really believe that the best way for Indian industry to thrive in the long run is in an open economy. You end up disincentivising exports when you tax imports. Let me give you an example from our own sector. We’re in the engineering sector and export a reasonable amount of what we make each year, at least 20-25%. We have struggled this year with steep prices of our principal raw material or steel. The spiral is not only because of an increase in worldwide demand but also because steel carries a tariff in India, between 7.5 and 10%. This ends up spreading inefficiency and costs throughout the economy.
Now let’s take the labour-intensive garment sector. If you have a tariff on fabric, you end up not just affecting garment companies but other things than fabric. You might get advanced licences, duty and drawback. But what about thread, buttons and so on? You’re not going to keep track of what thread you used for export and what thread you used for local sales. The only way we can be a really effective long-term international player is if we keep our tariffs down, and they have to come down over time to zero. I think 10 years are a long enough period for us. Surely, we should be able to compete with the best in the world. And if we can’t, we don’t deserve to exist.
Harish Damodaran: With regard to capital goods, companies like BHEL are really struggling because of a lack of orders. Same is the case with equipment-manufacturing companies. How do you see the next two years?
This year we’ve been very pleasantly surprised with a pick-up in demand. Our boiler business is doing well. For the foreseeable future, it seems pretty solid and we hope that stays for another year or so. Then you’ll see an uptick in broader project activity happening and that will in itself stimulate consumption. For the power sector, the bulk of business comes from setting up coal-fired power plants. Here we need to come back to our sustainability goals. May be we have another couple of years of coal-fired power plants. In Glasgow, there was a lot of pressure on not just India, but other nations as well to actually commit to a zero coal scenario. We finally agreed to phase down instead of phasing out. But if we want to actually deliver on our commitments, I’ve not seen a single credible study that says we can achieve those targets without phasing out, forget phasing down. We will have to phase out coal. The sooner we start, the lower the level where it will peak. I hope we move in that direction soon.
That means BHEL and companies that are heavily reliant on coal-fired utility power plants, need to rethink their business, move to solar and renewables. BHEL is already doing so. It’s not going to be easy because the way in which the company operates is oriented around utility power plants. I think that’s what power companies should be worrying about, much more than competition or anything else. They should just worry about the whole industry going away over time.
P Vaidyanathan Iyer: You talked about an independent voice in the private sector. Yet when a young climate activist like Disha Ravi gets arrested in Bengaluru or when historian Ramachandra Guha speaks out, the entire IT industry in Karnataka remains silent. Nobody speaks out against dog whistles by political leaders against a certain community. In the US, many corporate leaders speak up but will Indian corporates do so?
Some industrialists do speak up. But industry as a broad category and social activism don’t go hand in hand. I’m not trying to make an excuse but social activism is not what we are about. I think for too many years, the Licence Raj bred a culture where we had to go to the Government for incentives or ask for protection and favours. Many of those regulations have gone since 1991. But that deferential mindset still continues, unfortunately. Be it a monsoon failure or airlines going out of business, we look to the Government for answers.
We cannot expect the Government to be all-powerful, the source of business, wealth and everything else. It’s there for governance. It’s not there to run the economy, make it work and make orders and sales happen for companies; that’s for companies to do. We can’t be dependent on the Government for our success, we have to be dependent on doing a good job, such that our customers want to buy our products and pay us a decent price for them. Only that shift will make us much more independent, even in the way in which we speak to the Government.
P Vaidyanathan Iyer: In the book, you also mention how a good government is one which does not lead itself but creates a space for the private sector. How do you see the seven years of the NDA Government in this context?
The first few years of the NDA Government were part of that broader trend. Somewhere in 2017-18, the direction changed and greater power was being given to bureaucrats, greater discretion was being provided to their ability to implement the tax code and so on. Against that, there has been a systematic decriminalisation of civil offences. There’s much more to be done. A report came out earlier this month listing 16,000 individual criminal offences in commercial law. That’s a crazy number. I think the authors of the report have done us a huge service by documenting the numbers. I hope that that the report will receive the kind of attention in Government that it deserves.
Sandeep Singh: The RBI recently decided to hold rates. How much role can interest rates play in pushing growth when the overall economy is inflationary?
What the RBI did was to keep rates unchanged. It’s not like it lowered or raised them. I think it is betting on inflation being temporary and hoping supply chain disruptions will sort themselves out. The RBI is one part of the story. What the Finance Ministry does, by investing in infrastructure to kickstart economic activity, is the other part. It is the right combination but my big concern is investment in social sectors.
Anil Sasi: How complicit is the industry in the Government changing tack and pulling out of the RCEP last minute?
The industry argued in favour of protection as it did in 1991, 2000 and 2010. The Government’s job is to hear the industry out but do what is in national interest. In the last few years, from 2017 to early 2021, there was a trend of increasing tariffs. I think in the last year, there has been some rethinking in the Government on trade.
There’s now a much more positive attitude to trade, international engagement and even to FTAs. At present, India is negotiating FTAs with the UK, UAE, Australia and the EU. India is now keener than the US on FTAs. Let’s see what happens. Unfortunately, there’s no movement on RCEP given our current environment with China. Meanwhile, let’s work on the others.
Anil Sasi: Do you see the industry taking advantage of corporate tax rates?
I hope so. There was a cut in the overall rate to 25% for existing companies. And then there was the even deeper cut for new manufacturing companies. The last Budget extended the date for these new companies by another year. That’s a good move. However, to expect widespread capacity creation in the absence of consumption growth is just not realistic.
Pranav Mukul: Apart from the Licence Raj mindset, do you think corporates keep silent for fear of being targeted? In the Supreme Court, some petitioners said that the Prevention of Money Laundering Act was being used arbitrarily to suppress dissent.
Maybe it does in individual cases. I think you can be independent without being aggressive or attacking. Expressing an independent and alternative viewpoint reasonably won’t get companies or individuals into trouble. I think the Government is open to that. And second, the Government is not a monolith. There are different voices in the Government, be it the bureaucracy or Ministers. I give an example in the book of how, after I wrote a couple of editorials criticising India dropping out of RCEP, I went to meet a particular Minister on a completely different matter. And he said to me, “I read your article on RCEP, I agree with you fully and was going to call you but didn’t because I’m a member of the Government.” You have different views in the Government. When we speak about what needs to be done, we strengthen the hands of reformers who want to move in that direction. It’s not an issue of getting into trouble and fear and so on. We can speak in a manner that’s independent, forthright and polite at the same time.