Policy uncertainty, cost of doing business dent investor confidence, says CII President

T.V.Narendran   | Photo Credit: Debasish Bhaduri

India’s corporate tax rates may have been cut, but the effective cost of doing business remains high if you factor in the cesses and the mandatory CSR spending norms, Confederation of Indian Industry (CII) president TV Narendran said. The Tata Steel global chief executive and managing director said the sanctity of contracts has also been fraying. “It should not be that somebody has won or lost an election and the validity of contracts then suffers. The Union as well as State governments need to do more to ensure sanctity of contracts and policy certainty to boost investor confidence in India,” he emphasised, while speaking on structural challenges for the country’s manufacturing sector, vaccination programme and the economy in a free-wheeling interview with The Hindu. Edited excerpts:

What are members saying on the state of the economy, though it may be too early to call it a post-Second-wave recovery?

First, there is relief that COVID 2.0 is behind us in some sense. Second, global macro-economic conditions are much more positive than when we came out of the first wave. Most governments across the world are spending a lot of money, revising growth rates upwards at least in the developed world. China has had a V-shaped recovery and is already back to pre-pandemic levels. So there’s a lot more optimism on the global recovery. This time last year, no one thought vaccines would be available so fast. So, in many ways, there are positives. COVID 2.0 was more of a humanitarian issue than an economic issue. COVID 1.0 was a bit more economic, with the humanitarian impact becoming visible as migrant workers started going back.

The key point is how will the rural markets behave? Because last year, the rural markets led the recovery in July. The rural markets came back strongly because there was a lot of labour available locally and a good monsoon. This year, maybe three-four weeks back, we were more concerned because the impact of COVID in the rural markets was not so visible as it is for the urban markets. But what we have been hearing from some of our members is it's not as bad as we had feared it would be. If you talk to the tractor manufacturers, their concern is a little bit more on cost pressures rather than demand growth. We ourselves feel that the agriculture sector will grow 3%-3.5%, which is close to last year. I would say ‘cautiously optimistic’ is probably a good way to describe how we feel. But by the time we have the next National Council in July, we'll probably have a little bit more insight from our members.

It's almost 10 years now since the retrospective tax was unleashed in India and major cases linger on despite the government losing global arbitrations. Is there a chilling effect from this on global investors’ perceptions?

At a broader level, one theme which comes to us from global companies looking to invest in India is Policy Certainty. It's important to look at high and low costs, but they say, as long as there is a certainty of policy, we will plan for it. If there's a high tax rate, fine, you choose whether to come to India or not. But once you come, you stick to that and budget for that.

So more than anything else, I think it’s important if you want to attract long term investment in India from outside… from new foreign investors who have choices, then it is important to have policy certainty and ensure contractual sanctity. Because that's another big issue which has played out in the last few years. It should not be that somebody has won the election or lost an election and the validity of contracts are then suffering, because all this creates uncertainty in the minds of investors, which is not helpful.

So, without getting into specific cases, I think, as an industry body, we would encourage preserving the sanctity of contracts, and stability of policy - both at the central government and States’ level.

Apart from the high-profile tax cases, we have seen reliance on regulations that have been made effective retrospectively in other domains over recent years, whether it's pertaining to GST, arbitration, or even the mining laws? Is this unnerving?

Absolutely. It is also important to look at the effective cost of doing business in India and effective tax rates. It's not just about the corporate tax; if you add up everything, even the 2% CSR spend (while many of us spend more than that) is also a form of a tax.

So if you add up all that — the royalties, the cesses, then you look at the effective tax rate, and then you compare yourself with other countries and then take a call. I think that's important, because that’s how a foreign investor would look at it end-to-end rather than just one part of the story.

We just need to look at policy and have some consistency around that to obviously reduce the effective tax rate to the level where you have not compromised so much on revenues. You have to find the balance between attracting investments and losing tax revenue.

What ails India’s manufacturing sector? The long-standing aspiration to have 25% of GDP coming from it hasn’t moved much. While you have mooted reforms in factor markets like land and labour, what else is holding us back?

This journey is not an easy journey, but it's an essential journey, so we shouldn't give up on it. Because we cannot assume that very smoothly, we will go from an economy where 60% people work in agriculture to an economy where everyone works in services. That's not going to happen. You need construction, manufacturing, to really absorb people as they transition from the agrarian economy to an urbanised economy. Second, manufacturing also creates jobs far away from the urban centres. You need to create jobs in cities, but you also need to create jobs far away from urban centres where new communities emerge. Many of our industrial hubs came out of nowhere, due to one mother industry and ecosystem that came around it. The most recent example is Sanand, which had no history of manufacturing and is now an auto hub. To me, I think it's very important for equitable development across the country to have a strong manufacturing.

Now, why haven't we had success? The ease of doing business needs to keep improving both at the Centre and the States. Even if you take a lot of actions at the Centre, a lot depends on the States. Second, the cost of doing business. While manufacturing industry can be encouraged to be world class and competitive within the factory gates, a lot of the competitiveness gets eroded outside the factory gates if infrastructure is not there, if you take a lot of time to ship goods, etc. So if you look at IT, which has grown into a huge, export-driven industry, it’s because of the telecommunications network. You don't have to navigate through roads and ports, so you are able to deliver your service across continents, whereas manufacturing needs to navigate all these infrastructure bottlenecks to service the opportunities in the world market. So, today, the focus on infrastructure is an important part of this manufacturing journey.

The other part is the skilling story. Manufacturing increasingly needs a lot of highly skilled workers. So while we have a lot of engineers, we have not, as a country given enough importance to vocational skills, unlike other big manufacturing economies like Germany where society looks at vocational skills as important. There is a social mindset, which needs to change here. Companies need to be paying more for skills. Typically, when you hire an engineer, you're conscious of where he or she studied, but if you're hiring a welder or a fabricator, you're not really asking much. So there are a lot of things that we need to do.

I think the government is also doing the right thing through the Production Linked Incentives (PLI) scheme, for instance, focusing on electronics manufacturing and creating ecosystems for that. A lot of work needs to be done both at the Centre and the States’ level and industry also needs to do its bit.

Commodity prices are rising amid inflation worries as cascading effects of the high fuel taxes are also escalating freight and transport costs. So even with a weak demand situation, we've high inflation and nothing seems to be easing up…

There are two-three dimensions to it. One, commodity prices are reflecting global macroeconomic conditions, which are much better than people imagine one year back. Whether it is China or the U.S., large economies are coming back much stronger which puts pressure on commodity prices. Second, obviously when commodity prices go up, there’s an overlay of speculative element which comes in, which is what China is trying to act on and suppress. Also, for many of the traded commodities, it's also an investment class. So there's a lot of money chasing that, as well. So these are some of the complexities we have to deal with in a globalised world.

We cannot be independent on what's happening around us and this is also being reflected in higher oil prices, some of which should get evened out as supply chains stabilise and the speculative element goes out. And it's a better reflection of fundamental demand supply issues rather than transient issues like the speculative element or supply chain distortions. So there will be some stability, which will come in and I think we should wait for that. If you look at inflation, the RBI also feels that as supply chain issues get sorted out, the inflation will come a bit more under control. I would think if you have a good monsoon and the agriculture output improves again, some of the food inflationary pressures will be less. But otherwise, volatility is a subject that we need to deal with.

How can we propose transaction and contract structures, which can help mitigate the risk, particularly for the Micro, Small and Medium Enterprises (MSMEs) who struggle because they are sandwiched between fixed price contracts and highly volatile input costs? How is it that we can help some of our members deal with volatility? So these are things that we need to look at good practices, there are good practices in some countries, and we'll see how to deploy that work with the government on that as well.

The government is upbeat about the direct tax and advance tax collections for the first two and a half months of 2021-22, that have more than doubled.

More than that, I would look at the GST numbers. Last year, this time, ₹1 lakh crore looked a long way off. To have six months at a row at over one lakh crore, including in May, is quite positive and you had ₹1.4 lakh crore in April. That, in a way, is a sense of economic activity on the ground. Corporate taxes are a little bit more discrete events, but this is a continuous event and we take some confidence from that. We are keenly awaiting the June (GST) numbers. Some of the other indicators are seeing a pick-up, such as the generation of E-way bills (in June).

Vaccination holds the key to a sustainable economic recovery. Do you think, the latest iteration of the vaccination policy is adequate, as CII has estimated that a minimum 71.2 lakh vaccine shots are required to meet the target to inoculate all by December?

CII welcomes the recent announcement that 75% of the vaccines will be procured by the Centre because I think different State governments running around and the Centre (also) buying… was complicating things with different price points. As it is, it's a complex journey. It was making it more complicated. To that extent, there is a bit more stability, of course, what is most important is to get more vaccines on the ground. The government, as the biggest buyer needs to also help the vaccine producers ramp up, by giving them confirmed orders, advance payments, if required, whatever that helps them ramp up.

From the industry side, we need to make sure that we vaccinate as many people as we can — not only employees and their families, but also contract workers, communities, etc. And when more vaccines are available, we want to also encourage our members to insist that people are vaccinated before they come into the workplace.

So there would be a lot of work that we will do in this journey, including tackling vaccine hesitancy or vaccine paranoia in rural India. There's a lot of it. We'll have communication campaigns around it. We will rope in role models and famous personalities and work with local governments, and use our influence to work with communities. We can't just say it’s the government's problem… industry needs to participate very actively and drive this as well, because it helps us.

You are hopeful that we will be in a better position by December?

Yes, in fact, our view is in the next two-three months, you will have a problem of having vaccines, but not enough people willing to be vaccinated unless we work on vaccine hesitancy. A lot of people in urban India would have been vaccinated. But it's not good enough to just have urban India vaccinated. We need to have most of India vaccinated.

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Printable version | Jul 25, 2021 5:04:53 AM |

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