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BW Businessworld

Look To Become A Global Supplier

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Early this year, when outgoing finance minister P. Chidambaram criticised Narendra Modi’s Gujarat model at the World Economic Forum in Davos, Adi Godrej, Chairman, Godrej Group, was quick to defend Modi’s policies. With India’s manufacturing sector in decline over the past few years, Godrej’s mantras for a turnaround is improving ease of business and government facilitation. He tells BW’s Sachin Dave in an interview what Modi must do to revive the manufacturing sector.

What should the government immediately focus on to boost the manufacturing sector?
The biggest agenda would be to revive economic growth. Industrial output has suffered the most.  In the (July) budget, there should be fiscal stimuli for all sectors. In India, our experience has been that lower the tax rate, higher is the collection as the tax base automatically increases.  So, along with industrial output, fiscal stimuli also help increase government revenues. 

Second, the UPA government over the years increased the rates of minimum alternate tax (MAT) or the minimum tax you have to pay. Now, the government gives a lot of incentives for manufacturing. Some of them are geographical - like if you are in Himachal Pradesh or the North East, you get incentives. Some of the incentives are extended to certain sectors like renewable energy. However, companies fail to take advantage of these incentives because of MAT. You may be investing to save tax, but MAT would negate such a benefit. When it was introduced, MAT was just 8 per cent. Now, it is 20 per cent plus surcharge. I think MAT should not be more than 12 per cent. Many companies are not currently investing because they are unable to take advantage of the investment due to MAT. So, that is one change that should be brought about in the Budget.

Lastly, a very important reform to boost manufacturing would be the introduction of the goods and services tax (GST). This will take care of a lot of aberrations in indirect tax structure. It will also help exports because, currently, the taxes paid do not get refunded. Once the GST is in place, everything will be refunded. GST is a very important reform measure and it is expected to add 2 per cent to the GDP, other things being equal.

What should be priority sub-sectors to trigger manufacturing on a large scale?
Right now all manufacturing sectors need help. Even consumer goods are down as is the automobiles sector. Once manufacturing revives, it will help GDP because manufacturing helps transport, retail and other sectors in the economy.

What are the practical solutions to the current problems that are pulling down manufacturing growth? How to counter the Chinese threat? How to face the growing non-tariff barriers in terms of frequently changing quality specifications, etc.?
Ease of doing business in India (which was not very good in the first place), has worsened in the past three years. Decisions are not being taken, infrastructure targets are not going ahead, etc. All these need a lot of attention as our manufacturing competitiveness has reduced. Imports from China have grown. So we need a competitive manufacturing model to counter this.

One good thing is that China is becoming less and less competitive as wages are going up there.  This is a very good opportunity for India to replace China. But, instead of us replacing China, we are losing our own position to countries like Indonesia, Vietnam and Bangladesh. We should pay a lot of attention to that and become a huge global supplier of goods.

There are several sectors, including auto, tiles, engineering goods and tools, where India has become more competitive than China. Why is this not being replicated in other sectors?
The main sectors in which we are ahead are pharmaceuticals and auto parts. In certain areas where engineering inputs are high, we are generally competitive because we have good engineers, among other things. But in areas where manual inputs are high, or in other sectors, we are not very competitive. And, we should be very competitive across sectors. Our manufacturing policies should be such as to encourage all sectors. Instead, we bring in restrictions. So, when a company wants to set up a new factory, instead of taking it a year-and-a-half, it takes five years. Environment clearances get delayed, land acquisition gets delayed. Instead of solving problems we are creating more problems.

There has been a lot of publicity around the one-window clearance in Gujarat. Do you think a similar model can work at the national level?
Of course. Take for example, when we decided to set up a new Godrej Agrovet factory in Gujarat. We got land allocation within three months. In most places it takes two years. It was very quick, and reasonably priced. So, if ease of doing business improves, it can help tremendously. And, if the Prime Minister takes strong steps at the national level, a lot can be done.

What are the best global practices India can adopt to give a fillip to the manufacturing sector?
Two things - the first is government facilitation, which has been poor; and the second is that companies themselves should adopt good internal practices to be competitive and concentrate on green manufacturing that helps save costs. Now, the Confederation of Indian Industry is doing a lot to make companies competitive, but unfortunately, the government response has deteriorated over the past three years, instead of improving. India was always ranked low with respect  'the ease of doing business', but recently the ranking has gone further down.

There is a perception that growth and environmental care are contradictory. Some argue, China's crackdown on companies that have not followed environmental norms has led to the fall in their growth. Do you think India focus on growth can lead to harming the environment?
 Not at all. If you preserve environment only by slowing down growth, that is bad for economy. Where are people going to get jobs? Environment should be protected through science and technology and not by slowing growth. Unfortunately, there are some environmentalists who want to slow down growth because they are socialists who do not like the idea of growth.

What can we learn from our past mistakes vis-à-vis China in manufacturing?
We will always benchmark ourselves  against other countries. That can be done by learning not only from their mistakes but also learning from their good practices.

Any specific example that you would like to give in this context?
Yes, we should be fair to our labour force, but at the same time be flexible about it. You can't give artificial protection to labour. Here, we tolerate illegal strikes. Why should that be done? We have lost a lot of production in the auto sector due to illegal strikes. Environmental delays have led to a lot of problems in the coal sector also. We have become one of the biggest importers of coal when we have some of the biggest coal reserves. We say there are environmental restrictions. But there is technology available for environment-friendly coal mining, and we should bring those in, instead of altogether stopping mining.

How can India leverage the Sino-Japanese tension strategically to its advantage in the manufacturing sector?
There is tension not only between China and Japan, but also between China and Vietnam and Russia and America. So, there are opportunities for us to get closer to a lot of countries. And I think the new government's geopolitical policy should take that into account and ensure that India gets close to a large number of countries. We should maintain good relations with our neighbours and also with countries such as Japan, the US and members of the European Union.

Will becoming part of a regional value chain help us?
That always helps and we should look at all regional connections; South Asian Association for Regional Cooperation, Association of Southeast Asian Nations, etc. We should look at leveraging our geographical proximities, and that should be constantly part of our foreign and industrial policies.

How critical is foreign direct investment (FDI) in helping the manufacturing sector?
I think we should be totally open. I am a great believer that FDI brings in competition, technology, knowledge and good practices. We should be open to FDI in all sectors, not just manufacturing. Even in defence, why are we keeping FDI at less than 25 per  cent? We are the world's biggest importer  of defence goods. Why not manufacture them in India?

But do you think Indian manufacturers are ready to take up the challenge in defence?

Let us have FDI, let us have joint ventures, let us open up. What are they going to do? What are we worried about? If a foreign company is in India, we can control it. Why are we restricting FDI in insurance, pension funds and retail?

Are there any sectors where India has a natural advantage in manufacturing? How do we exploit that?
I think we have an advantage in areas where engineering inputs are high. We have a lot of good engineers. So, in value-based engineering manufacturing we are more competitive. A country like India should be competitive in all areas, including agriculture and services..

Does our policy flip-flop have anything to do with the lack of manufacturing in several sectors?
First of all, we should not have too much government intervention through policy. When Modi was campaigning, he made a very good slogan  "we want less government and more governance". The government should not start deciding what is good for your country - people, and entrepreneurs should.

Which is more hurtful - lack of legislation or failure to implement existing laws?
There is too much legislation in this country; there should be less of it. Why should the government interfere? There is too much of interference.  Why should I go to the government to get permission for X, Y, Z? I should be allowed to just go ahead and do it as in other countries .

Are we powerful enough to independently drive manufacturing growth, while being deeply connected with the international markets?

We should have a target for at least double-digit growth. It is possible, and we should aim for that. We should be suppliers of the goods to the world.

Post-elections, has there been a change in sentiment of industrialists, as is largely assumed? Will this lead to more investments by industry in the coming year?
The sentiment will be very positive and that will help investment. Together with a  strong  government , good policies will further improve positive sentiments. If the budget is growth-oriented and if the utterances of the new ministers are good, then sentiments will further improve.

Do you think the statements made by many of the BJP candidates against our neighbouring countries during the run-up to the elections could affect our economic relations with these countries now?
We should ensure that our economic relations with our neighbours, especially with Pakistan, improve because there is a great potential of open trade between the two countries. Modi will encourage strong economic relations between India and Pakistan. There is a study which says that if there is open trade between India and Pakistan, then India's GDP growth will rise by around 0.5 per cent and that of Pakistan by 1 per  cent. Both countries will benefit.

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(This story was published in BW | Businessworld Issue Dated 16-06-2014)