Exclusive interview with the Chairman of the Godrej Group.
By Govindraj Ethiraj
NEW DELHI: Adi Burjorji Godrej, the chairman of the Godrej Group, is one of the richest industrialists in India, worth more than $9 billion.
Godrej, who has an MBA from the MIT Sloan School of Management, is the chairman of the Indian School of Business since April 2011. He was elected as the president of Confederation of Indian Industry (CII) for the year 2012-13. In 2013, Godrej was awarded the Entrepreneur of the Year Award at The Asian Awards. He was awarded the Padma Bhushan, India’s third highest civilian award, in 2013.
In an exclusive interview with the Rajya Sabha TV, Godrej shared his thoughts about Budget 2014, and the issues that need urgent attention of the BJP government to keep inflation down and to put the country back on its growth trajectory.
Excerpts from the interview:
So let’s look into two sets of issues. First, let’s look at the growth and inflation issue which was one of the key things talked about before going into this budget and subsequently we will talk about some of the issues from India Inc.’s point of view, including how easy it is to do business with India after budget 2014 . So let’s begin with growth and inflation, which was one of the main concerns before going into this budget due to the slow trajectory of growth.
Well, I think if you look at it, over the last three to four years there have been several macro-economic concerns, one was inflation that was running very high. The reason why inflation continued for a long time that too at high levels was because of depreciation of rupee. Due to this the cost of anything imported or exported from India started increasing. The other problem was that the growth had slowed down. Now it is expected that the new government, which for the first time in 30 years have a definite majority in the parliament, will being a growth oriented and investment oriented approach by taking steps to correct the situation. Many of these steps were enunciated in the budget. I think the first budget of the new government was good and if they take off from this position, a lot can be done to get India back on 8% plus growth trajectory.
Let’s go a little deeper into that, how would you break that on and where do you see the ingredients for that 8% kick?
Well, one of the major concerns was the slowing down of investments. New investments were not happening, partly because ease in doing business was affected which made people less interested in investing. Adding to this we had created a lot of tax issues like retrospective taxes, transfer pricing issues with international investors etc., all these reduced the desire to invest. These issues created a strong anti-investment sentiments and this led to growth deterioration. I think one good announcement in this budget was that investment allowance will be allowed even for investments up to 25 crores. But one of the things the government is yet to address is the inability of people to invest due to the high M.A.T rate (minimum alternate tax), which is around 22%. So, if an investor get incentives for x, y and z, and if his/her company is hit by the M.A.T tax, the investor cannot enjoy the benefit of incentives. So it is desirable at this stage to review the M.A.T and bring it down to maybe even 15% or preferably 12%. If the government does this, I think there will be a dramatic increase in the number of investments.
So that’s about tax related incentive or lack of incentive, but what about non-tax and other sort of growth inhibitors or kickers that needs to be looked at?
Ease of doing business; it was never very good in India but over the last 3 to 4 years it has worsened further. So I think improving the ease of doing business is imperative. This government is clearly seized to manage these types of issues including concerns over retrospective taxes and transfer pricing extra. The finance minister has already announced some corrective measures in the budget speech and I am sure they will announce more because not everything need to go to budgetary routes.
What about goods and service tax; it is something that you have been personally advocating for many years now. There was obviously a mention in the budget on this but were you expecting a specific timeline?
Yes, I think even in some of the media conferences, finance minister had mentioned that he would like to put it in place by early 2015. He has understood that there are a few things that need to be done for the states to make them comfortable. It’s quite possible and it is the biggest single step the government can take in getting us to a high growth path. G.D.P growth of India will increase by about 2 % the very day they introduce G.S.T. So there is no single reform that can do even half as well.
Let’s look at the other side, consumption and demand, how do you see this going and did you see the budget doing sufficient or enough for improving this area?
Some, I wouldn’t say enough but clearly some. I think issues like excise duty and inverted tax structure, where people pay higher import duty on raw materials were addressed. Many industries can benefit from this, so I think yes, many steps have been taken and more needs to be implemented. As we know that the next budget is due in a few months’ time and is not 12 months away.
So again to industries that obviously depends on consumption or higher consumption. What do you think is the need of the day to really see the kind of demand we saw few years ago?
Well, clearly industrial production must accelerate, GDP must do well, inflation must come down, and interest rates must also come down. Fortunately if you look at the macro-economic indicators of the last month, many of them have improved. The steps announced by the government will create a positive perception about the Indian economy in the future. I think a lot of these improvements will take place and it will be a sort of a win-win situation. I expect a growth of 5 and a half to 6% at the end of this financial year and, in the next financial year I expect it to raise to 7% plus.
Okay, that’s quite optimistic. Anyway, so you talked about some of the indicators that have recently emerged which are obviously looking good; the manufacturing output is one of them, can you illustrate your own example and how you have been stepping up output?
Clearly, perceptions have improved. In some of our businesses we have already seen better demand. For example, in appliances we saw an excellent summer this year. The auto industries have also done well even though we are not in the auto sector. In appliances, compared to the previous year there was a growth of almost 30%, which is a very good growth partly because of a hot summer this year and partly because of the better perception. Some industries for example FMCG has still not fully picked up but they will also pick up within a month or two. So I feel many industries are doing better when looking at the results and also many companies have announced better performance during April-June when compared to the same period of the previous year. I expect this trend to continue.
Right, so when you say consumer product is something that is likely to pick up, you are therefore talking about FMCG. FMCG is fast moving but that is based on the ground that it is only sentiment that would bring it back or is there something else that might work?
It’s mainly sentiment. You can see that FMCG has slowed down because people were concerned. They were concerned about their jobs and their incomes, so they started consuming a little less per capita of FMCG product. Once people feel more confident about the economy and their jobs, we can see an increase in consumption.
So let me come back to investment which is again an inevitable ingredient to the overall growth equations. How do you see it from your advantage point and in the advantage point of your peers?
Clearly we have changed our 3 years strategic plan. We now feel that the demand will increase so will the supply. This made us to change our investment plans for manufacturing units, and started investing more. We now expect to produce more and of course we have a rolling 3 year plan which helps us to watch the situation every 6 months. Progress will be even better than what most people are projecting. Large amount of our manufactures and consumer products; both durable and fast moving, are doing very well and is growing despite the general slow-down. So we believe that this will accelerate even more. To achieve this we are investing more and subsequently sales and production will grow.
So to what period you compare this phase that you are seeing currently, when did you last seen this?
See, let’s put it this way, if you look at the positive perception and expectations of people, I haven’t seen such a trend except maybe 20 years ago or when the 91 reforms were first announced. Things were picking up and everybody was quite buoyant, but I haven’t seen much change in the performance. I would say, we need to come back to 2004 – 2007 period to measure actual performance because the GDP growth was actually very high. I have a strong feeling that something similar will take place, but I am yet to see something pointing at that direction.
And again, coming back to growth inflation and investment. Inflation now is something that obviously affects you. I mean every consumer including yours is constrained due to high inflation. Are you feeling more optimistic than the rest about where the inflation goes?
Yes, I expect inflation to slowdown; it has already slowed a little. But what worries us most is the fact that when inflation is high, interest rates are high and if interest rates are high, investments become difficult. Due to this consumer consumption of residential flats or autos slows down. As a result of this consumer financing becomes much more expensive. This is extremely important for strong growth and for containing interest rates and inflation.
Right. So do you see any positive in the interest rates front?
I see positive because inflation is coming under control because the rupee is under control. A lot of inflation we saw in the last 12 months was because of rupee depreciation. Now over the last 12 months the rupee has appreciated a little to dollar and in the last 3 or 4 months it has appreciated very considerably. Our foreign exchange reserves are rising, which will lead to lower interest rates. Interest rates will definitely come down within the next 3 to 4 months or may even come down within a month or two. Clearly there are signs that inflationary expectations now are very low.
So you are saying that overall it’s looking like a fairly well poised situation?
Yes, I think overall it is looking good; it is well poised and will allow the right actions on the part of the government. If the government is well-informed and well directed, I expect this to happen.
Let’s talk about something more fundamental; Infrastructure, and then I will come to jobs and ease of doing business. Infrastructure continues to be a big issue; it would affect you as much it would affect every consumer of yours and every citizen of this country. Is enough being done or was their sufficient signaling and financing for it in the budget and what else needs to be done?
I think it is too early to expect that everything needed to be done on infrastructure will be put in place, but clearly the signals given in the budget speech of finance minister were very good. I think if you look at the infrastructure ministries, the one good thing is that all the bifurcated and trifurcated ministries are put together again. There is much more cohesion to my mind in how infrastructure is handled whether its roads, power or other transports. A lot of good steps have been taken; infrastructure is extremely important because it creates the investment which in return creates the jobs and thus provides the physical infrastructure which the country needs.
How does one abstain from making the same mistakes that were made in the past?
Some of the past mistakes were because of concerns about getting bills passed and about alliances who kept threatening x y or z all the way. Now they don’t have to be too concern about such issues and I think they are clear minded of what India needs and what India will get. So I think it will operate much more efficiently.
If you had a sort of infrastructure wish list what would it be in terms of whether it is roads, ports?
I think everything. In power, we fortunately have the capacity. The fuel issues have to be sorted out and it’s a matter of some administrative decision. In coal, productivity needs to be increased. It’s a shame that India, which has one of the highest reserves of coal in the world, is one of the world’s largest importers of coal. Our gas issues have to be sorted out by utilizing the reserves of shell gas and gas at the bottom of the sea bed. This can increase our output.
So you are placing energy a little higher than the rest of others?
I think the energy is our priority though transport also is very important. I think some of the decisions they have done on railways, for example to have fast bullet trains, to have much better goods transport in railways, to make railway goods transport more competitive with roads etc. will add a lot of value in the long run.
How do you see it benefiting, let’s say your group and the velocity at which the goods are able to move from place to place? Has the efficiency improved?
All logistics will improve if GST is implemented. There will be lots of other advantages which when combined with infrastructure will add to rapid growth.
What’s the kind of profitability benefit this might accrue?
Well, I don’t think there will be much profitability benefit, there could be some but ease of doing business will definitely improve. You don’t have to keep worrying about logistics and affectivity in infrastructure but what is important is not only physical infrastructure but also social infrastructure. So education and health, the areas which this government has paid lot of attention to, will solve many issues for example, the shortage of skilled and trained person in the economy. So it will not only permit businesses to get the people they need but also create employment. Once the job is created, consumption will also increase, so it’s a virtual cycle you create.
So let me link that to the budget and I was going to come to job in any case , I mean that is one of the factors on which these elections were won in a sense, I mean the whole ability to meet the aspirations of young India. Where does the government or policy makers need to move the fastest in order to ensure that some of these gaps are bridged?
Well, I think one of the most important things to do is to pay a lot of attention to skilling and training because on one side we don’t have adequate number of skilled persons, even in skilled construction workers there is shortage in the country. On the other hand, people don’t get employment, so sometimes there is no unemployment in India just “unemployability”. If you provide skills, training and even education at a certain level, I think a lot of these problems in employment front would get sorted out. The new government in Rajasthan which is run by the BJP has already made changes to some labor laws making them more employment friendly. If you have labor laws which always give a message to an employer to employ less people, it would not work. So that’s one of the other areas of ease of doing business.
You have talked about increasing your manufacturing capacity for which you need people, what according to you would make a larger ecosystem to provide those people or will private sector in general and specific play a greater role here?
I think the private sector will play a greater role and not just the private sector but small and medium enterprises also. It will be extremely important. If the economy picks up and if GST comes in, economy growth will automatically accelerate. We can get to at least 7 to 8% growth next year and 8 to 10% in the coming years. After that we will find a lot of tightness in many areas, so we will have to take advantage of all manufacturing units especially medium and small enterprises. Thus India can boom again and this government has the capacity to improve the ease of doing business in various areas which are bottlenecks today to really get to strong growth. We have seen BJP governments doing this not just in Gujarat but in Chhattisgarh, Madhya Pradesh etc. They have done well.
Having said that, there is concerted attempt to fix the job problem. But there is still a huge mass of young Indians who have aspirations. Are we as a country geared up to meet their aspirations; isn’t this a much larger question?
Well, I think if you look at the vision of the country, we have the vision to do it. We have always found where we have failed, it is in the implementation stage, so I hope this government will pay a lot of attention on it. I have seen this government making statements that pay a lot of attention to implementation. If they get it correct and empower states to implement growth measures then things can move very rapidly.
So let me ask you another India Inc. question now; what are the issues that have been addressed to your satisfaction and what are the issues that have not been addressed?
I think that the ease of doing business is something you can’t say has all been addressed completely. But it has been continuously improving. Improvements have been made in areas like reducing the number of government permissions etc. Secondly, implementation should be improved by combining ministries. If power and coal are combined as they have; I think it will run very efficiently and the same should be done with roads, shipping.
And this you are saying from India Inc.’s point of view because you are interacting with government?
Yeah, we interact with government and even for the government if they have too many departments, coordinating with each other will be difficult and things will not move smoothly. Combining different departments of the environment ministry will make it more efficient. Environment is very important, climate change has to be taken into account and quick decisions should be taken. Technology should be utilized for this and I see the environment ministry now moving quite rapidly on many fronts.
So what about the issues on balance sheet and tax; is that something important?
Yes, those are also important. You see, the government have tremendous assets as shareholdings in public sector companies, land etc. They should all be utilized. If the economy does well as a result these assets, the balance sheet size will also increase which will make the future so much better for the country. So I think there is tremendous opportunity and the physical deficit must be contained. In first one or two years more disinvestments can take place to ensure that there is physical deficit containment followed by containment of inflation and then interest rates.
Three things that you feel went right with the budget as you look back and 2 or 3 things that is clearly part of unfinished agenda?
Well, I think 3 things that went well were related to growth orientation. The budget addressed investment increases and some of the issues that has kept industrial production down like inverted duty structure etc. The 3 things that have to be done are could be to further refinements as I mentioned investment allowance limit being decreased to 25 crores was a very good move but MAT will be a problem that needs to be addressed. GDP growth can be even faster if physical deficit is definitely contained, this can be done through disinvestment. The disinvestment target was increased but finance minister can do even better and we must remember that a lot of economic policies are outside the scope of the budget, so there will be economic policy announcements till the February budget. We expect many more good policies to be further announced in February when the government would have a good 6- 7 months to consider all the issues.
Right, so I am not going to ask you to rate the budget 0 to 10 or 1 to 10 as you were on budget day. When you look back, has it left you with a good feeling?
Yes, a very good feeling and clearly even a better feeling thinking about the positive steps this government might take going forward.