Hands In The Pocket

In less than two weeks, first Prime Minister Narendra Modi and then RBI governor Raghuram Rajan have all but accused the Indian business sector of lacking in innovation and fighting spirit—to be more precise, ‘animal spirit’—as there is a continuing tendency to depend on the government to provide sops, tax exemptions, stimulus or incentives bef­ore finalising investments. Worse, India Inc was being taken to task for not having faith in India’s growth story, the continuing overseas investments by the business sector being a case in point.

How true is this contention? Is it prompted by the backlash to the continuing pressure on the Modi-led government to help ease land acquisition and speed up project clearance, both of which have landed the government on the back foot with the Opposition and the greens? As the government strives to cleanse the system of some of the stigmas of the past—the corruption-ridden coal mining and telecom sectors, among others—the industry seems to be losing patience. And finally, it seems even the government is not willing to do more without the industry putting its best foot forward. As Rajan said in a lecture earlier this month, “What will be critical in success...is that business has to believe in the tremendous possibilities and opportunities the nation has, and be willing to take the investment risks that will generate returns. No country succeeds without believing in itself.... While Indian business has been hurt by public authorities’ acts of omission and commission in the past, it has to look forward. And I have no doubt that as business presses people in positions of public responsibility to make the changes needed to ease doing business, we will respond.”

There is a clear divide among industry watchers and veterans about whether the industry is justified in looking to the government to do more to make investments more attractive. In the past, this demand has led to the government pushing private sector participation through public-private-partnerships, or PPPs, where the policies were framed to ensure that the private sector was assured of returns.  Though not as yet stopped, PPPs are currently on a slower wicket as the government takes a relook at the rules of the game. Continuing with the previous UPA government’s efforts (towards the tail-end of its tenure) to remove roadblocks holding up several mega projects, the Modi sarkar too has been endeavoring to do the same with several successes. This modus operandi has helped get several road projects back on track.

“There is some truth (in what the PM said), as except in some exceptional cases, most Indian industries happen to be short-sighted and don’t understand the behaviour of the cyclical cycles. They are too used to government incentives, subsidies, tax exemptions. When the margins are getting squeezed, they stop investing,” says N.R. Bhanumurthy of the National Institute of Public Finance and Policy (NIPFP). He points to the fact that while Indian business is fighting shy of investing within the country, citing hurdles, “foreign investors are taking a long position” on India’s growth story. Official government data released recently shows that India received $30.93 billion in foreign direct investments (FDI) in 2014-15, a jump of 27 per cent, compared to the previous year.

“Indian industry is looking for arbitrage, or more importantly, access to national resources. Rather than see them as need for growth, what is more important is for the industry to innovate for growth,” says Mahesh Vyas, managing director of the Centre for Monitoring Indian Economy Pvt Ltd. Several industry experts—many of them did not want to be identified, as the common perception is that the government “does not appreciate negative murmurs”—pointed out that all the blame cannot be laid at the door of industry since lots of sectors are seeing supply-side constraints. This includes the telecom sector, where call drops have become the norm due to overcrowding of spectrum.

Vijay Kalantri, chairman and managing director of Dighi Port Ltd, a greenfield Maharashtra-based project in Raigad, says that the industry will come up to the government’s expectations if it is supported by investor-friendly policies, infrastructure and regulations. “We need  better infrastructure, the tax regime should be simplified and anomalies removed. The government should refrain from putting criminality clauses everywhere. There is too much emphasis on black money. Government policies are not tax friendly,” says Kalantri, who is also president of the All-India Association of Industries (AIAI).

Doing something? Modi greets captains of industry

A first-generation entrepreneur who has invested Rs 2,000 crore in the port sector in the last four years, Kalantri wonders why it took the government six months to clear the cloud over the MAT issue. On the positive side, he is happy  that the road and rail connectivity to his Digi port, pending for long, have been cleared by the present government.

Shashikant Hegde, director and CEO, Economic Research India Pvt Ltd, which tracks project implementation across the country, states that while India needs clean power, good roads, efficient ports, faster railway lines, increased inter- state power distribution lines and so on, at the current juncture there are very few Ind­ian private companies equipped, or in a position to, execute these projects.

“Many of these companies are carrying huge debts in their balance sheets. Hence, expecting them to join hands with the government in setting up infrastructure projects is ruled out, at least in the short run,” says Hegde. He strongly feels that government agencies, both central and state-owned, should take the initiative in this direction and leave the private sector to concentrate on setting up manufacturing bases and services like IT and telecom.

Currently, the high cost of power seems to be one of the major hurdles to doing business in India. Though the power sector has seen substantial imp­rovement in generation capacity, the state of the power utilities and the distribution infrastructure has ensured that large areas are either left wanting or the cost of power makes industrial production uncompetitive, especially at a time when global demand is weak.

Empathising with the industry, Naina Lal Kidwai, country head of HSBC India, says that right now the demand is just not there—both in the domestic and in the global market. This applies to sectors like steel and cement in particular, with India facing tough competition due to cheaper supplies from China and South Korea. “The industry may have overcapitalised by creating capacity during the boom years in the anticipation of growth at 8-10 per cent. Until that 70 per cent capacity utilisation on an average becomes 100 per cent, I don’t see much more investment flowing into some of these sectors,” says Kidwai.

Unlike the industry, Kidwai is however optimistic that India’s growth story has not dimmed and that the demand will come back. But it is difficult to say when that turning point will come. “It will depend on each industry. Those that can ramp up their capacity quickly may wait till the capacity utilisation is 90 or even 100 per cent, but those that take much longer in their execution may plan to do it earlier,” opines Kidwai.

As the policy planners, including the prime minister, harp on the need for greater “animal spirit”, former Plan­ning Commission member Arun Maira has a word of advice. He says, “When using such metaphors, we have to be careful what we are asking of these people. Is it the law of the jungle that we are seeking? If so, then civil society is bound to react adversely. Or is it that we are asking for more benign people who would understand us and work bearing in mind our social and environmental conditions also?”

Maira, who is the author of a new book,  An Upstart in Government: Journeys of Change and Learning, says, “Business people also need to look inside themselves, instead of depending on the government to tell the people that we are good for them, tell them not to make it too difficult for industry to buy their land and fire them after we hire them. Instead, the industry should appeal to the people themselves and not depend on the government to do so on their behalf.”

But the habits of several generations, and the peer experience of receiving regular bailouts and sops, are hard to give up. Whatever the compulsions, these are habits most Indian industries would hate to shed. It is good that the prime minister’s overseas sojourns are helping to attract more FDI. For all the complaining it is prone to doing, India Inc will have to show more optimism about growth take-off. Just relying on the faith that Modi will deliver isn’t going to be enough.