The need of the hour is to decrease the cost of doing business, increase the sanctity of contracts and boost personal disposable income to promote investor confidence in India. In a recent conversation with the president of Confederation of Indian Industry CII and Tata Steel, global chief executive and managing director TV Narendran, examined key points to improve the economy post-Covid.
Is our country in a post second wave recovery phase?
After hitting the peak for the second wave of Covid 19, global macroeconomic conditions are very optimistic. The developed world is increasing expenditure to revamp growth rates. The developed world advises everyone to let the debt to GDP ratio cross a hundred points; this strategy has to be used until 2030. China is following the V-shaped growth rate graph and is back on pre-pandemic levels. This enthusiasm owes its self to the availability of vaccines against COVID-19 which provides a sense of security against the infection. Many lives were lost in the second wave of Covid; hence humanitarian impact and effects are visible.
The primary sector of India still accounts for the maximum number of employed people; hence the growth of the rural market is crucial to economic revival. In the first wave of the Covid rural market led the graph towards recovery because of ample rainfall and availability of labourers due to lockdown. After the second wave, the rural market is not marred by low demands as CII feared; the issue at hand is increased cost of production and cost pressures. Rising inflation and skyrocketing prices of crude oil which further increases the cost of production is the main concern. The CII Estimates that the agriculture sector will grow by 3 to 3.5%. Hence country is cautiously optimistic regarding its perception of the economy.
Taxation policies introduced by the Indian government have not yet been implemented. Does this dampen global investment?
Global investors hate two things– uncertainty and uncertainty. International investors are not worried about taxation policies and their poor implementation; instead, they are concerned about fluctuating tax rates which mucks up their budget. Every investor looks for policy certainty because significant investments need planning. Long-term investments require assurance on tax policy and the sanctity of contracts. Our government needs to ensure that the validity of contracts will not be void if governments change, be it central or state government.
Few incidents where the sanity of the agreement was disturbed resulted in pulling out of investments from the market. The retrospective effect of regulations on GST, arbitration, mining laws et cetera increases the cost of doing business. Even if the corporate profit tax rate is low the add-ons disburse the effect that low tax rate would create. Add-ons like 2% CSR corporate social responsibility, royalties, cess increase the effective tax rate which proves to be a disadvantage worldwide.
What was the Vodafone case on retrospective tax?
One of the most high-profile cases of retrospective taxation was Vodafone versus the government of India, the PCA Permanent Court of Arbitration at The Hague ruled in favour of Vodafone. Retrospective taxation was introduced in 2012 to stop companies from exploiting legal loopholes.
Because of unstable policies and different interpretation of tax rules, businesses were hit. Global investors lost confidence in the Indian economy stating that the amendment was evil. PCA ruled that India’s demand for the retrospective tax was breaching the promise of fair and equal treatment and was a violation of the United Nations Commission on International Trade Law UNCITRAL. The defeat of India at PCA was a policy setback and set an example for future cases on similar issues.
Since India provides a huge market for businesses, hence it is India’s right to tax investor’s income but a balance has to be sought between attracting investment and losing tax revenue. The government needs to come up with a policy that would reduce the effective tax rate without compromising a lot on revenues but the policy needs to be stable across regimes and continuously applied.
What measures are required to strengthen the manufacturing sector of India?
The Indian economy has bypassed the second phase where it jumped directly from being a primary sector economy to a tertiary (service) sector economy. The secondary sector creates jobs and employment opportunities for people who cannot come to urban centres. Urban areas are at total capacity; therefore, new centres that harbour manufacturing ecosystem need to be created.
Creating manufacturing hubs away from urban areas will provide a chance for inclusive growth and equitable development across the country. Sanand which was nowhere on the map is now an auto manufacturing hub, India needs more such sanands.
Apart from centres of production Centre and states need to improve the ease of doing business and cost of doing business. This can be done by providing optimum infrastructure like transport, roads, cold storage, warehouses, permits, reducing corruption, disseminating licence, shipping et cetera. India could grow as an IT hub because the infrastructure required for IT growth, that is the telecommunication networks is available abundantly.
Apart from infrastructure, the humans who work on that infrastructure need to be abundantly skilled. Our education system needs to be revamped so that it celebrates and incites creativity, supports vocational skills rather than textbook knowledge. A country that produces lots of engineers is not able to compete worldwide because they are hired on the basis of their degree (IIT, NIT) not skills. If a fashion designer is hired his skills are essential than his alma mater. Production linked incentive PLI scheme is a right step in this direction.
The effect of high fuel taxes on commodity prices, freight and transport amid inflation- when will it stabilise?
Because of globalisation cascading effect of one countries policy on others is unavoidable. High commodity prices indicate better macroeconomic conditions as advanced economies are reviving. An increase in commodity prices brings with it speculation like increased oil prices which countries like China are trying to suppress.
Highly traded commodities are also an investment asset; hence high demand leads to a higher price. This hike is temporary because once supply chains stabilise prices will go down owing to reduced speculation. As far as inflation is considered RBI shares the same sentiment that once speculation goes out prices will reduce. Volatility and its effect on MSMEs must be curated so that MSMEs don’t suffer in this waiting period.
As India is unlocking, to sustain the economic activity vaccination needs to be ramped up, according to the CII estimates, we need 71.2 lakh doses of vaccine to meet the target by December. The recent announcement by the Centre that it will procure 75% of the vaccines is the correct step towards the mark.
If the central government is the vaccine buyer it will place confirmed orders, advanced payments thereby speeding the vaccination drive. The manufacturing sector should ensure that their employees, daily workers, contractual labourers, their families etc are vaccinated. The workers should be insisted to get vaccinated before coming to work. The manufacturing committee on their part should encourage a conducive atmosphere where vaccine hesitancy is reasoned.
The committee should use role models, famous personalities, communication campaigns and work with local governments to increase vaccination cover. Every industry needs to do its bit and not rely on the state entirely.
The only weapon available against Coronavirus is vaccination. This weapon needs to be uniformly distributed, be it urban or rural areas, literate or illiterate people. The sooner everyone gets vaccinated the faster our economy is back on track permanently.