Friday, September 6, 2013

Why Government and CII Don’t See Eye to Eye on Recent Reforms

Seasonal Magazine interviews S 'Kris' Gopalakrishnan, President of Confederation of Indian Industries (CII) and Co-Founder and Vice-Chairman of Infosys Ltd.

Interview and Feature by Jaison D and John Antony:  

Nation is fast approaching election year. UPA Government which has already lost out on economic development during the last four years, is eyeing the only redeemer on the horizon, which is massive socioeconomic development. Does that make S Gopalakrishnan an unhappy man? Ideally, it shouldn’t be that way. Yet the CII boss doesn’t see eye to eye with the government on most recent reforms including Companies Bill, Land Acquisition Bill, and the Food Security Bill. At Infosys, he is Kris, its beloved Co-Founder and Vice-Chairman who helped it scale to massive heights, especially during his long stint as head of North American operations. But outside Infosys, Gopalakrishnan initially looked like an unlikely leader to lead CII during this tumultuous year. If not for anything, for the fact that software exporting companies like Infosys have gained massively due to the rupee rout. Yet, it goes to his credit that he has really felt the pain of the larger India Inc., which is evident from the 10-Point agenda it presented to Union Government in July to salvage Indian economy from the crisis it is finding itself in. Confederation of Indian Industry had recently published these 10 points, and it comes across as comprehensive and impressive, except for the fact that on super-critical issues like oil imports, CII has only painful solutions to offer like removing the subsidies. The 10-Point agenda as well as CII’s calibrated reservations to certain provisions in Companies Bill, Land Acquisition Bill, and Food Security Bill clearly reveals that it has a different development plan for the country than pursued by the UPA Government. CII’s view is simply that only double-digit growth or at least high single-digit growth can lift millions more from poverty. Dr. Singh and Chidambaram would have agreed with Kris on some other day, but not today. The 2008 world economic crisis and the unconventional monetary policies unleashed by US, EU, & Japan to contain it have shaken the very foundations of these UPA economists’ understanding of economics itself. That is why on one hand they have brought in a more updated professional like Dr. Raghuram Rajan to head RBI, and on the other hand are more keen to follow Congress Chief’s benevolent plans for the poor. They had pursued growth, but growth had failed them. In fact, growth pursuit has failed the entire nation, as it became clear that growth was not enough to bring in more equitability between the rich, middleclass, and poor. Vajpayee’s failure to get a second term, and Dr. Singh’s need to rely on NREGA to get a second-term were telling. Yet, Kris would disagree. Not just disagree because that is the industry’s stand, but because he can make incisive cuts into the logic supporting more benevolence as well as more regulation. Who will be right only time can tell, but Seasonal Magazine caught up with Kris to get his views on the wide-ranging challenges the nation, and particularly the industry, faces today.

Seasonal Magazine in conversation with S Gopalakrishnan, President, CII, and Co-Founder and Executive Vice Chairman, Infosys Ltd.:

CII had made an impressive 10-point submission before the government for reviving the economy in July, which was published recently. Since it is almost two months now, have you seen any action on any of these 10 points yet?

Yes, we can definitely see some action, at least on a couple of fronts. Government has decided to act on infrastructure projects, and things have started moving. Also, with regard to large industrial projects, several clearances have come. But we realize that it would still take time. One reason is that there is a gap or difference in speed between execution at the Centre and execution at the state level. States are relatively slower in the decision-making or execution process. Several infra and industrial projects require things to get executed by various state governments also, and therefore the delay. But definitely things have started happening on some of our suggestions.

You come from the services sector, that too from an export-oriented sector, which is obviously benefiting from the rupee slide, looking at the way frontline IT stocks including Infosys have been moving up. Do you think that that makes you a little immune to know about the acute pain in sectors most affected due to the rupee fall like airlines, equipment manufacturers etc? 

Not really, as I approach these issues as an Indian first. And I believe that the sharp or significant depreciation of the rupee is bad for all Indians and the country, irrespective of the sector we are in. Firstly, India remains a net importer, and hence the net impact can only be bad. For all of us it will cause higher inflation. It will worsen the Current Account Deficit. Many corporates - including those who are not into importing - have also taken significant overseas debt in past years, and they are going to be severely affected with the rupee fall. Even the banking industry is going to be hit with higher NPAs, as our banks too have exposure to these companies. So, overall it is a bad development.

Looking at the 10-point agenda that CII put forth, though it is comprehensive in many ways, CII hasn’t addressed two root causes of the CAD problem - which is burgeoning demand for oil and gold. What would be your thoughts on this?

By the time we presented this 10-point agenda, Government had already started acting to curb gold imports, which have proven effective to an extent. More recent developments like the proposal for an inflation-adjusted savings instrument would further help in this regard. With regard to oil, CII’s 10-point agenda does contain enough suggestions, with the main one being the eventual and full removal of subsidies on diesel and other fuels.

But won’t that cause high inflation? And that basically doesn’t address the challenge of reducing consumption or demand…

No, that is not true. As per CII’s position, removing subsidies will be effective in curbing demand and consumption to a great degree. But as you said, it will cause inflation, but that pain is more likely to be short-lived, something to which the economy would adjust soon.

You have been a great proponent of sharply higher FDI inflows into the country, citing ratios like low FDI-to-gross-capital-formation and FDI-to-GDP compared with other developing economies. Can you explain this position?

Definitely. As per government’s own estimates, it needs 1 trillion dollars for creating competitive infrastructure across the country. Only around 500 billion of that requirement is possible to be sourced from domestic investments and government expenditure. For the rest, we have to depend on FDI. There is no other go. That is with regard to infrastructure alone. Other sectors too have such funding requirements. And when we compare India with other comparable developing and developed economies, using ratios like FDI-to-gross-capital-formation and FDI-to-GDP, it is clear that there is significant room for India to improve its FDI inflows to come up to the world averages.

Regarding FII activity in this country, CII’s position has been a bit confusing. On one hand, you have gone on record stating that FIIs should be clearly demarcated from FDIs, and on the other side CII has been advocating exemption of short-term capital gains tax for FIIs. Can you clarify this dual position?

What we need most is undoubtedly long-term foreign capital, which comes in the form of Foreign Direct Investment. Because only such patient capital would create infrastructure, projects, industries, jobs etc. So preference is definitely to attract FDI. That is why FDI strategies were highlighted in CII’s 10-point suggestions. But having said that, let me also explain why we need Foreign Institutional Investors. The world over, listed industries are supported in the equity markets by FII money. So, for a stable equity market, we do need to attract FII money. Exempting FII from short-term capital-gains tax is an effective method to make our equity markets relatively attractive with other global markets. So, we need both kind of funds, even though they should remain demarcated.

Your 10-point agenda, is high in content on short term goals, while lower in content on long term goals. With a strong economic model like China lying quite nearby, why can’t CII explicitly ask the government to follow the Chinese model wherever relevant, like in their wonderful track record in creating the world’s most formidable skilled work force in manufacturing?

No, I don’t agree with your view at all. More of CII’s recommendations to the government in that 10-point agenda were of long-term nature. For example, suggestions regarding infrastructure sector, FDI, GST etc are all with really long-term objectives. But, it is true that we also had to mention a few plans with short-term objectives due to the immediate nature of the economic situation prevailing in the country. That is why short-term solutions like the sovereign bond was mooted.

Can you reply on emulating the Chinese model too?

China indeed has an impressive manufacturing base, but don’t ever think that India is inferior in any way when it comes to manufacturing. In fact, we lead them in several key industries. For instance, automotive sector and advanced manufacturing. In fact, India exports more cars than China, which shows that our automotive sector is more competitive. But they have an edge in several other sectors, like electronics and appliances. Should we learn from them? I would say that we should learn from all good models. But I don’t think it is the manufacturing expertise that we have to learn, as we can any day develop that given our educated manpower. What we should be really learning from China is with regard to enablers like infrastructure, logistics, labour laws, competitiveness etc. Despite being a communist country, China has simple labour rules, that are good for the employers as well as the workers.

So, do you think India can compete head-on with China?

We should be able to do it, provided we improve in those enabling aspects. Thankfully, the Government too is recognizing the need for jumpstarting manufacturing, as the Centre has made an objective that manufacturing’s share of GDP should go up from the current 16% to around 25%. But then, no two nations are quite alike. We can’t fully emulate them, and there is no need for that either. We should play to our strengths. Also, we should understand that the relative competitiveness between countries is an evolving or dynamic scenario. For example, in sectors like leather and textiles, Chinese manufacturers have recently turned somewhat uncompetitive compared with Indian companies. Hence we are already taking advantage of this development in those sectors. Competitiveness is the key, and it should be fine-tuned to be the best in the world to attract investments and jobs.

Creation of a sovereign bond has been one of CII’s most noteworthy recommendations to solve the CAD issue. How will this help in battling the rupee crisis?

Many Indian companies, especially PSUs, are already creating overseas bonds for their own purposes. But if India launches a sovereign bond, the overseas markets would lap it up in no time. What CII has recommended is that it should be in the size of 70 to 90 billion dollars, so that it is effective to counter balance the CAD. It would end once and for all, excessive speculation against INR that was dragging it down. The rupee fall was basically a CAD issue, and solving it would naturally help the rupee rise and stabilize.

A deeper look into the ongoing rupee fall has revealed that the main factor pulling down the rupee has been Indian corporates buying dollars indiscriminately as a hedge, thinking that rupee would stay on between 66 to 70. It is said that some large corporates have hedged so much that it is enough for 3 years worth of imports. Why can’t CII advocate against such senseless pessimism or once-bitten-twice-shy attitude? And has CII or these industries ever given a serious thought on the kind of forex losses if rupee strengthens and claws back to around 60?

No, I don’t agree with your observations. I do admit that Indian corporates have significant overseas debt as well as the fact that they are hedging against potential forex losses. But to assume that those are the prime reasons for the fall or volatility in rupee would be erroneous. Rupee has been falling mainly because of the large fiscal deficit as well as the large current account deficit. Corporate issues are only secondary, and at best would have only an add-on effect. And companies cant ignore the hedging process also, as they have to guard against forex risks.

CII is an industry promotion body, of course, but don’t you think industry can thrive only if social imbalances are minimized? Recent actions of CII like its reservations regarding mandatory CSR in the Companies Bill or reservations regarding a more socially equitable Land Acquisition bill, are quite telling. Don’t you think CII should have a more inclusive picture?

CII stands for inclusive growth. In fact, we stress inclusiveness in almost all our policy suggestions. Our issue is not with inclusiveness, but with regard to implementation of the provisions, or in other words the execution process. If a new bill introduces too many new regulations and bureaucratic procedures, we believe that it will be bad for our industry’s competitiveness. Because, too many new regulations will obviously cause significant delays and probably more corruption too. Regarding the land acquisition bill, farmers should get good value for their land, which the bill now ensures through its provision for four-times the current market value, but that doesn’t mean the acquiring industry should go through serious uncertainties regarding the final outcome. For example, we had recommended the approval of 60% landholders, which was fair enough, but the final bill asks for approval of 70-80% owners. Then there is the new regulations like social impact study, environmental impact study etc, which all when taken together just means that infrastructural and industrial projects are going to be unnecessarily stalled, if not forsaken. Such a scenario would reduce our competitiveness further, which is already above 100th position in around 180 countries. Ultimately, a thriving industrial scenario is needed to create sustainable jobs, which is the only means to uplift millions of less fortunate Indians from poverty. That is where CII’s reservations come in.

What about the Companies Bill and Food Security Bill then?

We broadly welcome both. Many of CII’s recommendations were indeed added to the Companies Bill by the Government. But we have reservations regarding provisions like mandatory CSR. It is found nowhere else in the world. Similarly, the new CSR provisions have too many what-not-to-dos and what-to-dos, like where exactly to do CSR etc. One should understand that CSR too is a creative process, and that many Indian companies already have excellent CSR practices without any such regulations. It should come from within, as a matter of social responsibility, as a matter of pride. We believe it is not something to be imposed by a government. Regarding the Food Security Bill, our main reservations are regarding two aspects - the wide coverage and the implementation. Do you think 67% of Indians need subsidised food? That comes across as an extreme view. If people who can very well afford food is included in such an exercise, it will invariably end up in wastage and even worse, as a corrupt money-making activity for many. Regarding implementation, it is well-known that our PDS is full of leakages. If such a massive scheme is routed through the same PDS without plugging these leakages, it would end up in huge wastages.

Coming to a question on your sector, why hasn’t India still produced services like Google or Facebook or a software like MS-Office?

India already has internationally best-selling business software packages like Infosys’ Finacle for Core Banking Services. But when it comes to consumer software or services, yes, success hasn’t come yet, but it can come in the near future. You should understand that Google, Facebook or MS-Office are just three enormous successes among thousands of competitors around the world. In fact, it is not just India, but no other nation other than USA has been able to produce such global scale products. It is also a function of IT penetration. North America, especially USA, had the highest IT penetration in the earlier IT decades, and that is one prime reason why such successes were of US origin. But the situation is set to change, as India is a leader in the world when it comes to mobile penetration or social media reach. So, definitely we can expect breakthrough products of Indian origin in the mobile telecom space or social networking space. Already some big Indian successes are emerging in mobile app and Facebook app spaces.

You have been one of India’s most successful entrepreneurs as well as most successful corporate leaders. How far are both roles different, and how would you advise aspiring entrepreneurs as well as aspiring CEOs?

What I have always felt is that both these roles are not different at all. A good entrepreneur can be a good corporate leader, and a good CEO can be a good business owner. My advice to both these professional groups would be to scale up their activities. Scaling up your company is not just for business survival, but for societal contribution. You can influence the communities around you in a positive manner, if you are bigger and bigger. In the final tally, what matters most is contributions as a societal leader, and not as an entrepreneur or CEO.

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