India faces challenges ahead

Given that India has been growing over 7% in 2015, how well is the country equipped to displace China as the next global growth engine?

India’s basic advantage is with its people. Fifty percent of the population is below 25 years of age. Sixty percent is below 35. If you harness this, then you can definitely convert them into an asset. But the crucial question is whether you are going to harness them in a productive way. Otherwise it can turn into a liability. That’s why the focus of this government is on job creation. India is required to create 1 million jobs per month to sustain the large number of young people entering the market.

A million jobs a month, that’s extraordinary.

Yes, it is. And I would add that some estimates even say that India could grow as much as 9% for the next 20 years. If that happens, we will be close to a $10 trillion economy by 2035. I will keep my fingers crossed that what we envision is in the realm of achievement, but it requires hard decision making also. This government is on the right track. They are thinking big and want to make India one of the premier countries in the world. Unfortunately, we hardly think big, so in that regards, having the Prime Minister think big is a very positive development. Secondly, he is a man who has delivered at the state level and now he must deliver at the national level. It is no secret that the challenges at the national level will be more complex.

In India we are lucky to be among the fastest growing economies in the world now, and we place special attention to our relationship with the US, as it is the world’s largest economy. China and India combined still consume less than 60% of what the US consumes. And I am not only talking about trade in goods. When you add services, India has a trade surplus with the US of $35 billion. Secondly, this government is talking about some of the major initiatives for using renewable energy. If we are going to achieve this, we need technology from places like the US. We are very pleased that the US is supporting India in its solar initiative.

What is your opinion on the government’s Make in India initiative and its ambitious goal to transform India into a global manufacturing hub?

Regarding Make in India, this is to cater to both the foreign and domestic market. This initiative is an invitation for companies to set up their manufacturing base in India, and look at both the domestic and export market. India’s “ease of doing business” ranking is important not only for foreign companies choosing to do business here, but also for domestic businesses seeking to start operations. Unfortunately we have not improved substantially in the last few years; though the World Bank usually makes these statistics from the stakeholders, so it will take some time before statistics sway.

Nevertheless, the government has put in place a large number of reforms. By focusing on Make in India we will not have another choice than to make it easier to do business in India. For a foreign company, it is very important to have stable policies here, a predictable tax regime, and transparency. This government is conscious of this fact. Global companies today have many options, yet they come to India because we have a huge market. However, if there is no predictability in the taxation regime, and you are not sure what you will be earning in two years time, you won’t want to invest in a country. The Prime Minister has successfully attracted interest in India, yet there is a significant challenge to deliver as well. The sectors identified under Make in India are a nice blend of traditional sectors and emerging ones: from textiles to nanotechnology to IT.

How can the government ensure that Make in India will be successful?

We feel that if Make in India is to be successful, we require large companies to set up their base in India. Take Suzuki for example, which arrived in India 30 years ago, throughout this time you have seen the industrial base grow in different states. If Boeing for example were to come here, they could develop plants and clusters for their necessary components as well. India has huge technical manpower that companies can maximize on. Today, almost 300 of the Fortune 500 companies have their R&D base in India. If we give them a decent environment to operate here, then we can spur growth of small and medium-sized enterprises. The capital employment ratio for SMEs is much higher than for larger corporations that yield better opportunities. So, we have a scenario of SMEs developing around the cluster of larger corporations – this is what we can achieve through Make in India.

And what do you feel are the main challenges?

A major challenge will be infrastructure. Cost of capital projects go up due to lack of infrastructure. This government is very keen on putting infrastructure projects on the fast track for development, focusing on freight corridors, double-decker trains, river transportation, and other advancements to reduce logistic costs. Logistics costs in India are currently very high making production inefficient, and the cost can be up to 14% of GDP. This is huge and something that has to be addressed – however much of it can be reduced, and I am sure that you will see this over the next few years.

Skill India is another important government initiative. Unfortunately, India has defied the traditional economic transition – moving from an agriculture-based economy to manufacturing to services. We jumped from agriculture to services, bypassing manufacturing. Today, the service sector dominates 65% of the GDP, manufacturing struggles on 15%. We have a major challenge at hand as we have to absorb people from the agricultural sector into the manufacturing sector, not the services sector.

One of the reasons why China has been able to do this is due to their productivity. Today, Indian labor is 50% cheaper than Chinese labor, but Chinese labor is 60% more efficient. However, there is a limit to which you can increase productivity.

China today is in a situation where they are ready to exit the labor-intensive sector, moving into the service sectors and technology sector. This leaves a gap that India is best suited to fill. Yet you have other countries like Cambodia, Sri Lanka and Bangladesh eager to step up as well. If we are to take this space, then we must emphasize our prowess at the skill level. This government is accurately taking that hold, with a ministry dedicated to enhancing the Indian skill level and working for that.

To accomplish this we need to focus on our education system, which has a great disparity here in India. By focusing on enhancing skills through schools’ curricula, you can give people the skills to earn a decent living, and also take the pressure off of the education system at the same time.

Amitabh Kant is one of the architects of the Made in India campaign, yet some others talk about a campaign Make for India. In other words, if you make in India for the global market, but the global market slows down, whom do you sell to? What is your vision on that and how is your organization helping exporters?

The Indian economy is growing by over 7% even when the world economy is slowing down. As a nation, we need to focus on the domestic market and on exports. At our organization, we are focusing on exports, obviously, which reflect the aspirations of the SMEs here who struggle to get credit and find a market. This organization plays a crucial role in assisting these companies to provide them a helping hand.

One of the important issues that have been flouted in India has been multiple taxation and state taxes. The government is looking to introduce goods and services tax (GST), which could add 1-2% in GDP in 2016. This takes away the divergent taxation. This is something we will all see happening in the next few years. There is confidence in industry today and optimism for the coming years. We are hopeful to be a middle class economy by 2030. There will be a lot of money flowing in, but we need to focus on managing our resources to seek the maximum benefit.

The government has taken impressive strides to invigorate the economy – today you have the public sector bank led by a private sector leader, so you are bringing the best talent to manage those banks.

Even though relations between the US and India are growing, US Secretary of Commerce Penny Pritzker has said how the true potential for trade and business relations has not lived up to its full potential because India is the world’s seventh largest economy but only the 18th largest US export market. So, what needs to happen to unleash this full potential?

I think the US has already flagged the issues. One is the banking sector; we have some restrictions on foreign banks, which is an issue that the US has marked. But, the US also understands that India is able to operate without bowing to a single power, which the US can respect. India is a vibrant democracy and the world’s largest. We require US support in the defense sector, and if this sector opens to foreign investment, I am sure various companies in the US would benefit. We have still not yet opened up a few sectors of the economy for certain reasons, but we are on that track and I see solid potential in this regard.

You have been a driving force in this institution and have made some great things happen. What are your plans for 2016?

I always believe in innovation. I have always said that in the service industry, we have to be a step ahead of what consumers need. I need to know what my members want before they ask for it. We have to be proactive, look at what challenges will be faced by the export sector and face those challenges accordingly. For example, we know that the GST will be introduced in 2016. There are many issues that exporters will face because we have provided them tax exemption when they procure raw material. I will now have to explain to my exporters to forget about the exemption. The money will be initially blocked but I will have to lobby the government to release the money quickly. So if he makes export in 15 days, you release the money in 15 days. What has happened unfortunately in India is that much of the exporters’ money with state governments is blocked for over six months. So if you have a GST rate of 22% and your money is blocked for six months then you are overpricing the market by 11%. And nowhere in the country and in none of the products do you have a margin of over 10%. In a fiercely competitive market.

So on the one hand I have the challenge to convince my members to move away from exemption. Be ready to pay the duty to get the refund. I have to work with the government to get the refund expeditiously. So in a way for 2016 I am anticipating that kind of challenge and accordingly also preparing to convince both the government and my members.