Vijay Kumar Munjal likes to count potholes. There are 168 between Delhi and Ludhiana - a distance of 310 km - and as many as 62 on the four-km road connecting two of his factories in Ludhiana.
These don't worry Munjal too much; his Audi A6 is more than capable of negotiating them without rattling his bones. The potholes Munjal stumbles on are the figurative ones. Such as the job-seeker who turned up at his office one day.
"How many centimeters to an inch?" he asked the candidate, who claimed to be a mechanical engineer from a private university. The candidate smiled in the manner of one facing a trick question. "They are different, no relation."
In reality, an inch is 2.54 cm. But the mechanical engineer still got the job; he had come highly-recommended by a political heavyweight.
Munjal himself is no lightweight. He is part of the fabled Ludhiana-Delhi family that gives him his surname and runs the world's largest two-wheeler company, Hero MotoCorp. Vijay Munjal owns and runs Hero Eco, which is into bicycles, electric vehicles, health care, exports and real estate , and is among the more prominent industrialists in the Ludhiana area.
The lesser ones in the area pay Rs 20,000 to get each of their railway containers cleared at the ports. "I suspect the excise and customs clerks make more than I do," says one of them.
Munjal and his ilk in this thriving industrial belt - home to numerous units making bicycles, hosiery, tyres, other automotive parts, and engineering goods - encapsulate the opportunity and challenge that Finance Minister Arun Jaitley faces as he prepares the Narendra Modi government's second budget, the first for a full year. They are also the issues that the Prime Minister's Make in India campaign grapples with, even as it is widely expected to form the backbone of this Budget.
But first, the opportunity.
The BT panelists did not tire of pointing out in their discussion that the Finance Minister has a historic opportunity. Japan's financial services group Nomura sees 2015 as a goldilocks year for India. The intended meaning of that term here (the others are a girl with light blond hair and a plant with yellow flowers) is that the Indian economy is neither too hot nor too cold but just right - the way the United States economy was described two decades ago.
Nearly every macroeconomic indicator is favourable. Inflation is down. The current account deficit, the UPA's grizzliest bugbear, has been tamed by the historic dip in global crude oil prices. Foreign exchange reserves are at an all-time high. Foreign institutional investors (FIIs) have been pushing stock market indices to new highs, showing their continued faith in the Modi government. Even Reserve Bank of India Governor Raghuram Rajan seems to have turned a believer, effecting an out-of-turn cut in the repo rate in mid-January and reducing the statutory liquidity ratio at the scheduled policy review on February 3. The IMF has forecast that India's economy will grow at 6.5 per cent next year, faster than China's 6.3 per cent growth.
The Central Statistical Office (CSO) is several steps ahead and has already taken India's growth beyond the IMF's projection. As it changed the base year and jettisoned factor cost for market prices, the economic growth in 2013/14 stands revised at 6.9 per cent, and not 4.7 per cent, splashing buckets of sunshine even on the UPA's gloomy last year. Assuming similar improvements in the four quarters of this financial year, we may end March 2015 with 7.5 per cent growth.By the time you read this, you will have learned more - advance estimates for the GDP are to be released on February 9, when this magazine will be under printing and binding. One can expect the fiscal deficit to meet the target of 4.1 per cent of the GDP, as Jaitley said in a public statement at the end of last month. But it's a figure he will disclose only in the Budget.
We need to catch a breath here to allow the sobering thoughts to come through. Despite the CSO's ebullience, the usual signs of a typical boom period are missing in tax collections (growing at only half the rate of 19 per cent the last Budget hoped for), excise duty (down 2.7 per cent), bank credit growth (slower this year than last year), and Index of Industrial Production (depressed despite the perky electricity sector). Corporate balance sheets remain weak. The banking system, as BT's last cover story pointed out, faces peril.
"The government will miss its revenue target and achieve its fiscal deficit target. This will be the poorest quality of fiscal deficit in the recent past, as 75-76 per cent of it will be for revenue expenditure, not capital expenditure. There might be a Rs 1 lakh crore shortfall in tax revenues," says D.K. Srivastava, policy advisor at management consultancy and audit firm EY.Until April-May 2014, growth rate of expenditure was 20 to 25 per cent. That has come down to 7 to 8 per cent since the Modi government took charge. The government is spending mostly on salaries and pensions and not purchasing goods and services, nor on building assets.
Investors complain of a lack of concerted action after big announcements. It did not help that soon after the Prime Minister launched his Make in India programme and said he wanted to raise India's ranking in the World Bank's ease of doing business index from 134 to 50, the new rankings showed it had fallen to 142.
"When I talk to investors, they are all hungry to come and invest in India. But they are frightened of setting up greenfield projects. Foreign portfolio investors do not hesitate to buy stocks and multinational companies do not hesitate to buy existing businesses. But companies abroad are not so comfortable setting up businesses from scratch," says Ridham Desai, Managing Director of Morgan Stanley.The good part is that the government looks determined to change things. It has already pushed through a spate of ordinances, some of which deal with ticklish economic issues like land acquisition, and has threatened to call a joint session of the two Houses, which will negate its weak position in the Rajya Sabha, to pass the bills to support those ordinances.
The finance minister has received a further boost from two sources. Disinvestment has begun to roll. The Coal India sale of 10 per cent equity means that more than half of this year's disinvestment target has already been met, even if a lot of it had to be bankrolled by state-owned bodies like the Life Insurance Corporation. Secondly, a Rs 80,000 crore bonanza accrues from the failure of many government departments to utilise their allocations of plan expenditure. There will soon be an auction of telecom spectrum. A good showing there will come in handy.So, given all this, what is Arun Jaitley likely to do on February 28, as he rises to present this year's Budget?
Make or break
This year's Budget, like any other, will obviously address the entire gamut that an annual accounting exercise ought to: there will be the yellow, green, blue, red, and white booklets addressing taxation, allocations, and the laundry list of the giving and the taking. There will most likely be something to reform the direct tax system and something to ensure that the much-awaited Goods and Services Tax can be ushered in by April 2016.Modi has said he does not favour slashing subsidies because they favour the poor, the Budget may like to plug their leakages. Hopefully, there will be a big-ticket capital expenditure programme by the government. The last growth spurt of 2003-08 owed something to the post-liberalisation high in the central government's capital expenditure, some of which could be seen in the rapid construction of highways.
We are likely to have more assurances on retrospective taxation, which is at the core of the allegations of "tax terrorism". The government signaled this by not contesting the Bombay High Court's judgment on transfer pricing that went in Vodafone's favour. That would have consoled Marten Pieters, who recently stepped down as Vodafone's India head. He has said more than once that India is a difficult place to do business in.
However, statements made by ministers and bureaucrats, in public and private, and conversations with businessmen who interact with the government suggest that this could well be a "Make in India Budget". Now, the Make in India campaign will already be five months old by the time the Budget comes, but many people are still trying to figure out what it means, and what it changes. "When I look at this government, I am not able to connect the dots," says a top functionary of a large global investment bank. The Budget may help him connect them.
First, the government has concluded that the time has come to dismiss the talk of India being a unique economy that will jump from being an agrarian one to a services one, skipping the stage of manufacturing. "It is fine for those countries to get into a services economy which have a high per capita income and low population, like Sweden or Norway," said Amitabh Kant, Secretary, Department of Industrial Policy and Promotion, at the International Chamber of Commerce AGM on January 27. Kant has been handpicked by Modi to run the Make in India campaign.
On December 29, Gautam Adani, Mukesh Ambani, Anand Mahindra, and 44 other CEOs landed at Vigyan Bhavan in New Delhi to attend a workshop on Make in India. They had the entire Union Cabinet for company. Twenty-five secretary-level bureaucrats made presentations to this audience with an action plan, with deadlines, for various ministries. The workshop lasted 12 hours.
BT has seen a document that was part of the proceedings. The proposals in it include - carmakers take note - a cess to raise Rs 350 crore a year. Assuming 2 million cars sold in a year, that's Rs 1,750 per car. There is a proposal to reduce central excise on footwear from 12 per cent to 6 per cent and the customers duty to zero on machinery for the leather industry. To help gems and jewellery, there is a proposal to reduce the import duty on gold and silver from 10 per cent to 2 per cent. VAT refund, according to one of the proposals, will be paid directly into a company's bank account within 60 days. You will find many of the other proposals sprinkled over these pages.
In the first week of February, the Prime Minister met 21 global fund managers and institutional investors at an event in New Delhi hosted by BlackRock CEO Lawrence Fink. The priority of his government, Modi said, was "growth and jobs". A minister says he and his colleagues are working overtime to untangle the issues in mining, coal, power, oil and gas, and infrastructure projects . That will put the action back in those sectors. More importantly, there will be more jobs.
Jobs is what we need. A million of them. Every month.
That's how many Indians join the workforce - every month. If we do not find jobs for them, the much-touted demographic dividend - more than half the population below the age of 25 - can become a demographic disaster. And services are not the panacea for it.
As services drove the last growth spurt, the talk of "jobless growth" gained momentum. The sector employed less than 27 per cent of the workforce in 2011/12, the latest year for which this data is available, although it constituted more than 57 per cent of the GDP. On the other hand, manufacturing constituted 18.4 per cent and employed 24.3 per cent of the workforce. The runaway winner here was agriculture, employing nearly half the total workforce while constituting just 14.4 per cent of the GDP.
But this hardly makes agriculture the messiah for job-seekers; a very large portion of its workforce suffers from what is called hidden unemployment - too many people doing what can be done by just a few. The savior of the excess farm labour, therefore, is manufacturing.
"To create enough jobs, we need nine to 10 per cent growth every year for three decades. For that manufacturing must grow at 13 to 14 per cent," says Kant. But the sector has its own issues, one of which is the lack of clarity on who to make for.
A much-debated statement by RBI Governor Rajan is worth reproducing here. "There is a danger when we discuss 'Make in India' of assuming it means a focus on manufacturing, an attempt to follow the export-led growth path that China followed... But the world as a whole is unlikely to be able to accommodate another export-led China." Instead of Make in India, he said, "?we have to look to regional and domestic demand for our growth - to make in India primarily for India."This received a quick riposte from Arvind Panagariya. Before he was appointed to head the NITI Aayog, he said in a column in India Today, BT's sister publication: "Given his export pessimism, it is no surprise that reforms of myriad labour laws? find no mention on Rajan's otherwise long list of reforms? we confuse our policy-induced failure to compete in the global markets with their saturation." For his part, Kant says the country must increase its share of global trade - 1.7 per cent in 2013. "India lacks size and scale, and needs big thinking."
But can a marketing-led campaign do for manufacturing what it did for a service sector like tourism? As the cliché goes, time will tell. But raising that question is jumping the gun. So, first things first.
The more things change?
There are some manufacturing industries which now employ fewer workers than they used to, for the same capacity or higher, because they have embraced automation. And no one can blame them, given the history of labour strife in the country that continues to rear its head, and the need for higher productivity to be cost-competitive.
Harsh Pati Singhania of JK Group talks of automating the entire operations management at his cement factories. R.V. Kanoria of Kanoria Chemicals, too, wants automation in his units.
"A lot of the laws inhibit people from employing more. We have been expanding our businesses across paper and cement. We see that operations management wants more automation than labour partly because some processes come with automation. The other part is the reluctance to handle people. The issue of skills also comes in," says Singhania.
"Smart factories" are the in thing. There are people like Google India head Rajan Anandan who believe that in two decades robots will do all the work that industrial workers do today. If 3-D printing becomes more rampant, they may be proved right.
There can never be a case against automation - it increases productivity, cuts cost over the long term, and improves quality. But it does not help an ever-swelling workforce.
One thing that stayed with the listeners from Modi's Make in India speech was that the cost per km for Mangalyan was less than what the autowallah charged in Ahmedabad. But low cost can only be achieved with high productivity. And that, as Suman Bery of Royal Dutch Shell pointed out in a newspaper column, may not be compatible with the employment goals. "Labour productivity in India is the lowest in the world. The flipside of that is skilling and if you really want India to succeed you will have to identify five to six core sectors and push them," says Gopal Sarma, Head of Infrastructure Practice, India, Bain & Co.
The government has done that, and chosen sectors that are more labour-intensive than the others for special attention: textiles, leather, gems and jewellery, and food processing.
To readers of a certain vintage, that would sound like a blast from the past. There is another one from the not-so-distant past. The Make in India website says its goal is to increase the share of manufacturing in the GDP from 16 per cent to 25 per cent by 2022 and create 100 million jobs. These are the exact same goals that the UPA's manufacturing policy of 2011 sought to achieve. You can see how things have moved in the intervening years in the graphic titled Evolution of the Indian Economy.
That takes us back to Vijay Kumar Munjal in Ludhiana. For he talks of the things that have not changed, and of things that echo across sectors, including in the government's chosen ones.
MAKE IN INDIA GAME PLAN
Suggestions for States
-Implement and enforce single-window clearance
- Online registration and monitoring of applications
- Single registration and ID for all state taxes.
- Earmarking land parcels for types of industry, green industry, no red industry
Develop a land bank
- No requirement for green industry
- Develop and implement electronic consent management systems
Oil and Gas
Interest subvention, long-term funding for manufacturing clusters from Oil Industries Development Cess of Rs 10,000 crore
- Investment target of Rs 6-7 lakh crore with a target of indigenisation of 50% for upstream sector
- Recognise third-party service providers to provide certifi cations and conduct inspection
- Labour arbitration courts to expedite dispute resolutions
- Introduce self-certifi cation
- Duty-free import of capital goods and consumables
- Creation of jewellery parks/clusters
Capital Goods and Automotive Sector
- Auto cess fund of Rs 350 crore a year
- Formulation of AMP II and policy for localisation of automotive electronic components system
- Formulation of Capital Goods Policy
Leather and Leather Products
- To grow from $12 bn to $27 bn by 2020
- Skilled manpower to go up from 2.5 mn to 6 mn in five years
- Central Excise Duty reduction on footwear from 12% to 6%
- Duty-free import of machines; interest subvention scheme
- Approve and implement Fabless chip design policy
- Operationalise Electronics Development Fund
- Reform inverted duty structure -
- Allow deferred payment of excise duty for seven years »œ Set up an empowered national electronics commission
- Tie-up with 100 companies to create skill development models
- Initiate setting up of 2,500 multiskilling institutions in PPP mode
- Support states through funding, technical support to boost capacity
Defence and Aerospace
- Tax holidays for R&D
- Defence procurement procedure to be time bound and simplified
- Thrust to MSME sector and streamline export procedure
- Facilitate long-term partnerships with private sector
Textiles and Apparel
GOAL: Mega textile parks
- Fiscal incentives - excise duty, service tax and working capital
- FDI, single-window clearance
- FTAs with key markets
Gems and Jewellery
GOAL: To employ 6.6 million, up from 3.5 million, by 2018 To achieve global growth rate of 13% from 7.5%
- Set up special notifi ed zones for sale of rough diamonds
- Reduce import duty on gold from 10% to 2%, on silver from 10% to 2%
- Processed pearls from 10% to 2.5%
- Comprehensive gold policy including mining
- Duty-free imports of capital goods and consumables
- Creation of jewellery park/clusters
- Focus on skill upgradation to international standards
- Tax reforms to explore movement of jewellery across the country
Labouring through it
There has been a lot of talk lately that India is one of the most liberalised economies in the world. The FDI regime has been loosened up in defence, insurance, railways, construction and medical devices. Eighty-eight per cent of all items are on the automatic list. And so on.
But, to those who run businesses, things remain very difficult on the ground. And at the factories.
"Initially, we assembled more than 1,000 cycles a day, but the workers' union objected and reduced it to 300 units. After hard negotiations with them, we raised it to 500. Recently, one of our clients did a performance audit and found that we were producing at a third of the capacity," says Munjal. "I cannot pull up a worker even if I find him violating a safety or any other norm. It is very difficult for us to even transfer anyone. I feel scared going to my factories alone."In faraway Ambur, a small town on the Bangalore-Chennai National Highway No. 46, the concerns are similar. This area is known for two things: mutton biryani and leather export units. Ambur and the cluster around it - Vaniyambadi, Ranipet, Vellore, Gudhiyatam and Pernambut - have 50 large and small leather units that employ 3,00,000 directly. They garnered $1 billion from exports, a sixth of all leather exports from the country.
Salman Ahmed, Partner at Habib Tanning Company, says there are other problems plaguing Ambur. "There is a daily power cut of two hours bang in the middle of the production schedule." Running diesel generators is very expensive, but export orders are time-sensitive. Getting additional power sanctioned is a nightmare. Some units have setup windmills. "However, the government forces us to part with 25 per cent of the power generated and supply it to the grid, for which we spend months chasing the payments," says an agitated leather exporter.Gems and jewellery, as the government has rightly figured out, will remain labour-intensive. It uses laser to cut diamonds, but polishing will always have to be done by human hands. It is a deft art that takes years to learn. It is a sector that needs a lot of capital because, well, diamonds are expensive and customers pay late - 45 to 120 days after the shipment. But capital is a challenge for the scores of small units that dominate this industry. Only a few banks like the State Bank of India and Bank of India would do business with them. Private banks remain sceptical.
"It is scary to think what will happen if a customer went bust," says Aagam Sanghavi, Director of Surat-based Sanghavi Exports International. The government's Export Credit Guarantee Corporation says it doesn't have enough funds and provides selective, limited coverage.
Income tax and customs duties are rough edges for the industry because the price of a diamond is subjective and ever changing. "That's why we demand a turnover tax regime, or a presumptive system," says Sanghavi. But they are not there and international diamond miners refuse to come to India because of that.For once, these troubles are faced not just by the small units and towns. Rajan Bharti Mittal, who runs Bharti Retail, is forced to have a six-to-eight week training programme for his employees because the usual lot coming out of colleges lacks the skills. And then there is the FDI restriction.
Last year saw Carrefour, the big French retailer, exiting India, and the breakup of the Bharti-Walmart alliance. "If the government is keen to give manufacturing a push, it should allow [more FDI in] multi-brand retail, this will enable manufacturing of more private labels and offer better choices and competitive prices to the consumer," says Mittal.
Biocon's Kiran Mazumdar-Shaw recently chose to set up an R&D facility in Malaysia. "Why should a person come to India unless it is globally competitive? Availability of talent and cost of capital are very important? I had a huge challenge in meeting timelines in India. Approvals would have taken over a year and I would have lost valuable time. Malaysia gave me a great offer: a tax holiday, training grants, subsidies. It was flawless execution. They had a dedicated cell in their PMO for everything I needed."
By now you may have begun to wonder whether Make in India, in spite of its bluster, will go the same way as the 2011 policy. That it may not is down to fact that the Prime Minister's Office has put all its considerable weight behind it.
All hands on deck
Junior officials in the Ministry of Commerce and Industry titter that Amitabh Kant, whose DIPP is a part of this ministry, spends more time at the PMO. And why pick on Kant, a minor constellation has formed around the PMO, with everyone - quite unbelievably, for a government effort - pulling in the same direction.
Ministries in India have traditionally worked in silos, with ministers losing sight of the greater good because they are too busy guarding their turf. For a change, several ministries are now working as a cohesive unit. Even tricky issues get resolved through phone calls between ministers, doing away with the earlier practice of onerous file transfers, which could have taken weeks and months to cross the road between the North and South Blocks on New Delhi's Raisina Hill.
"We can see who the boss is," says a high-ranking officer of the power ministry referring to the Prime Minister. The boss has made sure that every minister concerned is going the extra mile to Make in India work. Two of his lieutenants - Nripendra Misra, Principal Secretary, and P.K. Mishra, Additional Principal Secretary, are directly involved in the drafting of the Budget. One of the things they are keeping an eye over is, well, Make in India. They also regularly take stock of the stuck infrastructure projects.
Many of those projects have been stuck for ages due to lack of environment clearances. The PMO is directly overseeing initiatives to resolve the mess created by the violate and inviolate areas for mining, or "Go" and "No-Go", as they had come to be called under the UPA.
Textiles Minister Santosh Gangwar is working on a draft policy to make textile hubs in the country more export-oriented. Oil Minister Dharmendra Pradhan looks at gas pricing and diesel decontrol, unified licensing and NELP - all under the watchful eye of the PMO. Labour Minister Bandaru Dattatreya, is busy drafting a new labour policy, with the PMO's help. A ministry survey says only 18 per cent of the fresh engineers are employable. The ministry is trying to address this with help from its counterparts in Germany and Canada.
A minister, who declined to be named, explains that all this is nothing but Make in India. "It will be wrong to see Make in India as a separate policy. If the railway's operations become more efficient, it will change the way freight moves. If the power situation in the country improves, it will push manufacturing. If capital is made available at a cheaper rate, if you improve the skills of the labour force, if the tax regime becomes more predictable, Make in India will fly. The Prime Minister's vision on Make in India is clear and he is hands-on. We can expect these assurances reinforced in the Budget as well."
An eight-member team called the Invest India Initiative has been set up to facilitate investments. Young professionals from different sectors have been hired to answer queries and handhold investors. According to newspaper reports, the finance minister may unveil a package on February 28 to lift investment sentiment. The package may raise customs duties on some products to encourage their manufacturing in the country, and make changes to the Minimum Alternate Tax for FIIs.
And so on a typical smoggy morning in Delhi this winter, a group of businesswomen discussed the challenges in - hold your breath - the wellness and beauty industry with Skills Development Minister Rajiv Pratap Rudy. In attendance were Blossom Kochhar of Aroma Magic, Vandana Luthra of VLCC Health Care, and others. They discussed ways to bridge the skill deficit in the Rs 41,000-crore industry.
That turnover figure may not be the cheese that drew Rudy to the meeting. It may have been the number of people that have jobs in this sector: 3.4 million.
@shwetapunj; @anileshmahajan; @venkateshababu; @nevinjl