The Parliament continues to debate the good, bad and ugly aspects of GST. In this context, Business Today's Anilesh S Mahajan spoke to Ravichandran Purushothaman, President of Indian subsidiary of Denmark-based Danfoss Industries and Chairman of CII National Task Force for Cold Chain Management to understand how things may change on ground with this act. As we speak, the government has sent the GST bill to the Rajya Sabha Committee to vet it and may present the recommendations in the forthcoming monsoon session. The lower house of the Parliament has already cleared the bill.. Excerpts of the interview.
Q. How do you see this government faring in its first year? As an investor in this critical segment, how do you see the developments?
A. The accountability has gone up. My view is that there is a lot of ownership by the Government to do and move things. That itself has a lot of positive effect on investors. But they still believe a lot has to be done on ground with regard to ease of business and reforms. That is what they need to improve as a Government. India is getting rebranded. There is a lot of commitment from the Government that they want to push a lot of things. But I think carrying their entire bandwagon with them is a challenge as a lot of people have their own ideas. Take the cold chain as an example. An investor has to get 37-39 approvals to set up a cold chain. From the time you have a blueprint, till the time you have to shift goods out of your cold room, there are about 37 approvals. In some states, it is 39.
Q. So will GST change the business for them?
A. Certainly. GST will bring about a path breaking change.
Q. Especially in cold chain?
A. Wherever you have logistics, inter-state transactions, movement of goods from one part of the country to the other, movement of goods from one part of the value chain to the next part of the value chain and till it reaches the final consumer, you will see a lot of impact.
Q. Even with the 27 per cent duty structure, do you think things will start falling in place?
A. I think so. I don't know if it's going to be 27 per cent or global number of 18 per cent. There is speculation that it could be 20-27 per cent, but if you see for emerging markets like India, I think around 20 per cent is what I anticipate. If you look back at the previously announced budget, they parked the services tax at around that area (17 per cent) so I have a feeling they will settle down at 20 per cent. 27 per cent would be for a matured economy in my view, where revenues are moderating. Ours is a growth economy. Scale is significantly in our favour. So I don't think they will go for 27 per cent, but this is just my speculation. My view is that it would be between 18-20 per cent. That's a very reasonable rate. The impact of GST will be realised only after two or three years and it would clearly be a one or one and a half percent of GDP growth in India. Because in a way you are taking out the inefficiencies in the system and it makes India more competitive.
Q. Do you think with the single stroke of GST, you can make an impact in the cold chain segment?
A. GST will be one of the significant moves for cold storage logistics and the transport sector. It will certainly enable cold storage investments. I'll tell you why. If you take any infrastructure, we have a mindset in India that the internal rate of return (IRR) should be 26-27 per cent. That mindset is prevalent because of GST not being there.
Once GST is a law, people will be able to see that they can settle down for an 18-19 per cent IRR because they have a strong cash flow coming in. The cash is also getting locked in to the system, right? The cash will get released and investors will feel far more confident enough to put in their money. The other side of the coin is that, lets' say, you are shipping bananas from Tamil Nadu to Delhi. The whole logistics chain (intermediaries, aggregators, etc.) will now have one way of doing things, so you'll have far lesser impact of cost escalation. In my view, GST would also have a significant impact on inflation, because it will be a derived spin off effectively that you will see moderating prices. People investing in cold storages, will of course benefit because as I mentioned earlier, one needs about 39 different approvals. Even to keep your record books, you need to file your taxation. It will get much more simplified in my view. My take is that it is not the only enabler, but it's certainly one of the significant enablers.
Q. What's the biggest one?
A. I think the biggest one would be on food retail. That will have a bigger impact on GST. Food retail is about bringing commerce closer to customers. Whether you need foreign or Indian companies to do it, it does not matter. For this, capital is needed. I feel food retail is one of the drivers of growth of cold chain in India.
Unless we have technology players in food retail we won't see prices coming. If you take the auto industry, you have far more players and customers have choices and prices have come down. Remember India is a country with consumers from different layers of economics.
Even though you may say that I don't need food retail for India in a longer picture, there are other trends that drive the need for food retail, like urbanisation. Today, in many of the urban cities in India husband and wife go to work. The lifestyles are changing, so they want to go to shops where they can get everything at same price, they want to spend less time and get more value for money. That may be 30-40 million, that's as good as Denmark. In my view, food retail format stores in India need better structural evolution to address the different needs of different customers. We certainly need to think about how to improve food supply system for the bottom pyramid along with medium and top of the pyramid.
Q. There are retailers who want to push things to bring in foreign equities.
A. You need equity to build something right. It's an infrastructure game. You need technology, you need equity, and also you need a lot of regional presence in a country like India. So it's a good cooperation between Indian enterprise and foreign enterprise if you think you need more capital from outside. Do you think they built capital for ourselves in the telecom industry? Here also you can have Indian players. In the car industry do you think any Indian player is there? We are only making a cherry-picking discussion correct. We want the cake but at the same time we don't want someone else to eat it. The world is globalised and we can continue to protect you but only we tend to lose out. If you look at a 5,000 MT cold storage with a complete distribution system, it has the potential to create anywhere between 600-800 jobs. Because you need storage handling, transportation, grading/sorting, packing, distribution, unpacking, front end retail.
Q. What is the capacity of the new Kundli Plant?
A. The Kundli plant that we had commissioned for Sabharwal is 5,000 MT multi-commodity cold storage. As you know, in India, we have 60 MN tonnes of storage. About 75 per cent of them are from West Bengal and UP: more to do with potatoes.
But if you take the food today, you have food commodities which need to be stored at different temperatures, ranging from -25 degrees to +10 degrees. For example, if you want to store chicken or meat, you need sub-zero temperatures. For ice cream it is -20 degrees, for fruits and vegetables it varies from 4-10 degrees.
All are grown in one part of India and transported to another part of India or the world. The whole temperature control and supply chain system is not in place. So, we do believe that India has to move away from the mindset of single commodity to multi-commodity cold storage. On one side, we have a lopsided situation where a lot of it is for onion and tomato, because Indians eat a lot of onions and tomatoes.
We also need to look at their viability in the future as a business model, as a value-added enterprise solution. End of the day, what is a cold storage? It's a warehouse. It's just like our post office where we ship something; it goes safely to the other side. Similarly you should be able to ship vegetables and fruits, meat, milk.
It should be able to be delivered to the right people at the right time at the right price and in the right quality. So it's just a supply-chain model which is clearly missing in India and because of which we have significant wastage. Right now, I think the estimated loss of horticulture is about 20-30 percent. It depends on what crop you talk about.
Even about a month ago, West Bengal had excess production of potatoes because they don't have storage facility. Sometimes, we do not have good intelligence where we believe we could do better using technology. Today, using technology you can see what is grown where, through which you can do a demand mapping. We don't use technology to an effect. In my view, like banks use technology, food chain models need to use high level of technology.
So technology is going to be a driver for a profitable supply chain model in the cold chain industry. Take the example of Shimla apples. You don't get them in Bangalore or Chennai. You actually pay almost double the price of Shimla apples for a Washington apple which is not as tasty as a Shimla apple. This means that apple in some parts of India are bought by consumers at even higher prices than what apples are bought in more mature economies. In Nashik, there were heavy rains six weeks ago. A lot of grapes that were to be plucked out later were on the floor. Fortunately, winery capacity was available which saved something for the farmers.
Q. Do you think some of the state government are valuing food processing and cold storage?
A. If you look back at our history, during the era after independence, we wanted to become an industrialised nation. We did not have a systemic view on agriculture. We were focused on building steel plants. At that time, if we had bought the right technology for agriculture, we would have progressed. Today we make the best steel and cement in the world. Agriculture should have been harnessed then.
I believe that there should be more focus on agriculture because 600 million people are dependent on agriculture. This is how we can create rural jobs. In my view, we need technologies because land holdings have got smaller and we have fewer natural resources. We need to embrace new technologies because if we use PM Modi's new comment, he wants more crops per drop of water (he is talking about better yield with lesser resources).
Gujarat has been successful with drip irrigation because they adopted Israeli technologies much earlier than other states. I think we don't have the same focus and momentum as we have in 'Make in India' for Make in Agriculture.
You cannot win in manufacturing only as an economy in a large agrarian economy like India. If agriculture wins, manufacturing wins. Because you need to mechanise farms, you need a lot of technology, you need to create much more alternative technologies using solar and wind, and you need technology for cold storage. You really need to build an energy efficient infrastructure platform for agriculture. We will face malnutrition issues if you don't address these food issues today.
On one side, you will create jobs through make in India. Agriculture can create more jobs than 'Make in India'. When I say agriculture, I mean food processing, production, post-harvest, food retail, everything.
Q. Food processing seems to be a part of new India strategy. We have seen agriculture growth in the last 3-4 years in Madhya Pradesh, moreover, Maharashtra, Haryana, Rajasthan are keen to get into food processing. Punjab and TN are keen too to get more investments in food processing. So where are these states lacking?
A. My view is execution. For example, the food processing parks that the government is announcing: it is a good idea to create a park and build infrastructure, but you have significant challenges in running it, executing it and making money out of it.
You need strong yield-better by the day. For example, in case of mangoes or bananas, only certain areas produce world-class quality. Certain clusters lack quantity and quality.
There are 19 varieties of bananas in TN but now they only make G-19. This means there are issues around tissue culture, mechanisation, losses on fruit care, etc. Same is the case for grapes in Maharashtra. There are 17 varieties but we grow only 3-4 types.
For mangoes, there are two types of mangoes-table variety and processing type. And even in the processing variety, some of the centres have a lot of yield and others have less yield. This is because there is half-hearted approach by a farmer. Value creation is not seen by the farmer to put his heart and soul. This is a state subject and the state has to fix it.
There are a lot of pre-harvest issues. Unless you get yield up, you cannot do anything with food processing. Crops come only in two cycles of the year. Mangoes are available only for three months in a year. Banana is maybe a crop that is available throughout the year, roughly 10 months. But do you have the capacity to process the three month production of mangoes in India? Absolutely no. Do you really create the yield out of your garden today? No
Q. Which are the areas of success, according to you? Do you think milk is one such category?
A. Certainly a lot is happening on milk. Government is opening up the industry. Milk industry is becoming competitive. A lot of technology is being adopted in this industry. Meat is another area that is growing. There is lot of internationalisation of meat. Seafood is growing again and India is becoming a big exporter of seafood.
There are pockets of successes happening like grapes (a lot of private entrepreneurs are building up the eco system) and bananas. We see intervention from companies like PepsiCo and Coca Cola buying potatoes from West Bengal. In fact, PepsiCo is doing a project with West Bengal Government to improve the yield. But we need a national mission on agriculture if we want to life it up. India cannot win in manufacturing against China. India can win against other countries when it comes to agriculture. If only we get it right in the next 5-10 years. They have to feed a billion plus population in India. The amount of focus we need on agriculture has to be far higher.
Q. Cold storage is part of make in India, but the sense I am getting is that it hasn't been implemented well. With GST it may come through. Your thoughts?
A. For cold storages you need scale. As per registered data, 6,000 cold storages are there in India. Out of this 40 per cent of the cold storages are under 1,000 MT. That's peanuts. You really need those entire 1,000 MT to be converted into 5,000MT and even in the 1000 MT storages, all are single-commodity. So you only store potato through the year. If potato is not there, you don't store anything. So it's difficult to make money. So we need a holistic model looking through the supply chain model.
Q. What new trends do we see in cold chain?
A. 1. You will see more private players in cold storages
2. You will see more warehousing companies putting up cold storages.
3. Just like you give a package to DHL and they deliver for you, farmers will be able to give apples and companies will deliver for you. You can expect that kind of investment coming up.
That will also include refrigerated trucks once GST comes in this will be in place. As of now, roads don't have the capacity for trucks.
Q. There is a school of thought that this government is putting industry before agriculture. How do you see these developments?
A. In my opinion they should coexist with each other. Take the tractor industry today, India is producing world-class tractors, but our own farms are not as mechanised as other countries. We don't directly produce renewable energy but our equipment can be powered with renewable energy. However, we have a factory in Chennai where we have used renewable energy to produce our own goods. Our factory is now running 16 per cent on renewable energy: solar. We have put solar rooftops, floor-mounted solar, solar car parks. We have 1 MW capacity on solar. Typically if you take 5,000 MT cold storage, you need about 350 KW of electricity. So there are solutions where you can use solar energy.
Wind is favourably placed in TN because of the physical location. We receive both the north-east monsoon and south-west monsoon.
Q. Tell us about your new plant.
A. Our new plant is now commissioned and as you know, we started production from November. We have completed machinery for 3 value streams: on-off switches, filter driers and ammonia products valves have started.
We have built an eco system of suppliers as well. We are evaluating more products to be made in India. And we will further launch starting coming quarter to end of next quarter.
From a learning curve point of view, we have had very good successes. One, India has a very strong manufacturing mindset. And we have seen very high quality suppliers in India. And because of the fact that we have high quality of automotive suppliers based out of India, the competitiveness and skill is helping us achieve localisation in the factory. We currently have 80 products developed in the R&D. Some of them are global products while some are dedicated and launched in India.
There is one particular product for the cold storage industry that we launched eight months back, that is gaining good momentum and it is utilised in milk collection centres, called the bulk milk cooler. Consumers can recover their costs in nine months. We have brought in a lot of innovation into this product having worked closely with customers.
Milk collection happens in the morning and evening. Once you collect the milk, you need to keep it at four degrees until it reaches the dairy plant. So there will be a supply chain model that works. Let's say you are in a locality, you have 50 people owning 75 cows. You collect milk and store it in the bulk milk cooler and there's a truck that collects the milk and takes it to the dairy. So till the truck comes you have to keep it at four degrees. That's the purpose of this application. There we have found that we are able to cut down on energy consumption by another 20 per cent. We have made the product robust so it works with higher frequencies, lower voltage. Using R&D in India, we are building more products for India in India.
We still have more capacity in the factory. We are currently at 50 per cent in usage. By the middle of next year, we will be done with current capacity. Then we will look at further expansions next year.