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Lightening Centre's balance sheet can get economy back on track: PwC India's Sanjeev Krishan

"Lightening the balance sheet of the government means divestment and monetising their investments. That is the way to go. If you look at it globally, that is how things have worked out," says Krishan

Rajeev Dubey | Anup Jayaram | January 25, 2021 | Updated 13:20 IST
Lightening Centre's balance sheet can get economy back on track: PwC India's Sanjeev Krishan

Sanjeev Krishan who recently took over as the new Chairman of PwC India has been a lifer with the firm. He joined PwC in 1991 as an articled trainee. After becoming a partner in 2006, Krishan led PwC India's transactions and private equity business. He also did a three-year stint in Sweden. Krishan spoke to Business Today's Rajeev Dubey and Anup Jayaram on the current state of the Indian economy and the possible way forward. Edited excerpts:

Business Today (BT): What all according to you should the FM do to drive economic growth?

Sanjeev Krishan (SK): Two or three things are quite evident. We are not out of the woods yet. Continuous focus on healthcare and sanitation is important. The other is going to be on social capital, because the whole system has been disrupted quite a bit. We have been talking about symmetry between the haves and have nots of society, even prior to COVID. Now, this is going to get further enhanced. So social capital and education are going to be important. The other thing which a lot of corporates are doing is the power on ESG, something the government will need to consider.

There might come a day when foreign investment in India might be funded, predicated on carbon neutrality, which Indian businesses have, or their social governance. We already know that foreign retail chains have parameters on child labour. Environment is now becoming quite important. It is not just the social imperative. People have done enough on the social side. During the last year because of various reasons there has been significant consolidation. There is nothing against consolidation, but you need big corporates to continue and survive, because they are the ones who generate importance for the millennial population we have.

BT: Do you see India emerging as a manufacturing hub?

SK: Yes, every crisis is an opportunity. The reforms that we're able to do in this period have the possibility of gaining acceptance quite significantly. Some, like land and labour reforms, have been in the works for a long time. If you put that all together with the governments focus on Atmanirbhar Bharat, it is possible that manufacturing will in some ways come back. The geopolitics of the world is obviously another. I don't think it's a given that people will move out of China into India.

While labour cost in India is lower, but in infrastructure and logistics costs we are not as competitive as China. I don't think it's an obvious. But the good thing is that the reform process has started and manufacturing can have a multiplier effect. At some level manufacturing can provide a significant incremental boost to GDP. It can help incentivize some foreign players to start investing in India.

Look at electronics. It is our second largest import. There are segments that can benefit from the PLI scheme. We have already seen some uptick in chemicals and pharmaceuticals. A healthy ecosystem has been set up. But, we need to get into niche manufacturing, which is more precision oriented. Skills training is something which is needed. Then, do we have the right technology - are we using embedded technologies in manufacturing?

BT: Given the state of central government finances, what strain are you expecting on the government's balance sheet? Where can they really raise resources this year?

SK: We are happy to go from -24 per cent to -7.5 per cent in the second quarter, but is still a significant contraction. While there is an uptake in GST collections, can it be sustained? There is a challenge on the revenue side. There are two things. One is how do you expand the tax base. The second is how can the government continue to lighten its own balance sheet? Today, there is private capital available to lighten not just the central government, but even the state government balance sheet. There are many, many areas like tourism and others, and some of these have been hit in a very big way.

How can we monetise some of the assets that the government has? On the fiscal side, maybe the room to manoeuvre is not so much because, a lot depends on activity. Lightening the balance sheet of the government means divestment and monetising their investments. That is the way to go. If you look at it globally, that is how things have worked out. Whenever a situation like this has come, lightening the balance sheet, or monetisation of assets has helped get the economy back on track.

BT: Where do we go from here on healthcare spending? Last year, we've spent more on healthcare, but not much on infrastructure...

SK: Today, nothing is more paramount than health. It's not something one can ignore in the near term. The crux of the question is what you can prevent, and what you cannot. On the public health side, there is work to be done on an efficient and equitable health system. It should be robust to meet surge demand. The question is are you able to meet the surge demand. The other thing is about having early detection mechanisms in a country with such a large population as ours.

On polio we have done huge campaign work. But how can we get to early detection and bring in containment measures. This is something that we need to be ready for every two to three years. Many conversations we have had with people say this is something one has to be now ready for. Also, how do you involve the private sector in healthcare in a big way and get them more involved. That could be through voluntary schemes or universal health coverage. Those are additional things which will possibly help, because it's all been about public private partnerships. But how do we continue to incentivize the private sector?

BT: What are the companies you're dealing with saying about the extent of recovery? And what is the realistic assessment of when do we get back to pre-COVID levels, if not better times?

SK: It's a bit of a crystal ball game because nobody knows for sure. There are certain sectors which have come back quite evidently like power and telecom and maybe even pharma and chemicals. Then, of course, hospitality, tourism and travel, which were the worst cases. If we include a survey we did in July of last year, almost 82 per cent of them told us they expect to be back to pre-COVID run-rate by June of 2021.

Having said that, I do believe that there is going to be continued challenge, at least for the next two to three quarters. I would suspect that until and unless we get our heads around the vaccine there are a lot of challenges. Now in terms of how we disseminate, how distribution happens, who gets it and who doesn't. As a businessperson, I would like to tell my people that you can come to work if I do believe that creates greater efficiency in delivery. If not, work from home is working just fine. Or if this pandemic has changed the way we do business forever, then it is another thing.

The other part is when does consumption pickup happen? I believe that is going to be staggered because people will probably come back in a calibrated way which means consumption increase will be in a calibrated way. So it's a bit of a cycle, but the good news is that cycle has started. It will take another two to three quarters for demand to come back in the way that we possibly were used to.

BT: Services have been most impacted and did not have an opportunity to bounce back unlike manufacturing. Do you think that between services and exports we may be able to show some resilience? Or is exports a gone case for us...

SK: Unless there is global demand, exports may continue to be muted. But, the good news is that across the globe there are recoveries. So, the recovery is starting to happen. In that way, I am a bit more upbeat about services, because it could be more immediate. As long as you're able to deliver on services, it should be possible to get back on that segment. There is a global recovery, which would actually help us.

Because of this challenge, investments and innovation which was happening has flattened off. Much of the services growth comes because people are interacting with others and coming up with new ideas. That pace has slackened. So, from the pace at which it can grow, there will be challenges. But getting back to where it was shouldn't be a big challenge in the next two to three quarters.

BT: When do you see the private investment coming back?

SK: We are at an interesting point of time. Interest rates are down as low as they could. There is no incentivisation for the private sector to start building capacity again. We discussed the PLI scheme and other possibilities of sectors like electronics, pharma, medical devices and so forth. I think there is just so much to incentivise the private sector.

At this point there isn't enough excitement for consumer demand needs to come up. Industry will produce because it can export or if there is internal demand in India. The government has done enough to incentivise the private sector. We will start producing for the Indian markets, which will definitely happen over a six to nine-month time period. I think manufacturing will surprise us at the end of next year.

But, the PLI Scheme will encourage lot of foreign investors to set up manufacturing bases in India. And together with some other stuff such as getting more skill training will enable us to achieve it in some part. That will, of course, need more private investment.

We have the right ecosystem; interest rates are at an all-time low; corporate tax rates for manufacturing companies are at 17-18 per cent and we have 100 per cent FDI in most manufacturing activities. In the long-term, demand will pick-up. Nobody's disputing that. And in the meantime, how can I use India more as a manufacturing hub to the world is a question that hopefully we'll have answered in the Budget.

BT: Demand is an issue. Is there logic to the government focus on only looking at the supply side, and not necessarily demand? Until last year the whole focus was on following the Chinese model ensuring enough supply and then demand takes off. But it didn't play out as they anticipated. So, where was the disconnect between what every economist on the planet was telling the government and what the government is doing?

SK: The China model was a model in transition, where they were moving from incentivising domestic demand, as opposed to being producer to the world. They did a fairly good job. They were leveraging on the capacity that they had built up over the years. From an India perspective, the demand pick up has not been as significant.

There are two or three things. The government has made efforts, if you look at cash flows. In some ways they've been trying to ensure there is enough incentivisation. The challenge is that while the rural demand is there, urban demand has some sort of flattened off. It is coming back in some level. Auto sales have picked up as people want to travel in their own cars from a safety standpoint. But discretionary spending is at an all-time low.

If you look at the indicators, say GST collections, toll collections and all of those were showing significant enhancements till the festive season. Some of this could be pent up demand.

I think the government has done enough to push demand at the rural end. Urban demand has been hit. The problem is people are starting to live in a minimalistic way, but capacity creation is a bit higher. And that is a conundrum that we are dealing with.

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