In this segment, we’re diving deep to give you a detailed look at various factors which drive and influence the business environment in India, as well as the Indian economy.
Our agenda is to bring in industry experts from various avenues, who can give a holistic perspective on where India stands on the global stage and how business-ready it is for future investors and potential market entrants.
This podcast sees us in conversation with Nitin Garg, who’s a business advisor, currently serving as the Founding Partner at Coinmen Consultants. Nitin’s experience in his domain sees him give a reality check on what businesses looking to enter the Indian market can expect. He further talks about India as a consumption market as well as potential, the country’s policy framework and its nuances, and more.
Watch the full video shared above or read the transcript of the interview, shared below:
To kick things off: From 123 to 63, in 3 years, India’s rank in the Ease of Doing Business Index has bounded up. But is the ground reality different? Has it really impacted the perception foreign companies have towards setting up a business in India?
It’s a very pertinent question, according to me because theoretically and on paper, India has been moving up in the Ease of Doing Business rankings and has the led the people to believe/expect that a lot of changes have eased the overall process of doing business in India.
On the ground level however, there are conflicting opinions not only from multinational businesses but from Indian businesses a well. They have been continuously skeptical of the Government’s policies, and especially of the banking system in the country. Right form opening a bank account to undertaking routine transactions, it has been quite the challenge.
If you look at western economies or even developed economies like Japan, banking is probably the primary right given to any businessman.
So, all in all, while there have been improvements in smaller setups on a peace-meal basis, I believe that on a holistic basis, we have a long way to cover and some of it also gets resonated in the economic survey where it talks about how the government’s intervention on a policy level have not always been positive and how we’ve struggled in terms of logistics and banking with regards to ease of doing business. Hence, there is a fairly long way to go before we claim an actual ease in doing business on a ground reality-level.
We also see a lot of investment for factories and setups going to China in the early days and despite all the efforts, India doesn’t seem to be the first or most preferred choice for setting up and my interaction with my clientele has also highlighted the same sentiment (them having moved to Vietnam and Thailand), as the ease of setting up a business is phenomenal in those countries.
Is the potential of the emerging Indian economy as a consumption market big enough for companies to consider India?
I agree that every market is different, and it throws its own strengths and weaknesses and it’s the way you harness them to your advantage is the key. I agree that Indian is a big consumption story. But in my view, consumption is directly linked to income and the propensity to spend from the big population that we expect.
An example again here would be China which itself was a huge consumption market owed to its huge population, and internal consumption propelled the country’s growth for a very long time.
The overall environment was such which enabled significant economic growth, giving a lot of income to the people, thus propelling the middle class to a higher middle class and the rich class to super rich class. And it was that income which eventually got consumed it into the economy and led it towards growth.
So, in my view, we need to see a stronger economic development which will be supported by the presence of this huge population, leading to huge consumption, and the policies have to make this easy because we must keep in mind that even though it may come back to ease of doing business and it makes a lot of impact on people’s decision as well (whether to invest or not without getting a return on that investment).
And this is something which isn’t just valid for international investors, but domestic investors too. They themselves are caught up in the cycle of lack of consumption, lack of demand, leading to their decisions on investments getting postponed which again therefore leads to lesser income generation and therefor a lack of consumption. It’s a vicious circle we’ve gotten into and it must be broken somehow.
That is where I feel that the Government’s role through public spending on asset creation becomes super important.
Is enough being done by India’s policy makers to address the needs of the investors?
There has clearly been an effort, and not just in the budget but over the last 6 to 12 months as well, we’ve seen the Government (from a tax point of view) trying to give more money in the hands of the taxpayers so they can spend more.
I felt that the efforts made in the past and even in this budget via the deductions in the tax rate and eliminating certain exemptions corresponding thereto, hasn’t yielded the desired results. And I don’t think it would do so either because of the following:
-It releases a very small amount into the pockets of a taxpayers, which makes it difficult to fathom that how it goes into the economy from a consumption standpoint, which is why even to increase consumption, tax is not the best way to put in more money.
-We need to figure out how the money gets used in asset creation. The increase in consumption or increase in the flow of money happens via policy framework rather than tax adjustments because what we’ve seen is that the net impact of these tax provisions has been relatively nil.
A lot of exemptions have been taken away, thereby putting people into higher tax brackets as compared to the ones they were already in and that nullifies the net effect of these exemptions. This mechanism doesn’t seem to be working as of now and I can’t see how this gives the money back to the people. And it’s not just for individual taxpayers, but even for moves like the removal of Dividend Distribution Tax and similar changes which in effect doesn’t give enough money in the pockets of the people.
Will the new tax slabs and tax rates help in creating wealth for India’s consumption market?
A quick calculation does at least suggest so and we’ve been essentially able come up with a lot of scenarios yet where this might yield a high advantage, especially because of the middle class, in terms of the percentage of the money handed to them (even if one were to assume that a given individual isn’t a significant earner).
Make In India has been an ongoing mandate for the Indian SME manufacturing sector. But has it resulted in the kind of growth needed for the economy?
Well, yes. What we hear from various agencies is that there has been a significant increase in the number of queries asked by people wanting to set up their manufacturing facilities here but my fear is two-fold; the first would be that regardless of the increase in queries, how many investors end up investing.
Secondly, looking at the data, since most of these companies come in from China, we’ve not seen a holistic investment growth in the manufacturing sector. Another reason could be the free trade agreements in place which allow reduced import duty on finished products (if imported from countries other than China) and hence, probably giving lesser incentives to countries looking to set up plants in India.
Thirdly, the fact remains we’re a “low-skilled labor” country and even though we may aim at manufacturing, what ends up happening in India is the setting up of assembly facilities/plants (especially in the field of electronics and auto components). There is no real value addition, and even if there is any, the value add is limited.
Most functions undertaken here include assembly, where knocked down units are brought in to be assembled in India, which again has been highlighted in the economic survey. Personally, I don’t mind that because gradually, we will move from a low-skilled population to a high-skilled one and therefore towards manufacturing rather than assembly and that needs recognition.
The policies need to be framed around in such a manner that it facilitates quick fixes even for assembly plants being set up. If you read the economic survey, it lists down the approvals required for a manufacturing plant being set up and it’s quite baffling compared to the approvals required for assembly plants, with the former being way too much in number.
These hurdles and the time taken for setting up plants put off a lot of investments. However, my fear is not that the investments don’t come in, because India does provide you with low-cost labor, efficient resources, and a huge consumption market, but it does postpone a lot of decisions, especially in the SME sector (both in India and outside).
The big guys will do what they need to do and maybe even influence policies, but here, the government plays an important role in supporting the SME sector and we’ve had discussions with our clients where they face a lack of clarity from a policy standpoint which has led to them postponing their investment.
From a service economy to an assembly one and eventually into a manufacturing hub, isn’t that the natural progression for India?
Within services as well, we can become a high-end service economy and we see a lot of volume-based service provides doing a lot of quality professional work, but the high-end services are limited to large players. That’s the natural progression for services. From assembly to manufacturing, yes, it’s a progression but the ecosystem needs to be created for the same
Right now, we’re not a manufacturing country and we can’t boast of Sonys and Hyundais of our own, as we mostly do backend assembly or component manufacturing for these kinds of big players. Every time you travel to countries which are smaller but have large economies (like Korea), they have companies which have gone overseas and have done very well, and it comes back to the moot question of assembly vs manufacturing, low-end vs high-end services, and similar issues.
Despite India’s vision, plans, and efforts for its startup ecosystem, it still seems to fall short. What do you think needs to change?
Again, having spoken to multiple startups, the way you can do business in India puts a lot of pressure on promoters to ensure proper compliance so that they don’t end up on the wrong side of the law. Of course, these promoters want to be on the right side of the law whilst not engaging in compliance matters on their own and not underreporting anything as well.
But then again, they need to make sure that all compliances are followed and for that, they need to spend their time on it because they generally don’t have the monetary resources to ensure that someone else does it for them.
We’ve seen most of the startups, irrespective of their size, spend considerable time on tax assessments, particularly on shares-related issues and set-valuations for their investors. And to be honest, there have been no other issues, but rather only this one. By looking at the ecosystem, we need to give them a free hand instead of giving them tax exemptions because once they start making money after setting of any brought-forward losses, I’m sure they’d be happy to pay their taxes.
They need to be left alone and not put under pressure of multiple compliance matters and registrations, and banking should be made easier from them as they are working in a mass market level and banking becomes a key point for them, because either they are collecting money from retail consumers or just the number of transactions they undertake, banking becomes an important cog in the wheel for them.
If I were to look at it, 3 simple things would come up and here’s how I’d plan to solve them:
- Reducing the compliance burden for startups so that they can focus on developing a proper business model and not worry about paperwork, etc.
- Giving them a robust banking system, even if separate teams need to be created within the banking system which work with and understand startups.
- And lastly, not limiting startups with various restrictions, definitions, boundaries, etc. because every startup is unique is in its own way and they can’t be categorized via definitions.
If you look at the startup community, we’re looking at a pattern where idea are being replicated from the West, which means that there is a high volume but not innovation involved in these startups. But to some extent, that’s still fine as these startups still generate employment.
One thing that has been done in this Union Budget which caught my attention as a great move was the deferring of the tax on ESOPs which was a huge issue, as the startups were hiring a lot of people by issuing them ESOPs but the employees were afraid of exercising them owed to the resultant tax outflow on those ESOPs. Now, deferring the tax rate on those would surely boost the startup ecosystem.
Where does India stand on its infrastructure-readiness for its planned economic growth?
In my view, we’re doing okay in terms of developing new infrastructure. We always knew that we were lagging when we started. It’s not something which is new, whereas it has rather existed since quite a long time as we didn’t create the required infrastructure at the right time.
One can argue that the pace of creating new infra is slow because of the various teething issues but overall, the government has done well in terms of reducing the problems and bottlenecks while creating executing these infrastructure projects.
Therefore, the interest from various foreign companies in executing new infrastructure projects continues to remain.
I feel we’re doing okay in creating new infrastructure. We might do even better if we announce new integrated infra projects, though. The Government is focusing on all aspects, be it waterways, roadways, electricity, etc. The focus on infrastructure from the Government has been unwavering over the last 7-8 years.
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We’ve seen the growth, the development, and in a country like India one can always say that you can do more and more but I think it’s also a matter of finances that are available, players who are available to execute these projects, and the availability of the right technology for these projects.
Personally, having been involved within the infra space, I feel the progress is there but one can always argue about its pace.
To increase its public-sector spending, what more does the Indian government need to do for the divestment of its PSUs?
Yes, so the target is 2.1 lac crore INR which is huge because they’re targeting to collect this money form 3 or 4 exits (one of which is Air India, which wasn’t necessarily mentioned in the budget but the efforts for the same have going for a while now). There are a few other PSUs like BPCL, LIC, etc. which have been named as well for disinvestment.
The efforts to disinvest from these PSUs have been going from some time now but what we would prefer to see is the actual exits happening from the Government so that it collect some money and invest it in asset creation. Even in the post-Budget presentation by the Finance Minister, it was mentioned that any money collected from disinvestment will only go towards asset creation, which is a welcome move.
The challenge however will be the practical implementation and that is something we’d love to see. The intent is there, now we just need to see new assets created. If these targets are met, there’d be a lot of money towards asset creation for sure.
While the intent is there, implementation seems to be a problem. What do you think has been the biggest challenge for the Government?
On some big-ticket reforms, whether good or bad, the government has pushed it and implemented it. When we look at GST or demonetization, the Government has pushed and implemented them. The result have been mixed and it might even take some time for the real results to kick in.
We can say GST is now nearing stabilization, which was expected, and even the Finance Minister has acknowledged that something like this won’t be implemented easily. At a grassroot level however, some things are missing. Some things which aren’t as fancy or big-ticket yet equally important, they sometimes tend to get lost and not find a priority in the Government’s agenda.
And I feel it’s an all-round effort where the focus is now shifting to do better rather than doing too much.
Even in this budget speech, we saw that there were not deeper discussions on a few key issues, which to me is a sign of worry that while trying to do too much, you might end up achieving very little.
The reason why GST got implemented and eventually came to what it is today because there was a hawk-eye focus on its implementation, which is what I’d probably like to see as well; maybe some smaller policies or matters getting implemented faster, especially in the SME sector because it’s an important sector which we can’t ignore.
Hence, maybe from an implementation point of view, things need to change because making a big-ticket change takes up a lot of energy and resources and their results can only kick in correct after some time. Therefore, it’d be better to see smaller changes but faster and more effective changes in policies.
Agriculture and its allied industries remain a focus for the Indian Government. But is that approach correct or do the policies remain populous in nature?
I’m not an expert in the rural or agricultural sector but that’s an area we can’t ignore in any budget, irrespective of what the focus of the Government might be because it’s one of the largest contributors to our GDP, it employs the maximum people and it gives the livelihood for a lot of people depending on agriculture for their economics.
Though I’m not so sure about all the policies being adopted to uplift the rural economy in totality. A few discussions with those known to me makes it seem that the policies are more counterproductive rather than achieving what they were made for which in the longer run, probably won’t be good for the rural economy. But since I’m not an expert, I’ refrain from making any comments on that issue.
Did the recent Union Budget live up to your expectations?
I was very happy to see the last year’s Budget and its vision. I thought there was a clear agenda in the minds of the Government which’d be chased over the next 5 years. I was a tad disappointed in this year’s budget because I thought we were stuck in trying to focus on everything, rather than clearing our vision on a few big-ticket items from the last year’s vision statement.
The government has been very forthcoming in listening to various viewpoints to make course corrections, which is also welcome, but probably committing themselves to a couple of agenda points over the next 2-3 years and working deeply on them is something I’d like to see and I hope it happens like that.
That’s because even the investor community works around the vision statement from the Government and makes its investment plans accordingly and it’ll be an immense boost to the overall confidence levels if the government can stick to this vision statement and prepare each budget or each policy in an endeavor to achieve that vision, because that’d find a lot of support from the investor community.
What is that one message you’d like to give to the business community keeping the present and near future in mind?
The story of India’s growth doesn’t change. What doesn’t change is that we still continue to be a strong consumption economy, and what doesn’t change is the Government’s focus on developing new infrastructure which is the right way to invest public spending.
There are a lot of positives to look at, but with a minor tweak in approach to focus on a few key areas over 5 years would be beneficial. A clear messaging needs to be given out because what scares is me a confused approach in messaging, even from a taxation point of view and how we want to approach the taxpayers; whether we want to have a collaborative relationship or create issues for the taxpayers.
A clear messaging approach would surely help, and I do hope it’ll move into this direction especially because of the mandate this Government received form the public; it is incumbent on this Government to deliver on its promises and more than promises, have a clear message over the next 5-10 years.
Over the last 15-20 years, “policy paralysis” is a term we’ve heard time and again and I’m afraid we might move into that direction if the focus isn’t made clear once again.