Budget will unfold what to expect from the Modi government: Shashank Tripathi11 min read . Updated: 26 Dec 2014, 12:20 AM IST
PwC India partner and strategy leader says the Narendra Modi government should focus on steps to make it easier to do business in India in the budget
Singapore: The Narendra Modi government should focus on steps to make it easier to do business in India in the upcoming budget, said Shashank Tripathi, partner and strategy leader at PricewaterhouseCoopers India (PwC). India needs legislation that lowers the burden on entrepreneurs and also clear laws on foreign direct investment (FDI) and technology transfers, he said in an interview during a visit to Singapore.
You (PwC) recently published a report stating India could be a $10 trillion economy. What were the key findings?
Our search started six months ago. We started by asking what would it take for India to grow at 9% and more? At that time, even though growth was at a paltry 4.9%, we got a clear view from corporates that 9% is plausible and is desired—not just because the youth are clamouring for it, and that there are expectations; that resolve got solidified in the general election. The way we approached it is that 9% is fine, but India also needs (to move up on the) human development index. Because, unless you carry 1.25 billion people along with you, it will be a very short-term victory. This 1.25 billion that is going to 1.5 billion people, how do we make sure they have health, education and inclusive development... In healthcare, life expectancy at 66 currently can go up to 80 in 20 years—the US is at 79 today. In education, from seven years of average years of schooling, we believe that can increase to 10 years. Against the standard of 3.5 doctors for 1,000 people, we have 1.3 currently, and India would probably require 3.5 million extra hospital beds. We are saying the “winning leap" in these sectors is not “leapfrog", but a combination of fierce catch-up, significant leap and leapfrog. This is where the story shifts from the macro picture to what the companies have to do to react to this shift, and there are five key themes—empower and inform customers, flexible operating models, a very different view to partnerships because if we take the same view to resources and partnerships, it will burn up the planet to get to that same place, growth and innovation mindset, and this is critical as most Indian companies still believe that when the customer is knocking, they start building, as opposed to a more profound view of innovation and R&D (research and development). We believe the percentage of R&D that is required will be shifting threefold. And finally diversity and sustainability. What surprised me was that every business leader that we met said they could not do this on their own, but would need entrepreneurs of this country. The only thing we are asking from the government is help in ease of doing business. We have come out with three models—the base case is troubled waters which is 5.5% growth, second is 6.6-7% and third case is 9%.
What is the role of the government?
The government has to improve the ease of doing business—back off, regulate less and do more consistent policy like in the case of tax issues. We also need positive roles with respect to two national platforms—physical and digital connectivity. But I can also see other national platforms, like the case of Aadhar (unique identification project)—it has been endorsed by the new government also. Frustrations have eased a bit (under the new government) on the ease of doing business front, but time will tell on how much we progress here. Some of the enabling national platforms that allow the winning leap to take place has to be convened by the government; the national optic fibre network is something that may be built and utilized by others, but the government has to convene it.
You spoke to CEOs across sectors from your report—what are they saying now on the seven months of the Modi government?
There is a definite positive outlook to the new government. But business leaders who are not just interested in FII (foreign institutional investment), but in hard business on the ground—they are still cautiously positive. I also feel the new budget will be a big signal to know what to expect from the government—the last time around, the government did not have too much time to react and come out with a budget with its vision. The government has so far been cleaning up the arteries and unblocking the pipes, but the rush of water through that is going to start to happen now. Mature businesses know that to turn an economy around, it is not some magic wand that someone can wave. The maturity of the new government is that it has not done too much in a flurry, but has done the small things right—it has plucked the low-hanging fruit—and not it going for the big push.
So what would you like to see in the upcoming budget?
Steps that will improve the ease of doing business—there should be more legislation that allows for lesser burden on entrepreneurs. Clearly, there is a lot of lobbying and noise going for the large companies—but what is that we can do to embrace entrepreneurship across the country? Some suggestions from our side is that, to a certain level of revenue, take away the burden of many regulations so that entrepreneurship is unleashed from the bottom-up. Second, there should be a clear signal from the government on national platforms—whether it is Aadhar, national optical fibre network and road transport—the government has to play a big role...and now that the planning commission has been disbanded, what is the role of the states? Fourth, with respect to FDI (foreign direct investment) and technology transfer, there should be some clear legislation that should come in, and there should be some clear incentives—currently, there is a lot of money that is coming into India, but the quality of money that is coming in is also important. For instance, from the Singapore perspective, the technologies that Singapore has with respect to smart cities—the deal it has signed with the Andhra Pradesh government for the new capital is fantastic. The government has to give incentives for the transfer of technology. In defence, they have already increased FDI to 49%, but more work is required, especially in the high-tech areas, where it will be difficult for global firms to come and do something profound, unless they really feel that they can own part of that.
What will it take for India to become a $10 trillion economy?
In terms of numbers, right now we are at $1,500 per capita GDP (gross domestic product) and this will have to go up to $6,800 in 20 years—this is 8% growth, but our population is growing also and so the net result of that is a 9% GDP growth. For 9% GDP growth, since we are initially at 5.5%, we have to first catch up and exceed 9% for a few years so that, overall, we maintain the 9% average. It has been done before and can be done again. The investment required to get us there must also increase 9%—it is currently at $600 billion per year, and it should be at $3.6 trillion by the time 2034 arrives. If I take 9% growth and say, where we would be at the end of 10 years, India will be a $4.5 trillion economy. Over the last 20 years, India has grown $1 trillion, and what we are saying is that, in the next 20 years, it has to grow $8 trillion more, and that is a significant shift in the way we have to approach.
Have any countries grown at such rates in the past? What examples can India follow? In a democracy how tough is it to plan on a 20-year scale because the first priority of governments is to last five years and then retain power.
India itself grew at 7% on an average for the last 10 years, and it is not as if that we have to go from where we are at currently—5%—and this is because of the last 2-3 years. For instance, ease of doing business can uptick growth quite a bit because entrepreneurship is unleashed. Some of the regulatory back and forth that happens, that disturbs entrepreneurs and FDI, can uptake growth by certain points. If we create the national platforms we discussed, it will uptake it further. If you talk about real innovation and productivity increase, which is very central to the winning leap—it is not just doing the same thing, but doing it smarter and faster. I do feel 7-9% has always been achievable. Second, many of our own states have grown at this level. Take Gujarat—12%, year-on-year, and look at Madhya Pradesh and Tamil Nadu and Rajasthan. Madhya Pradesh (MP) is important because it is growing from an agrarian society and when we talk about the north of India, they have a model in MP. If we can replicate this in other states, then that is what is required than looking outside. But if you were to go outside, then Korea is a great example—it is not as big as India, but it went through the same process of coming out of agriculture and going industrial and now going technical with Samsung and other brands. It evolved very fast from an agricultural economy to an export-led economy. China is an obvious example, but the China comparison is not fair because of its politics and its thinking is very different and it can push buttons which we cannot do. Our way of approaching this has to be more democratic and bottom-up and it has to involve the citizens of India.
If we evolve the way we think of democracy, away just voting once every five years, and involve that citizen in that winning leap, then this path is possible. We have to involve the 1.25 billion people, or the 750 million people who are part of our work force currently, in saying that this is important for them. You should tell the people that don’t just go and vote and then reappear five years later—in every minute of your life, you must tell them to start thinking about building—that is happening and Modi mandate this time is an early reflection of that.
Can manufacturing come back to India?
On manufacturing, we have to reverse the trend. Over the last 10 years, the percentage of manufacturing (as a share of GDP) has dropped from 18% to 16%. Our (PwC) model says we can bring it up to 24% and the government says it can come up to 25% very quickly. Even at 25%, services will remain the future of India—even reversing the trend from 16% to 25% requires several crucial steps—we need to improve the ease of business. Everyone should be able to start a manufacturing business without 15 people coming to inspect it. The nature of manufacturing will have to take a divergent path—we can’t do what China did 20 years back, where it took a single labour-intensive path. We will have to do some labour-intensive manufacturing because India still has very cheap labour—countries like Vietnam are competing with us on this, but as they develop, their costs will go up much faster than India’s because we have a much bigger hinterland. What is exciting about manufacturing is that the nature of manufacturing is shifting to be more decentralized, more high-tech enabled—so we need to catch that. Our IT sector has done that. India has an opportunity to have a two-track manufacturing approach—one will be more value added that will require more engineering skills and IT integration technology, and the second will be classic low-cost which we will have to grab from other countries. It is true many countries have a better industrial regime that allows manufacturing to come in—frankly, many Indian companies are thinking of those countries in South-East Asia as well. I think the government has to do a very strong job with regard to ease of doing business, building infrastructure, providing power, labour law and land acquisition rules. Manufacturing will create a large number of jobs—but the 10-12 million jobs we need every year won’t come from this alone. Services will constitute a large number of jobs—not just in the traditional format, but in the form of retail, in taxis… One test in the future that India will put economics to is whether services are adequate to create jobs and have enough surplus for economy to grow.
Which sectors require most changes to achieve this level of progress?
We asked CEOs this questions and the uniform view was you can’t take a sectoral view—if you don’t have right health, manufacturing will suffer as labour will not be productive. If you don’t have education, urbanization will suffer. In the first bucket, health is very critical—at least in smaller towns, health infrastructure is very poor and people are under a lot of stress. You can go back to poverty due to health. On the institutional side, power is important—it is a national shame we have not managed to give electricity to every citizen even today. We can’t be calling ourselves an emerging power when you have power cuts even in Delhi. On the enabling sector, I would push a lot on digital because it will allow us to leapfrog in a way that has not been possible. The national optic fibre is doing a great job—the challenge is putting hardware to use it and using it to advance their quality of life.