Making A Fresh Start

CEOs from diverse sectors on what's in store for 2017

Published 7 years ago on Mar 20, 2017 13 minutes Read

Outlook Business presents its second roundtable on managing growth in 2017. Editor N Mahalakshmi moderated an insightful discussion with CEOs from diverse sectors  to gauge their views on the after-effects of demonetisation, their assessment of the Union Budget and growth expectations in the coming fiscal.

It’s been a tumultuous start to the New Year, coming on the back of the surprise demonetisation move at the fag end of 2016. Though the jury is still out on what will be the impact of demonetisation, do you feel the Budget has done enough to spur a recovery?
Novartis India vice-chairman & MD Ranjit Shahani: It was a nuts and bolts Budget; which was good for one or two sectors. But the one that I was most interested in was education and healthcare, because an educated and a healthy society play a crucial role economically. In fact, the manifesto of BJP had stated that they will increase the healthcare budget from 1% of GDP to 2 ½%, which is still minimal compared with 4-6% for other developing countries. But this Budget did not have a roadmap on how to get there. Eradication of leprosy by 2018 and eradication of tuberculosis by 2025 are highly aspirational targets, but there’s no supporting infrastructure to make that happen. The government had spoken of 150,000 wellness centers; 3,000 Jan Aushadhi Stores for generic low price medicines; and recapitalisation of banks — there’s nothing effectively on that. 

Otis India president Sebi Joseph: I have a slightly contradictory view. I would say the transformation has already started with demonetisation, which will prove to be beneficial in the long term. The Budget is a second milestone. The finance minister has done a very good job, balancing deficit and growth. I think when the global economy is in a sluggish mode with an all-pervasive protectionist environment, it’s important to give a thrust to create inclusive growth in the country. I think this Budget has at least moved in that direction, be it investment in the rural sector, poverty eradication, electrification of villages, supporting the farmers, infrastructure and affordable housing. I think all of these measures will have a cascading effect on growth and boost employment which, in turn, will create inclusive growth. Not to mention the digital push and transparency on the electoral front by allowing the issuance of electoral bonds. While it may appear like a status quo budget, if you read between the lines, it’s a very intentional budget. 

Sunteck Realty chairman Kamal Khetan: It’s clear the Budget has not been able to address all the sectors but as far as infrastructure and real estate are concerned, he’s addressed quite a bit. Infrastructure spending has to increase and the real estate sector has to improve since both these segments provide a lot of employment opportunities directly and indirectly. Giving infrastructure status to affordable housing is a step in the right direction. Though as a company we operate in the luxury segment, but from a broader perspective, the need of the hour for the country is affordable housing. So, the relaxation on tax deduction for affordable housing, the switch from built up area of 30 sq mt in four metros and 60 sq mt of built-up area in other cities to 30 sq mt of carpet area is a good development. Also, the easing of the capital gain rule to encourage more landlords to come forward and contribute their land parcels is a positive. Earlier, landlords were hesitant to sell their land as capital gains was effective from the day of signing a joint developer agreement even though the project would get completed five or seven years later.

Is that a key development?
Khetan: Yes. It encourages people to contribute land. Also, bringing down the capital gain lock-in from three years to two years is a big positive. The fall in interest rate by almost 100 basis points for the housing sector will bring down the EMI cost for the home buyer by at least 8-10%, which amounts to an equivalent reduction in property prices. 

Sealed Air MD & VP (Indian subcontinent) Himanshu Jain: We’re in a sector which thrives on derived demand. So, for us, all sectors are important and yet no single sector matters. We work for hospitality, hotels, food & beverage and infra management sectors. If you ask me if I can go to the finance minister and ask for one thing in the Budget, I don’t have any agenda; I don’t have any specific demand. But as a citizen of the country, I think the Budget addresses some basic issues that the country faces. There was a time when we believed that if a Budget is good for a capitalist it is good for everybody, it’ll trickle down slowly. And this is changing globally, whether it’s Trump politics or the talk around more inclusive growth. The government is already helping the poor by increasing the outlay under MNREGA so that demand doesn’t go down too much. Affordable housing has got a boost instead of luxury housing, which means a lot of derived demand will come from the construction sector which is a source of huge unorganised unemployment and the one sector that was impacted by demonetisation the most. So, it’s a good budget, the government didn’t do anything stupid. It was not an election-oriented budget. 

Shahani: Yes, true there were no giveaways. But what is being done to address job creation? There are one and a half million people entering the job market every month; there are 20 million babies being born in India. Now, whatever fillip is being given, we have to quantify that how many jobs are being added. So, that’s going to be a big issue and, I think, in terms of growth orientation and job creation, there’s a huge gap. I think this was recognised long time ago but I don’t see any visible action on that and that’s why I’m saying some of the key things were not quantified.

Sebi, you spoke of demonetisation being a milestone. What good do you really see coming out of it?
Joseph: In the short term, you will see the pain, especially in the rural area. That’s why some of the measures in the Budget can help address the pain. I’m not being idealistic. While we may still go through some more pain and this year might prove to be a disruptive one with GST too coming, I believe demonetisation is going to benefit us in the long run.

What is the tangible benefit the economy gets out of this whole exercise?
Jain: My view is that the finance minister has factored in higher tax collection in the Budget. From my own family there are people who are into trading, who have transformed the way they do business. Earlier, it used to be all cash and now 80% is through a wallet or credit card. You can’t quantify the taxes that will come in. But for a country which has such a low tax collection, the move will go a long way in improving collections over time. I think the FM is trying to expand the resource base and demonetisation is just a cog in that wheel. 

Are we going to see a wider tax base leading to higher mop-up?
Shahani: I think the authorities now have a database which they can mine much more creatively rather than just squeezing the poor salaried class. So, now they will slice and dice the data in such a manner to target only the big evaders. The reason why the amount collected is not announced is because I don’t think the amount is very large, otherwise it would have been announced immediately. But it is a cultural shift which has to take place and we need to learn from countries which are highly digitalised and card-oriented. 

Jain: In Philippines you go to any trader they accept credit cards. Here even well known shops will say I take only cash or doctors say I take only cash.

But the money has to be transferred from a bank account. So, are they even open to the idea of subjecting themselves to scrutiny? 
Jain: I don’t think there’s a problem. My domestic help is happy about her salary being wired to her bank account or being issued a cheque. I don’t think they are bothered because they actually don’t make so much money that they will be taxed heavily. The problem is with those big traders who evade a lot more. Small traders, small hawkers, small Udupi owners don’t have to worry about heavy taxation as they don’t generate that kind of revenues.


Kamal, you spoke of small unorganised developers being wiped out. So, is that a risk, because the profit that they make is really the tax that they avoid? Do we necessarily need to go through this painful exercise?
Khetan: We obviously don't want such kind of players because they’re making money only because they’re evading tax…

But they are also providing employment…
Kamal Khetan, chairman, Sunteck Realty: But no industry or corporate would like to operate in such an environment 

Himanshu Jain, MD & VP (Indian subcontinent) Sealed Air: You don’t build a house on a shaky foundation. So, the faster you clean up the mess today, the better it will be tomorrow. We have a courageous government which has taken this step, it may not be the smartest move; but somebody has gone to the extent of doing such an audacious move with the intent of cleaning up the system. What we have always lacked in our country is leadership and we have always moved on with some small tinkering. So, let’s give some credit to the government for showing its intent.

Sebi Joseph, president, Otis India: The issue was with its execution but ultimately the system will get cleansed. It may take a while. I don’t think it will, what I call, be a battle for growth, at least, in the long term. Now, on the point of higher tax collection; we may not see a 25-30% jump, but even if it’s 10%-15%, it’s still a great thing as far as our country is concerned. 

Is the sharp demand contraction over? Are you we seeing signs of a revival?
Joseph: There are initial signs of a recovery as our sector is linked with the real estate sector.

Kamal, are you sensing a recovery in real estate?
Khetan: Within real estate, the commercial market was doing well and it continued to do well during demonetisation. On the residential side, after December, sales have slowly started picking up. I feel, post March, once the financial year gets over and there’s more clarity on a rate cut, demand will start picking up. In fact, demand should be much better than it was before demonetisation.

Jain: Across the sectors wherever we’re working, we’re seeing a demand pick-up. Hospitality sector for the past couple of years was growing at 4%, so we are expecting it to become 6% in 2017, and 8% in 2018. We have clearly seen projects getting started and money is being pumped into that sector. In the QSR space, while international chains are going through a phase of consolidation, local chains and start-ups are springing up quite rapidly. That sector is growing at roughly 20% year-on-year. Next is the beverage industry, which is really going through a tough phase with the carbonated drinks market slowing down. But players are investing in new products; like non-carbonated drinks. Then the bigger sector for us is the cleaning industry what you call as building service contractors, that segment is doing extremely well. 

Shahani: The fact is that for growth to bounce back we need to have a policy initiative. The PM’s aspirational target is to move up in the ease of doing business rankings; currently we’re No 145. Now, when you say single-window clearance, it has to be single and not 49 windows. All that just has to go. For example, in this Budget, we spoke of FDI and FIPB going away. Now, why should FIPB go away in 2018? It’s just a stroke of the pen. FDI hasn’t flown into healthcare and power for the past two years because of the distinction made between brownfield versus greenfield. These are just artificial divisions, just open up. India is a great market, so money will flow in. We’re still stuck in some of these bureaucratic boundaries. 

Joseph: In 2015 and 2016, our market grew by 8-9%. This year also I don’t see any reason for the market to grow less than 7%. There are couple of reasons — one, infrastructure spend is going to be higher and, second, the push towards affordable housing. It’s going to help grow the industry in a big way. The after-effects of demonetisation may extend up to June-July and with GST coming in July, we’ll have a little bit of turbulence. But even then the growth will be around 7%. 

Demand in pharma is not a big problem, so what are your biggest business challenges today?
Ranjit Shahani, VC & MD, Novartis India: Healthcare and pharma industry were growing at double digit even at the peak of demonetisation. I think the real challenge is predictability of policies. The regulator has been very unpredictable. The pharma industry is not saying that abolish price control. All we’re saying is that, have some predictability so we can manage our business and plan strategically ahead. If you take multinational companies, their challenge is that the IPR environment is still not world class. The prime minister is keen that India becomes an IPR-compliant nation; we should have investment in R&D. We joined the WTO in 1995, now we’re in 2017, which is 1/5th of the century right? Now if you look at it that way there should have been a significant movement up the curve. That’s not happened; else we would have seen R&D investments flowing into India. The demand is exists; there is still potential for much higher growth because 2/3rds of the population has no access to medicine. That is why we need investment in health infrastructure because you have the lowest priced medicines available in India, lower than Pakistan or Bangladesh but if you go 100 km outside a big city, then there’s no access to medicines. You have a Pepsi and Coke available in every village but you don’t even get Paracetamol or Aspirin. It’s a challenge that has been recognised but no action has been taken yet. 

From real estate’s perspective, what are the biggest business challenges?
Khetan: The RERA (Real Estate Regulation Authority) due in May 2017 is a welcome move. I feel any sector which was regulated whether its telecom or insurance, the market has grown and so have organised players. RERA will give lot of comfort to buyers and obviously shady and weak developers would get wiped out because of this. So, the opportunity is for players like us while the challenge is for those who want to do business the old way. 

Do you see real estate prices coming off?
Khetan: Unfortunately, except the developer everybody just wants real estate prices to crash. If you look at it, for the past three years, real estate prices haven’t gone up. Even if it’s not gone down, the price has been static for three years. During this period, inflation grew and so did the Ready Reckoner rates of every state government by 10-15% year-on-year. Today, the real estate cost in the city of Mumbai especially is high not because of construction costs but owing to all those fungible FSI costs, the premiums, the stamp duty on the Ready Reckoner rates and so forth. So, if you’re getting a house even after three years it is 10, 12% cheaper. The coming off of home loan rates by 200-250 basis points from its peak itself means a 15-20% cut in a buyer’s EMI. 

Are you investing for growth?
Jain: We have not stopped investing in any year. Our investment is into technology of doing things better and in people because you need more people, because our entire business is about creating a market. Since we need to convince people and tell them what you should do, it takes time to convert. So, the only thing that limits our growth is our internal capability to grow that many professionals who can go out there and create a market. From a customer’s perspective growth can be impacted in a particular year but from a market share perspective the only thing which matters to us is our ability to grow people. Hence, I don’t see any challenge beyond finding the right talent.

Khetan: We’ll continue to invest in growth. We have just announced a new product on the lines of affordable housing before the Budget itself. 

Shahani: Given India’s demographics, healthcare and pharmaceuticals continue to be a growth market. While we’re not putting any capex on the ground, we’re launching new products and are looking at how the market evolves. 

What is your projection on the growth rate?
Shahani: I would like to err on the side of aggression but I think I’ll be realistic and can’t pitch above 7%.
Joseph: I would agree with that. We have to be cautious.
Khetan: Same here. Maybe next year we can think of much better rates but not now. 
Jain: 7.2% is a damn good number in itself!