Sanjiv Bajaj: ‘Like GST Council, need a platform to sort Centre-state issues on land, energy, labour’

We are leaving behind a phase that was seen as favourable on account of multiple factors, including the liquidity push by global central banks, low inflation etc, to now enter a more challenging business environment. How does industry view the transition?

You have to look at it to understand what was the disease and what was the remedy. The disease was the pandemic and the related shocks. The world and the nation going into multiple lockdowns — the disruption in supply chains, the loss of employment especially at the lowest informal end. The disease was a complete chaos in economic activity. The remedy was to provide additional liquidity and backstop to MSMEs not because they’re not competitive but because they can’t open their shops. The remedy was about cutting interest rates because there was no demand. People who had money were also saving it for hospitalisation, etc. Over the last two years, we, as a country, have come up to speed with vaccination. The situation now is that those early problems are gradually going away. As a country, we are primed for significant growth and investment, and we’ve started seeing that in some sectors on the private side, commodities, construction, transportation, real estate. But then the war happened, and that was another disease. So the remedy got pushed out for some more time. We’re now starting to see some amount of normalisation. Partly because pandemic is in control, partly because a new disease has arisen — inflation. There are two sides to inflation — there is a demand side and a supply side. On the supply side, there is less that any monetary policy can do about. But on the demand side, it can. So with the interest rates reversing, it will hopefully bring inflation down. The two main drivers of cost is fuel prices and food prices. Fuel prices, in the last few years, when the prices were low, government has taken their taxes up. Our suggestion to them now is that because the prices are now high, in a collaborative manner if the Centre and states can work to cut taxes, it will help the pocket of the common man. The cure now is the slow withdrawal as the disease is also coming down. Of course, the war is still an unknown but hopefully it will reach some kind of a balance if not completely sorted out.

Does capacity expansion get impacted going ahead because of higher cost of money? And what should be the industry’s strategy to deal with higher interest rates without upsetting the growth dynamics?

The interest rate scenario is still very benign actually. It’s still very low, even as we are on a rising trend. As far as businesses are concerned, in the last 2-3 years, when we were in a scenario of high liquidity and low interest rates — in a normal cycle without external uncertainties — you would’ve seen the new investment cycle come in because that’s when money is easily available and capacities come in. However, in this case, because of demand being a question mark, you actually saw deleveraging across industries. That’s how you’re starting to see an investment cycle now. There’s 70-72 per cent capacity utilisation happening; in the coming quarters you’ll see more sectors starting to invest as long as external environment is a reasonable one. Volatility is what creates loss in confidence. Some of the interest rate hikes that are planned, I don’t see them coming in the way of the huge demand opportunity. In the last few quarters, we have started to also see a number of companies that have been bearing a large part of the rising input costs are now starting to pass on those costs. That’s why we’re seeing end-product price rises also. Some of those interest rate hikes will help in alleviating that margin pressure as well.

We’ve also witnessed a dichotomy in how the organised sector and the informal sector have weathered the pandemic shock. Also, the India story has broadly been a consumption story, while much of the measures brought in to address the pandemic were supply side measures. Do you see these two factors playing out going ahead?

In urban India, very clearly as the new investment cycle comes in, it should help create jobs and with salaries. The dichotomy was there in the formal and informal businesses. In the formal businesses, if you look at salaried employees, almost nobody lost their jobs. Maybe they didn’t get big salary increases in the last two years — that’s also started happening as demand has started coming back in the last couple of quarters. In addition, we have become a very significant consumption economy in the last 20 years. We have to keep in mind that we’re also an economy with record exports just last year, and that’s why the focus should continue on building that. So that over the years, we become an economy with multiple prongs not being limited to one source of demand. For the informal sector, an employee-linked incentive scheme will help in creating millions of jobs. Tourism, for example, can create 40-50 million jobs in the next 5-7 years. You’re also formalising jobs. I believe, for urban India, this should be the focus. As far as rural India is concerned, the higher MSPs with good agriculture, farmer’s farm income will be fine. The challenge is in the non-farm segment and their income and they’ll continue to need government support for some time. Some amount of people left urban India in the last few years and went back home but as urban India starts picking up again, people will start migrating back.

As we move towards a higher interest rate regime, do you see the problem of NPAs coming back again?

Because of the shutdowns and the pandemic, most people could not work and pay EMIs, that’s why the moratorium happened and in the low interest rate regime, lenders started providing for bad debts. As you can see, good quality lenders who provided for that have started writing back now. As things are getting normalised, the cause really to delay EMI payments is going away. There is no reason to believe that companies, which have adequately provided in the last few years for potential losses, will not show better numbers. We’re already seeing that for many good quality lenders in Q4. It’s a cause and effect issue — as the cause is getting solved, the effect will naturally go away.

How bad is this power situation that is unfolding for the industry? Is there also a concern that there is a build-up in renewables, as far as NPAs are concerned, with a number of states reneging on power-purchase agreements signed with green developers?

The current challenge on power is more to do with the sudden heat wave.The entire supply chain for raw materials like coal becomes a long-term complex supply chain and you can change capacities suddenly. Secondly, as we go into monsoons, storage becomes an issue. Automatically, balancing of stocks becomes a challenge for plants. So clearly, everybody was taken by surprise by the intensity of the heatwave. I would see this as an acute phenomenon and not one that is necessarily something that could’ve been anticipated. But given that this has happened, and climate change being a reality, how should we plan for that additional stock and storage is something we need to think about. Secondly, the issue of transition towards cleaner energy — the direction is very clear but the transition has to be very robust. We are seeing in Europe now, because of over-reliance on Russia for energy, it is hurting them now big time. Many of them have shut down their conventional power plants. This planning has to be done very thoughtfully. It has to be an effort between Centre and the states and we hope that they can collaborate on this and put in place a strong transition plan in the next decade or more. This is one of the suggestions we would like to make to the government — the GST Council has shown that irrespective of your political considerations, people can work together and find common ground that makes sense for the country.

It doesn’t mean everybody can get everything all the time but it ends up balancing itself. Why not have a similar council for three critical things that the industry needs — land, energy and labour. If we can sort these three things out between the Centre and the states with clear policy and guidelines, it will tremendously improve ease of doing business.

It clearly requires some amount of talking between the Centre and the states and we’re increasingly seeing friction points between the two. How much of a problem is it on fundamental areas where there is overlapping jurisdiction?

Every time a new Pope is chosen, they get into a room and say unless we see white smoke coming out of the chimney, you can’t go out. That has worked very well for GST, and that can be done here as well. Political considerations are there, but once you put experienced politicians together, and if there is clear intent, there is no reason … they all end up benefiting.

For financial services sector, is there a concern regarding an imbalance of regulations for banking industry and those for fintechs?

When you look at fintechs, there are two categories: those that are interacting with consumers and those interacting with businesses. The ones interacting with the consumer, most of them only end up distributing financial products. They sell down those products to banks and insurance companies that can hold them. There are some that are building capabilities of holding the loans themselves — they need an NBFC license so they automatically are subject to regulations. What we need is to encourage innovation but to ensure there is level of caution monitoring the supervision that happens so that the end customer is protected. So some amount of smart regulation is required by the central bank. But it has to be done thoughtfully so the innovation is not hampered. The world is changing dramatically and lot of these smart startups are showing us ways of doing things that we never knew could be done before. Thoughtful monitoring by the central bank will not only ensure customers are protected but will also enable creation of more robust businesses and startups.

Some new areas seeing momentum, cryptocurrencies or EVs for instance, how much of a constraint it is that there is lack of policy clarity on how to go forward?

It is very real that regulation follows innovation. What is important is that whether the regulator or the government should not ban something new as a first reaction. It should be to monitor, understand and create learning environments like the RBI or IRDAI have, in which these innovations can be monitored. Most innovations will have positive as well as negative aspects. If you look at cryptos, there’s black money movement, terror financing, etc, which are clearly undesirable. They can also end up creating some level of volatility in the formal monetary system. It is very important to think through that how should they be monitored. Our suggestion as CII would be don’t do an outright ban. Monitor this, set up the right mechanisms to try them out in sandbox environment.