The Hindu Business Line : `As you succeed, the next jump has to be higher'<br>Mr Ishaat Hussain, Executive Director, Tata Sons

Over the last few years the Tata group has been in the news both for the performance of its companies and its spate of overseas acquisitions. With the Union Budget round the corner, Business Line spoke to Mr Ishaat Hussain, Executive Director, Tata Sons, to get his take on the economy and expectations from the Budget. A former director of Tata Steel, Mr Hussain also spared time to discuss one of the biggest developments in the steel industry in recent times — Mittal Steel's bid to acquire Arcelor, happening as it did when Tata Steel was just beginning to add sizable capacity.

Excerpts from the interview:

What is your view on the current state of the economy?

The economy has done surprisingly well, clocking over eight per cent. It reflects not only a higher level of investment but also better use of that capital. Growth is more broad-based. The disappointment, of course, has to be agriculture. One would have imagined that agriculture, considering that so many people are dependent on it, would have shown a higher growth rate. It would have led to a higher than eight per cent growth rate and, second, from a long-term point of view, agriculture must continue to grow.

I think there is some pressure on interest rates. It has already seen some upward movement, by about 100 basis points, over the last six to eight months. It is not alarming, that's something we can live with. All in all, the balance of payments seems to be comfortable, despite oil. The stock market is buoyant, FII inflows are good — things appear to be comfortable.

Do you have any short- to medium-term concerns?

We need to watch out for oil price movement. I am more concerned about external shocks. Just now I was reading that the US has had its largest state deficit so far. The situation in the Middle East is getting more and more difficult. On the domestic front, I can't think of anything else except what happens in politics.

What are your main expectations from the Budget?

I wish we would not have a Budget for five years. All that I plead for is stability in the tax regime. But one thing on which I really wish the Finance Minister would listen to us is FBT. I think he should not have reduced the tax rate last year, he should have continued with corporation tax rate at the same level and not introduced FBT. Because FBT is a very, very complicated and quite unnecessary.

I want to see what the revenue collection is because they have taken a huge amount of credit. Some paper had reported that the total FBT collection would not be more than Rs 100 crore. I don't know if that it correct. What I really wish for is a stable tax regime. For the next five years, just don't change the tax rates.

I think we should go forward with VAT, at the appropriate time make it one CENVAT where you merge sales tax and excise duty. What has happened on VAT has been a major move; I hope all the BJP ruled-States now accept that. And, in the not distant future, move VAT along with excise duty.

I agree that service tax should be made too wide. There is no reason why the tax should not be applicable on all services, just as excise duty and sales tax are applicable on all goods, apart from essential commodities.

I also think we have to broadbase the tax net and agricultural tax should be seriously considered. Whenever you discuss this with anybody in government, they say it is not practical. But under VAT, every shop has had to register. I am sure there are more shops than land holdings. So, you need to look at agricultural tax.

Given the expansion at Indian companies and the trend of acquisitions, are there any constraints on funding that you would like to see addressed?

I think the situation today is quite liberal. We have not found any constraints as such. But at times I wonder, why there are so many clauses on end-use requirements. I think you should trust people. There should not be so many restrictions, particularly on overseas borrowings. There are limits on the investments you can make with reference to net worth — that's a prudential requirement. None of our acquisitions has faced any financing problems. All I am saying is, be a bit liberal and have another look at all these end-use requirements, which constrain others from going forward.

Tata Steel has been increasing its capacity. But where would such efforts stand given Mittal Steel's bid for Arcelor? Isn't it a case of trying to grow but getting dwarfed by the bigger giants in the industry?

This is my view — what has happened with Mr Mittal's bid for Arcelor; it could be a point of inflection. We have to wait and watch. But having said that, the strategy of Tata Steel is fundamentally sound — it wants to be the lowest cost producer of steel.

Now whether being the lowest cost producer is completely outweighed by scale, which Mr Mittal has, or may have if the Arcelor bid goes through, is something time will tell. But I feel quite confident that if Tata Steel goes along the path it has charted out for itself — so many million tonnes by 2015 and yet be the lowest cost producer — that is a viable strategy.

I have to see what a person will do with 100 million tonnes of steel; does he get pricing power? We have to see that. Clearly, it is something one has to think about. And probably, Tata Steel, apart from looking at its own organic growth — along with some strategic acquisitions it has made in East Asia — would it need to look at inorganic growth? I think we have to apply our minds to that. Definitely there is something that has happened which we need to take cognisance of.

As large companies move to acquire outright, is there room opening up in the steel industry for alliances?

There will always be place for alliances. The bigger question that needs to be answered is — going forward is there place for a 15-million-tonne player? Intuitively speaking, the answer is yes. But, then, scale also matters and, therefore, Tata Steel will have to think bigger, going forward. How, and what shape that would take — I don't know.

Do you think the magnitude of investment Tata Steel would need to make may be challenging, not just for itself, but the group as well?

When I joined Tata Steel, it was a 1.2-million-tonne steel company. At that time, Nippon Steel was probably the biggest, at 30 million tonnes or so. Tata Steel today is a 10-million-tonne player, hopeful of going up to 15 million tonnes; Mr Mittal is talking of 100 million tonnes.

But let's take an analogy — take the auto industry and the Daimler-Chrysler merger; or General Motors and its acquisitions, alliances. We all know what happened. There are economies of scale but not beyond a certain point, there are cultural issues, consolidation issues.

As I said, it has to be seen if the pricing power improves. In steel, there are barriers to trade and things like that. So, I am not too sure if scale alone is what matters.

Second, the Daimler-Chrysler merger spanned mature economies. Arcelor made defensive mergers; LNM was picking up cheap assets. To have 100 million tonnes in a market that is mature and not growing; while, conversely, Tata Steel has a pre-eminent position in one of the fastest growing markets — there are thus a lot of variables. But as I said, this is definitely an event that has to be properly studied and understood.

Given the several acquisitions that Tata companies made in the recent past, how leveraged is the group?

Most of the acquisitions we made were financed comfortably without stretching the balance-sheet of any company.

Even as we speak, each of those companies that made the acquisitions is sitting on a mountain of cash. Whatever we have done so far, we have been able to finance easily. We had very profitable years. If you step up the ante, then yes — maybe if we were to make a $22-billion bid, as is happening in the world — that may stretch our resources.

Normally, you cut your coat according to your size. The group has always operated on that basis. My own feeling is that most of our companies are in a position to make reasonable sized acquisitions and to show reasonable rates of growth.

How much are you being compelled to up the ante?

The market sets that pace. I think the ante will rise. As you succeed — and nothing succeeds like success — the next jump has to be higher.