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Monday, Aug 09, 2004

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`On industrial front, the mood is quite positive' — Mr Sunil Kant Munjal, President, CII

N. Ramakrishnan

Mr Sunil Kant Munjal, Managing Director and CEO, Hero Corporate Service Ltd, the services business arm of the Hero group, took over as President of the Confederation of Indian Industry (CII) in June, shortly after the new coalition assumed office at the Centre. The 47-year-old Mr Munjal, a commerce graduate with training in mechanical engineering, is confident that the new Government will carry forward reforms. In this interview to Business Line, Mr Munjal talked about the signal the Global Trust Bank crisis sends, the importance of free trade agreements and other issues pertaining to industry and economy.

Excerpts from the interview:

What is the CII's view on the manner in which the Reserve Bank acted on the Global Trust Bank issue?

We got mixed reactions from the market place and from companies. One said good, and the other, why did they do it in this manner. Those that said good, felt that at least everyone was protected. We could otherwise have had a major panic and any run on the financial system is not good for the country. From that point of view, the RBI did a good job... in quickly getting OBC to acquire GTB, which is also good for OBC. It is a strong bank but has a poor presence in areas where GTB is strong. It is going back to the old days of the Narasimham Committee report, which said you need consolidation in the system. Moving forward, consolidation and having a stronger financial system are essential.

When you compare us with China, one area of weakness is the financial system. Many global organisations and institutions are saying that one of the biggest risks in China is how its financial system will move forward. While they used to talk of India's system being weak, nobody says that anymore. They have suggestions for improvement, but nobody is saying that we have a weak financial system.

Was there a problem in supervision that resulted in GTB coming to such a state?

Some of the people who were critical were saying if there was a problem, why did not the RBI look into it earlier. Why did it allow the situation to reach this state and then take this action. I do not have a clear answer to that. As a regulator, obviously the RBI will have to take some of the heat on why and how it happened. What the RBI is saying is that on the one hand industry is telling us this is a private sector institution and so you don't interfere at all. On the other hand, when something goes wrong, you tell us why did you not fix it in time. We are saying wherever the institutions are private, let them function in a private, open manner. You should not be a policeman but only need to be a regulator. What message does the merger of IDBI and IDBI Bank convey? That the days of developmental finance institutions are over?

I am not so sure actually. What I have heard is that this new entity may be given part developmental finance role. We have said that there is a need to review this need of developmental financial institution. We are a country that needs a lot of development to take place, especially in the industrial sector and the social sector. Even developed countries, such as Germany, still have developmental finance institutions.

There is need for an intellectual debate as to whether we should make all financial institutions commercial or they need to play a developmental role as well considering the state of evolution we are in. We need to have this debate and we need to create clarity.

Is the manufacturing sector still as confident as it was six months ago about growth?

Yes. The mood in the manufacturing sector is good right now both in terms of what companies are showing as their order book position, as also their investment plans. Most of them are continuing their plans for investment. We are planning to send a formal survey to all our members asking them their investment plans. One concern would be agriculture, if it goes down any further due to the monsoon, then it could cause concern in industries that are directly related to agriculture and some which are indirectly related. On the pure industrial front, clearly the mood is quite positive.

Some companies are now looking at setting up facilities abroad. What needs to be done to spur more companies to look outside? Does the government have any role at all? Or is it purely market driven?

It is a bit of both. The good thing is to see the mood of Indian business today, of its confidence to be able to go out and talk of doing such things. Few years ago it was impossible to even imagine. That shows the strength that has got built into the Indian system now. As far as regulations are concerned, clearly there is a need to do two things. One is to make it easier as far as rules go for investments to which the government has done a lot. There is some feedback that some areas need to be addressed in this regard. There is a need for the government to address those quickly. And then make funding available. Today for the private sector, funding is not available for acquisitions, except in case of privatisation of public assets.

You had talked of an investment allowance and a higher depreciation as a spur for the manufacturing sector. Could you explain that a little bit?

I will give you a little bit of history on why we suggested this. After reforms began, some of our development was rapid. And we began to move forward. Companies did well, first few years they invested in capacity addition. Then we had too much capacity... So people stopped investing. Then came the downturn when there was no investment again. Now when the economy has begun to improve, demand is up for many products and services. But we have created very little additional assets and capacities over the last three years or so. If you do not at this stage expand, we will have a different kind of problem. We will have an economy in demand, but we will not be able to provide those goods and services.

To provide that impetus for growth we had suggested that for a limited period of time, may be even as short as three-four years only, the government should permit an investment allowance like it used to be there earlier to encourage investment. We had also suggested higher depreciation on capacity expansion of 10 per cent. We also suggested encouraging R&D but we had said R&D across all industry, but he picked R&D only for automotive as one industry.

How relevant are free trade agreements?

For India it is important in more than one way. The WTO movement has been slow at best and there are enough areas of disagreement right now that one doesn't know at what pace it will move forward. Eventually we do know that India wants to head towards a totally open trade regime and our tariffs will get lowered. In some sense, this is a trial period for us. With bilaterals, we get to learn doing free trade... it's like a pilot project. In that sense it would be a big help. It's like what happened when you opened India. People said you should have done internal reforms first and then started external reforms. This is in that sense giving us the opportunity to do that.

You said you would like tax reforms to be done first. What kind of reforms are you talking about?

Some of the reforms which actually have got announced in the Kelkar Task Force Report in the sense of clubbing all duties and taxes into one, making the tax administration clearer, more objective, quicker both for collection as well as decision making. In case of a difference of opinion, you need to find a quick decision making process. It needs to be more trust based, the overall system. You find that every time you lowered the tax rates, collections have gone up. Compliance also improves. The idea is not to make it difficult but to facilitate ease of operations for the assessees also.

I think it is (Kelkar Task Force Report) a tremendous move forward because every time you have a tax or a duty being charged there is that much more paper work, that much more reporting, that much more room interpretation or misinterpretation and therefore so many disputes and cases lying in the courts or with the department. In the bargain the actual revenue collection goes down and the harassment to the assessee goes up. I think this will leave less room for misinterpretation or difference of opinion on both sides and therefore clearly compliance should go up. From that point it is a good idea. Reducing exemption is something we have been recommending although we never said you should make it zero.

The kind of evolutionary stage we are in India, it is important for us to have some directional incentives. Now we want to promote the social sector. There needs to be incentives for people and companies to invest in that area. If you have a lower rate, but an easier methodology, you would in any rate improve compliance and collection.

Do you think there has been a slowdown in reforms in the last couple of months, beginning with the elections and after the new government assumed office?

What happened was that post the elections, everybody was surprised with the result — the party that lost and the party which won. Having said that, they did quickly get their act together once they were able to resolve the alliance and government. They have got on with business. I think the signals that were sent out earlier were mixed. And that did confuse people, both within India and globally. The messages today are clear. Yes, we will move forward, we will move in one direction.

Clearly today it is better than what it was four to six weeks ago. My feeling is reforms are on and we will see pretty much the same stuff we had seen earlier continuing and perhaps more so. We have a first class team in government, especially at the senior level... outstanding individuals whether it is the Prime Minister himself, the Finance Minister or Dr Ahluwalia (Dr Montek Singh Ahluwalia, Deputy Chairman, Planning Commission).

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