Naushad Forbes: The investment cycle has started to turn

Why does India promise so much and deliver way short of that? Naushad Forbes, Co-Chairman of Forbes Marshall and former CII President, takes a deep dive into this question in his book The struggle and the promise – Restoring India’s Potential. Forbes’ narrative envelopes industry, higher education, institutions, design, culture and diversity, liberally sprinkled with RK Laxman’s cartoons.   

In an interview with BusinessLine, Forbes talks about what’s holding India back and what’s the way forward. Excerpts: 

So, what prompted you to write this book? 

I have had this sense of potential that India has for a long time. As President of CII, I met people from industry and government, this sense of potential just got reconfirmed. We have everything that is needed to play a much bigger role in the world, and also fulfill our own aspirations as a country. 

Then there was a practical opportunity. I committed to deliver this book in 2019, then a year later the pandemic hit us. Since I was not travelling I thought this was a great opportunity to write. So, there was a very lofty reason as well as a practical one that came together to make this book happen. 

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Growth formula to boost manufacturing share in GDP: Naushad Forbes

On India’s growth path, 2003-2011 were the boom years, but growth started declining after that, especially after 2017, and then we had the pandemic blow. So, in the present scenario how can growth be revived? 

The economy started declining after 2012, it recovered for a bit during 2015-16, but then after 2017 the decline was more rapid. After 2012, the slowdown was led mainly by falling investment. There was also political uncertainty between 2012 and 2014, which led to the depressed investment cycle. Then we had the shock of demonetisation that also fuelled uncertainty. Uncertainty is very damaging for investment as you lose a sense of predictability. 

The second factor was our exports fell after 2012. Our trade to GDP ratio peaked in 2012, which was then over 55 per cent. It was higher than China and almost double that of the US. After 2012 we saw our trade-to-GDP ratio fall to around 40 per cent. 

But more recently the issues have been with consumption. Reports say consumption at the end of 2021-22 was 97 per cent of what it was three years earlier. So consumption, which was sustaining growth during the investment slump has now taken a hit. Also, the pandemic has had a huge hit on consumption. 

So, as the economy revives, as informal employment revives, in particular retail that employs 70 million people, and travel and tourism which is also a huge employer, and those people who moved back to their villages return to the cities and return to their jobs, that would help in the consumption story reviving. 

Right now the most troubling part of the growth story is consumption and that will have to start firing first, which will then lead to more capacity utilisation that will drive the investment cycle. And, hopefully, we can expect a more outward-oriented trade strategy that would trigger exports. So these three engines of the economy can revive growth.    

Do you see private investments perking up anytime soon? The government has been saying that is creating the environment for that… ? 

I can give you a data point from my own company. If you look at project investments, in 2020-21 due to the pandemic and lockdowns, they almost came to halt. But we saw things bouncing back in 2021-22. We saw growth over 2020-21 but also 2019-20. So going ahead, how much of this will be sustained?

As of today things are looking pretty good. The investment cycle has started to turn. Now what’s driving it, is the big question. It is not consumption as it is still stuck where it was three years ago. 

Is it the PLI scheme? That is true only for certain product ranges so that doesn’t tell the whole story. But we do see investments coming back; what’s driving them, we don’t know yet, but I hope that sustains. 

Exports have also started picking up in recent times… 

Yes, and much of it is being driven by the rise in oil price, which is a large part of our exports, and cut diamonds. Steel and iron exports too have come back strongly. Exports have touched the $400 billion mark last year; it’s an impressive achievement and I hope that sustains. I hope the shift to more value added exports happens simultaneously. More exports of the manufacturing sector, engineering goods sector, garments will be really good for the economy. 

The PLI scheme will only benefit select sectors, or do we need a more overarching theme there? 

The PLI schemes are expected to keep the supply chains moving and that’s a good objective. Where I worry about the PLI scheme is that it is also accompanied by protectionism — there are now tariffs in place for many products. Now if these tariffs and the PLI incentive come with a specific schedule or sunset clause (that they will come to an end at a particular date) then the PLI scheme will deepen the supply chains.

We want that not because we only want to make more in India, we want to make more in India and be competitive. You should be able to compete without tariffs. 

Why is the share of manufacturing in the GDP still stuck at around 16 per cent despite both the UPA and the Modi government’s efforts to raise it to 25 per cent? 

The 1991 reforms were for the industry, so why hasn’t the industry performed better? My answer is the manufacturing sector did well in the sense that it grew at the same rate as the GDP. But, despite the efforts of the governments (both past and present) the share in GDP is stuck at around 15 per cent. This is because Indian industry has always been more skill and capital intensive.  

So compared with countries at our GDP and per capita income levels we seem to be getting a higher value-added from sectors such as chemicals, and auto components. And, a smaller share from more labour intensive and less capital and technology intensive sectors such as garments, footwear and food processing.

So if you have a more capital, technology and skills intensive industrial sector, the only way you can have a more vibrant manufacturing sector is when you invest more in technology. 

So the reason why manufacturing’s share is stubbornly stuck at 15-16 per cent is that because our in-house R&D is not as high as it should be. In fact I have an entire chapter on that in my book. So we need to scale our R&D investments to a scale of five. 

This inadequate R&D investment gets reflected in our not being present in some very vibrant tech-oriented fields such as electronics hardware, IT hardware, aerospace. Out of the top 10 technologically oriented sectors, we have a presence only in three – pharmaceuticals, auto and a bit in IT services. 

Also, even in sectors where we invest in R&D it is still comparatively low as a percentage of sales. Our top 10 IT services companies invest one per cent of sales in R&D, in China the top 10 IT services firms invest 8 per cent. But if you talk to industry leaders they feel they are investing enough in R&D.

So if we don’t acknowledge the problem how are we going to fix it? The purpose of my chapter is not to depress people but just to highlight that there is a problem that needs to be addressed. 

You have a chapter on design in your book. Do you see corporate India accepting that design is going to be integral to their businesses? 

Some corporates are realising that. In my own company I realised design is something that is important for us as a technical engineering company and design is something that delivers well for us. Then I became the Chair of NID, so I sort of came to design from that perspective. 

There are some companies that are using design very effectively. Bajaj Auto and Royal Enfield compete on design. Tata Motors and M&M compete in the SUV market on design. If you look at the ads of any of these four companies, you’ll see that they are basically selling on design. There is direct appeal to the emotions. They are appealing to the consumers in a very design sense. 

I think we need that in every field. If we engage much more actively with design our companies can give much better products to our consumers. My guess is that there are around 100 Indian companies that take design seriously, but the number should be in thousands.   

You have liberally used RK Laxman’s cartoons in your book, which enriches the narrative. How did you hit upon this idea? 

There is a bit of history there. I took a course on financial accounting when I was an undergraduate. The Professor said that this was such a boring subject that the only way he could arouse the interest of his students was by putting cartoons on the handouts he gave them.  

I thought that was a brilliant idea. So when I started teaching I started putting cartoons in my handouts and I always used Laxman’s cartoons, because they illustrated so effectively what we talked about.

Then I started using Laxman’s cartoons for my talks on the Indian economy. This was in the late 1980s and early 1990s. I would give entire talks using just Laxman cartoons. Laxman’s cartoons portray what we are in a really precise and accurate way. 

This distrust between industry and government which was so pervasive in the 1970s and 80s, was something Laxman caught perfectly. We unfortunately see that distrust returning today. Cartoons can really make a point come alive. So humour helps, especially when you are talking about very sensitive issues. 

Read the book on Amazon

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