‘Corporate Profitability Looks Set To Recover’

Former chief economic advisor Arvind Virmani feels the demand and investment cycle is finally turning. In an exclusive chat with BW Businessworld, he discusses what ails Corporate India, and outlines the possible way ahead.

Edited excerpts:

Q. What ails India Inc?
The globalised corporate sector across the world is facing uncertainties in demand and profits since the Global Financial Crisis (GFC), layered with some purely domestic uncertainties. In our case, it’s the two consecutive droughts followed by demonetisation.

Q. Banking woes mean that India Inc. is being starved of precious growth capital. Credit offtake is low. The stressed asset scenario is getting worse, with nearly 11 per cent of bad banking assets crippling India Inc. of much needed capital. What’s the way out?
The NPA problem originated in the pre-GFC euphoria in India and across the world. However, in our case, the bad debt problem was accentuated by the government’s push for credit financed public infrastructure, which is not viable; politicised public sector bank (PSB) lending to unviable projects; and the consequent spread of corruption from the top to bottom in PSBs. Delay in solving the problem has made it more difficult. Though efforts to solve the problem have started, it remains a risk factor for growth next year.

Q. There are concerns around investment cycles and demand. How does this affect India Inc. in the short term and the long run?
The demand and investment cycle seem to be finally turning, and corporate profitability looks set to recover. The government and RBI must ensure that they do not introduce any new fiscal or monetary shocks to abort recovery.

Q. The humongous amount of paperwork that goes into filing GST returns is complicating the lives of small and marginal entrepreneurs. Do you see the situation improving in the near future?
GST has gradually stabilised with the suspension of some of the complicated requirements and the reduction of rates. Further rationalisation is in the offing for exporters from 1 April 2018, which, if it works smoothly should reduce or eliminate the negative effects of the earlier bad design. A single uniform rate on all intermediate and investment goods and most dual use (consumer+intermediate) is still necessary to make it simple for SMEs.

Q. The government is going after everybody to streamline the Indian eco-system in its quest to link businesses and individuals through systems such as GST, Aadhaar, etc. After the Mallya and Nirav Modi episode, businessmen fear taking loans. Is the government’s overreach crippling businesses?
I don’t understand why businessmen fear taking loans, though staff of PSBs may fear giving them. Reckless risk taking based on borrowing from corrupt PSBs should be curbed. Credit growth recovery, which seemed to be underway, may however, be delayed as far as PSBs are concerned.

Q. First, India is not generating sufficient jobs. Second, it isn’t prepared to handle the tide of youths who will soon be part of the working population. Third, new technological revolutions such as AI and IoT are threatening existing jobs. Is the government’s commitment to job creation looking bleak, given the present situation?
If government’s commitment to job creation was the problem, it would have been solved long ago. The problem is generating sustained high growth, basic education and job skills needed by the growing economy, and taking some very politically contentious decisions to reform land and labour markets. How many of us are willing to support these contentious decisions?

Q. India Inc. has not been investing in new capacities or R&D. What could be the reason? 
The GDP data contradicts this conventional wisdom. There is little decline in corporate investment rate since 2012-13. Perhaps the misperception arises from the decline in large, visible, capital-intensive projects. Most of the decline in national investment and savings rate is from household investment in structures (residential. commercial, industrial sheds). The latest data on construction and investment suggests it may be starting to recover.

Q. Trump’s decision to impose duties on steel imports from India could be the first of the many trade restrictions that can impact India’s growth in the global economy. In a protectionist era, how does India and India Inc. ensure that their interests are not affected?
India is not a major exporter of steel to the US. Further, tariffs and trade measures are likely to be targeted against China. The consequential slowdown in the rate of growth of the Chinese economy to a more sustainable level, which the IMF agrees is about 4.5 per cent, will be better for all in medium and long term. It will reduce the overhang of China’s excess capacity on rest of the world. There is however, a danger of collateral damage to us from some measures directed towards IPR tightening.

Q. Interest rates are on the rise in the US, globally and possibly even domestically making capital expensive with risks that many projects could go on the back burner. Is this a matter of concern for corporate India and the Indian economy?
Rise in global interest rates will only happen if there is sustained GDP recovery. The positive effects of the latter would offset any negative effects of the former. As with any economic development, there will always be some gainers and some losers, but I don’t view this as a major risk factor for overall growth.