Budget 2022: Kiran Mazumdar-Shaw, Ashok Wadhwa And B Thiagarajan On Budget Hits And Misses

India Inc.'s top chief executives agree three important features of the budget.

<div class="paragraphs"><p>Nirmala Sitharaman, India's finance minister arrives at the North Block. (Photographer: T. Narayan/Bloomberg)<br></p></div>
Nirmala Sitharaman, India's finance minister arrives at the North Block. (Photographer: T. Narayan/Bloomberg)

The government is likely to overshoot its revenue target, rightly focuses on capex and should be commended for not presenting a populist budget for 2022-23 given that key states go to the polls, according to three of India Inc.'s top chief executives.

Finance Minister Nirmala Sitharaman's Budget 2022 focused on a capex boost to drive long-term growth rather than boosting consumption in the short term. While economists said the growth in actual capex spending is lower than 35% that the finance minister's proposals suggest, the focus on infrastructure will help drive growth. And, the budget projects a conservative revenue estimate.

"If you look at the GST numbers for this month and extrapolate that going forward, you will probably exceed the revenue collection by a mile," Ashok Wadhwa, group CEO of Ambit Group, told BloombergQuint's Menaka Doshi in an interview. Even the divestment target of Rs 65,000 crore for FY23 is "conservative" given that there are assets that can be considered.

Wadhwa said, "this reminded me of Michelangelo's old saying on not aiming so low that you achieve it very easily, because (then) you don't know what you really missed. Apart from being very real and conservative, my concern is that they are too low."

Kiran Mazumdar-Shaw, executive chairperson of Biocon Ltd., said "you would have thought that she (finance minister) would come up with a populist budget, which she didn't."

"It is a very growth-driven budget because the government is keen to create a strong and sustainable economy based on a couple of things. One is, of course, infrastructure investment. Second, the government is keen to look at a digital economy, which is driven by various digital platforms, including digital governance, digital healthcare, digital education—and that is also a good investment for the government to get into."

But Shaw was disappointed on the lack of any incentives for research and development, a point that Wadhwa seconded.

B Thiagarajan, managing director of Blue Star Ltd. and chairman of CII-Western Regional Council, called the decision to put money predominantly in the capex in the "right direction". "Because anything else you do is not going to give you the long-term benefit."


Budget Fine Print And Estimates

Mr. Wadhwa, what does the fine print of Budget 2022 reveal to you?

Ashok Wadhwa: Interestingly, the budget was not just short, but quite precise. And the speech and memorandum aligned itself quite well. The only thing that she (the Finance Minister) didn't cover is that if the government sells a public sector enterprise which is a loss-making enterprise—I guess Air India to begin with—then under the tax law the losses of the loss-making enterprise can actually be carried forward.

The law otherwise is that if you're an unlisted company with accumulated losses, those losses cannot be carried forward when there's a change in control. The benefit of carry-forward losses is available only to listed companies, not to unlisted companies when there's a change of control. That's the one thing she didn't point out. But I guess that's because it's obvious.

The Tatas are going to buy Air India and Air India has accumulated losses. And that deferred asset, the Deferred Tax asset, will be available as a set-off. So, in all the calculations that we are doing, perhaps we missed out on the fact that there is accumulated loss. The loss is a benefit to Tatas because they don't have to pay tax going forward for ‘x’ number of years. Other than that, honestly, she got it covered quite well. The budget this time was concise, the speech was concise, and the two were very aligned.

It has been the consensus across business leaders, economists, even those in the capital markets, that the numbers seem believable and might even be on the cautious or conservative side – right from the GDP growth numbers to the revenue numbers, including even the divestment number.

Ashok Wadhwa: As a matter of fact, this reminded me of Michelangelo's old saying on not aiming so low that you achieve it very easily, because (then) you don't know what you really missed. Apart from being very real and conservative, my concern is that they are too low.

If you look at the GST numbers for this month and extrapolate that going forward, you will probably exceed the revenue collection by a mile. Equally, the divestment target for last year was Rs 1.75 lakh crore. Of course, LIC constituted a large part of it. Obviously, LIC is going to get done this year. A target of Rs 65,000 crore is a very small target, particularly with the monetization of asset programmes that she has embarked upon. She began with the National Highways Authority of India (NHAI) and she then did Power Grid Corp. of India; she can do GAIL Ltd., she can do NHPC Ltd. She's got many other power generating assets. So my view is conservative, though I hope not over-conservative because we don't want to miss the opportunity of being able to collect more and be able to divest.

Capex Over Consumption

The Finance Minister has made a tough choice and put pretty much all the eggs in the capex basket, and very few in the revenue expenditure or income support basket. Mr. Thiagarajan, how do you view this trade-off? Capex is a quality investment and has a multiplier effect, but there is a gestation time, an execution challenge and the viability question. Some would say what the economy needed was an immediate bump-up in consumption over the next three to six months and no budget effort seems to be directed towards that.

B Thiagarajan: I think it is in the right direction to put money predominantly in the capex part. Because anything else you do is not going to give you the long-term benefit. She (the Finance Minister) began by saying it is a 25-year kind of plan, the Prime Minister goes on to say that it is (about) building India for 100 years.

But the fact is that putting it in the capex part helps a lot. It creates employment. In order to improve our competitiveness, infrastructure is very important. It is very frustrating to run a business with such poor infrastructure in the country in its 75th year of Independence. So, it is consistent with last year’s theme.

We have to maintain this for at least three or four more years to be able to sustain this growth. Remember, this economic GDP growth has to happen for at least five or six years consistently at 8%+. We are on a small base and have just managed to reach the FY19 level, and it was not that in FY19, we were doing well in terms of GDP. So, it has to be maintained at this particular level and for that, infrastructure is important.

On the other hand, If we want to connect with the global supply chain, we must improve competitiveness, and for that, infrastructure is a key element.

Half the energy of the top management goes in (tackling) these kinds of frustrating issues which our peers across the world are not suffering from.

I have no quarrel with the infrastructure spends. Do you think the balance between investing towards capital projects, and what is needed in terms of short-term mitigation for lower-income households – more spends on healthcare, more spends on education, more spends to boost consumption for products like yours – was sorely missing in this budget?

B Thiagarajan: I don't think we should go on that path at all. As of now, even if you look at the subsidies, there is a lot more to be done. A lot of money is getting wasted in the form of subsidies in many sectors. So, put the money in infrastructure building and other capex, so that there is employment generation. Employment is the solution.

Of course, one can argue whether infrastructure-related employment is permanent or temporary, but it will be a permanent thing for taking poverty out and putting more money in the hands of the people. I am of the view that it is not necessary to go and give some schemes in order that consumption will momentarily go up.

The production-linked incentive (PLI) schemes are also putting money in the hands of the people, not in the hands of the investor. Because any PLI given to us is going to lead to discounted prices.

Let’s talk about the air conditioning industry. The capacity is doubling in the next year; in 12 to 15 months, you will see the production capacity doubling after many decades. Now, the consumption has to go up in order to earn the PLI, because PLI is paid on incremental sales over FY21. So, if every one of us has to earn the money, we have to go ahead and grow the market. And if I build the scale, the costs will come down. In other words, in terms of the air conditioner prices, I foresee a 15 to 20% reduction automatically because of PLI.

And you are expecting that price reduction will in itself help boost consumption over the next six months to a year.

B Thiagarajan: That is right. All the PLIs are going to boost consumption.

Ms. Shaw, do you take the same view on this trade-off that the Finance Minister has struck? All budgets are tough choices; we're trying to examine whether this one stands out for the skew.

Kiran Mazumdar-Shaw: I commend the Finance Minister for not being prey to a populist budget, because this is election time. And you would have thought that she would come up with a populist budget, which she didn't.

It is a very growth-driven budget because the government is keen to create a strong and sustainable economy based on a couple of things. One is, of course, infrastructure investment. Secondly, the government is keen to look at a digital economy, which is driven by various digital platforms, including digital governance, digital healthcare, digital education – and that is also a good investment for the government to get into.

Now, have they neglected the middle classes? Have they missed out on giving some inducements to the people who've lost jobs during this pandemic? Yes, it can be argued that they could have done something, because you are going to get a much higher tax collection this fiscal than what was estimated or envisaged. So, could part of this extra tax be used to help some of these people who are stressed is a moot question.

But on the other hand, you need to get this economy on its own feet. And to that extent, opening up the economy is where I would go, and that's what the government needs to get into.

We are well vaccinated and we are safe enough to open the economy. And state governments have a huge responsibility to open up the economy and get the services sector back on track, because that is really where the consumption is hit. That is where you're seeing the financial stress.

Obviously, the capital expenditure has a lag phase; it's not going to be immediate. It is going to be mid- to long-term kind of paybacks, and the visible signs of growth are only going to happen after this lag phase. So, everything is directionally correct and it sets us onto a very predictable growth path.

So in that way, this has been a good budget. I'm quite impressed that they didn't yield to the pressures of getting into welfarism. But, on the other hand, execution is going to be key.

They've calibrated the divestment down. Have we lowballed everything in a very conservative way is the question.

Air India is a good indication that (through divestment) you create efficiency, business growth because the private sector knows how to market and grow the business. And that's what we really need to focus on. There are many assets that need to be divested and privatized.

The R&D Miss

Ms. Shaw, you're not disappointed by the lack of more ambitious efforts in the healthcare sector specifically?

Kiran Mazumdar-Shaw: In the healthcare sector, they focused on universal healthcare, digital healthcare, the universal health id. They are trying to invest in creating a very robust digital architecture for many sectors, including education. So, I'm not disappointed in that respect.

But what I was disappointed in my sector was the lack of understanding of the need to invest in R&D. I was expecting research-linked incentives. That is the need of the hour for our industry and for many industries. R&D needs to step up. No one's going to invest in R&D, unless there are incentives, especially in an industry like ours, which is high-risk and there is gestational payback when it comes to R&D investments.

Otherwise, you will keep investing in predictable low-risk R&D, which is not the way we should be growing. So, that is a big disappointment for me.

The budget is only a one-day event. I hope it's an evolving space and I hope that the government understands the need to invest in innovation and research. So, that's the only disappointment from my point of view.

But other than that, I am pleasantly surprised that the government created a very growth-oriented, bold budget.

Mr. Wadhwa, you made a point about whether they're undershooting on the divestment side. What would they do with more money unless they were happy to spend it on revenue expenditure, because at this point a Rs 7 lakh crore budget for infrastructure spends for the next financial year seems like a mammoth execution task to pull off in one year.

Ashok Wadhwa: Remember, capex, particularly if it's related to infrastructure, needs longer-term planning, greater gestation, and therefore needs an advanced execution plan. Revenue expense, on the other hand, you can incur as you earn. If the tax collections are going to be more bullish, as we all expect, the government will get many chances, many opportunities. There are enough and more places where the government needs to incur the expense. The broken MSME segment is one example. So my view is that you don't need to plan as well for revenue expenditure as you need for capital expenditure.

The country is no different from any business. And as you earn and see buoyancy in your revenue, you will keep incurring that.

I would like to point out some things: We are ignoring the fact that this government started planning PLI two years ago; the first PLI program was announced then. And if we accept the fact that manufacturing creates long-term and sustainable employment, that plan began two years ago. They've added many sectors over the last 24 months. The first plan was issued when they came out with (PLI for) air conditioners.

So, here's what I would say – the plan, the understanding that we need to create more sustainable employment opportunities, and that manufacturing does it better than everybody else – was understood. And the plan began two years ago. You're only seeing a culmination of that plan today.

On the other hand, I wish they had understood that just like manufacturing, the other big edge that India needs, in a globally competitive environment, is our IP. IP needs to be nurtured and built. Like capex, that's a very long cycle.

I wish they understood that and had provided adequate incentives, not just to the pharma industry.

Given the disruption in China, and given the amount of capital India is attracting at this point of time, India is second only to the United States in innovation now.

If you look at the number of unicorns that are coming up, the number of SaaS (software as a service) products that are being delivered out of India today, that's a huge opportunity. And the nice thing is that it caters to a younger population, to a strength of entrepreneurial spirit. With access to capital now, I wish the government created more incentives for pharma, healthcare, and other IP-related businesses to say ‘go, invest more, take more risks’, because that's really where we are going to get global winners.

How Will Foreign Investors Assess The Budget?

Mr. Wadhwa, you're saying that you believe that this budget leaves scope for enhanced revenue expenditure as the new fiscal sets in. It might not be on paper right now but it could take place - an extension of the free food grain programme, or the MNREGA programme which have been so critical over the last two years. You see that some of the revenue expenditure may not be budgeted for but if taxes, divestment, revenues, etc, come in, they will push towards that as well.

Ashok Wadhwa: I'm super-confident that they are going to collect more, divest more, and spend more.

One of the big criticisms over the last few years of this government is that they have been over-optimistic. And therefore, the numbers are unreliable.

I think they're trying to address that one fallacy within their thinking system, and saying, ‘I'll give you a set of numbers that you think are not wrong, and I would rather beat what I give you than fall below what I tell you. And if I beat that number, there are many places and many opportunities to spend the money.’

You will see many more avenues from the revenue side where these additional collections and divestment proceeds will be spent. I'm optimistic that at the end of it, you won't see any reduction in either the MNREGA, or you will see good sustainable programmes for those who have lost jobs and who are suffering because of the Covid situation.

Mr Wadhwa, how do you perceive global investors – both portfolio and direct strategic investors– will assess this budget? We've seen substantial portfolio outflows over the last four months – not necessarily for local reasons, for global reasons as well. We also saw yields hardening today. And it does look like that curve is going to become a little more challenging for us over the next two months. What's your assessment of how attractive India looks for global investors at this point?

Ashok Wadhwa: Let's break it into the equity part and the debt part. The hardening of the yield curve today was largely because of the Rs 15 lakh crore government borrowing programme. As the government delivers better than expected numbers, both on revenue collection and divestment, that number will go down. And as there is greater visibility, collections and divestments are going to drive that number down and you'll actually see the yield curve come back to a little more normal tenure.

As far as equity is concerned, let's break it into three parts. FPI money (outflow) has nothing to do with India, there is absolutely no push factor. There's a pure pull factor from the United States. Every time the U.S. Fed sneezes, we know the world, particularly the developing world, suffers. We are going through that challenge at this point of time.

As far as FDI is concerned, let’s break it into two parts, what I would call long-term strategic FDI and lots of capital for new ventures and new opportunities in India. As far as the largest strategic capital is concerned, India continues to be a very attractive destination. I continue to see lots of interest from global players, both strategic and private equity investors.

As far as new capital is concerned, I am very bullish about how the younger generation is seizing the opportunity, coming up with some incredibly bright ideas. And the good news is there is no dearth of capital willing to back them up.

Not everybody will be successful, but some of them will hit the ball out of the park. And then, that will hopefully work very well for everybody.

The SEZ-Replacement Play

Ms. Shaw, do you feel positive about the growth momentum in the broader economy? Also, the surprise in the budget speech was the policy or law to replace the SEZ Act. Industry was asking for clarity on what happens once the SEZ tax incentives run out, and now it seems they might have something in place as quickly as September 2022.

Kiran Mazumdar-Shaw: I really need to know what they're planning because they didn't share details but it was at least positive news that they plan to have something that replaces the SEZ Act.

Coming to the first question; I'm very optimistic about India's growth potential. This budget also recognized the role that entrepreneurship and startups are going to play in driving sustainable growth in the future.

I belong to a part of the country where we are very excited about the advent of the digital economy. We have so many digital startups and unicorns, that it just seems to play to that kind of messaging that it is about the digital economy. We've got to strengthen the digital infrastructure, the digital architecture, and focus on digital skill development.

That's the way even Karnataka is looking at the future. They have come up with the Karnataka Digital Economy Mission which is something that I really believe in because technology, research, innovation — these are the areas that will give us nonlinear growth. I am very optimistic about the future.

Let's make sure that we create the right avenues for investment. Let's focus on infrastructure and digital infrastructure as well. And let’s start incentivising our entrepreneurs, and the whole startup ecosystem.

Mr. Thiagarajan, you mentioned the positives. Where do you see the challenges?

B Thiagarajan: The first challenge from the industry point of view is going to be the execution effectiveness. I know it is improving but a lot more needs to be done.

The second point, in quite a few sectors, if you look at China, Japan, Korea, the U.S., their GDP growth had a very clear correlation with R&D expenses, both by the government and the private sector. It is abysmally low in India. So I think that GDP growth, manufacturing growth, specifically certain services growth, will not happen without adequate investment in R&D.

Therefore, CII wanted a technology mission to be created, and they also insisted for startups and others that the patent registration on approved patents become collaterals. This was one of the things that we have been asking for, so that is going to be the second challenge.

Third, the huge talent shortage is already visible in quite a few industries. If we are going to sustain this 8% plus kind of growth for four-five years, a lot more skills have to be developed with focus. We have lost out on that due to the pandemic, quite a few things didn't happen in skill building. So that is going to be another challenge. But otherwise, in the past two years there is significant improvement in terms of resolving the issues. Even in this budget, whatever the issues, outside of the budget it gets resolved.

Again coming back to one thing she didn't cover adequately, the point of FTA’s that are being negotiated, that is going to be a big game-changer. We know for sure quite a few negotiations are at an advanced stage. According to me, it is a big game changer. That is something which can happen outside the budget.

Then, GST reforms have to take place. We are tinkering with that for too long. I think the revenues are coming back, it is time that the government goes back to the drawing board to come out with simpler, rationalized GST structure. That can also boost consumption by the way.

Do you have any more details Mr. Thiagarajan on this law to replace SEZ Act?

B Thiagarajan: I do not have any more information. On Feb. 5, we have an interaction with the Finance Minister at the CII National Council. Perhaps, we are going to get some more information.

The only place I was seriously disappointed is, I didn't think this budget laid out a very clear fiscal roadmap to meet our COP26 commitments. The Prime Minister made some very aggressive, ambitious commitments last year when it came to 50% of our energy requirements to be met by renewable energy by 2030 and net-zero carbon by 2070. And Mr Thiagarajan, because you are in the manufacturing industry and this is now a very big challenge across countries, do you think we're a little behind the curve on this – not in terms of the commitments but in actualizing them?

B Thiagarajan: I will not say that we are behind the curve, but I do agree a lot of work needs to be done. The pandemic is something that has derailed us for such a long time. The industry has to come back – growth will have to happen, investments will have to happen. Sustainability should be the top-most agenda. We have to work on that.

Now, my complaint is the PLI scheme. I mentioned it to Mr. Piyush Goyal as well. They could have easily said PLI is subject to your manufacturing being a green manufacturing unit. EU is insisting that green recovery is very important.

As far as corporates are concerned, we all will be one-after-the-other announcing our net-zero goals. The market itself is a watchdog for that. ESG is gaining momentum and people will be asking the question – do you have a net-zero goal? Most of the listed companies by next year would have announced at least the timeframe, be it 2035 or 2040 or something.

The second part is about the capability out there. It's not easy. You can announce but there are a lot of things that need to be done to achieve that. I suppose there was too short a time. You will hear much more about this. I will not be surprised if there is going to be an independent ministry for this or within the ministry there is a dedicated focus. But I am very glad, even in agriculture, this subject has been brought in for the first time.

Mr. Wadhwa, where do you see us on the growth curve? We’ve just come back to pre-pandemic levels. How do you see the momentum going forward?

Ashok Wadhwa: I'm glad we're back to where we were in 2019 with one big difference. This time we are back with 9% growth behind us versus the 3% growth behind us. Remember that 2018 to 2019 was a wagon train that was carrying us. Whereas from 2020 to 2021 and 2021 to 2022 there is a bullet train that's taking us. So hopefully if the bullet train continues to maintain its momentum, it will drive us to our destination.

IMF says 9% (growth), India says 8.5%. It’s rare to see the government of India actually coming with a lower number than global agencies. I think we are on a path to a consistent 8-9% growth rate. Hopefully, the bullet train will ensure that we get to the destination. That's what India really needs.

My view is that the Prime Minister is now not seeing a $5 trillion economy in the next five years; he is probably now thinking about a $10 trillion economy in the next 10 years.

One thing that came out so clearly in this budget, unlike in the past budget, is that there is now no collision between politics and economics. With five big elections just around the corner and a big election in 2024, we would have all said that this is going to be a popular budget. The fact that this was not a popular budget shows that at least politics finds itself in a relatively stable position, and therefore economics can drive our growth, our natural destiny.