India Inc has reservations about the government’s efforts to project the rich as dishonest and only the poor as honest. Confederation of India (CII) President Naushad Forbes tells Anjul Tomar in an interview that India has moved on from the days when wealth was associated with dishonesty and a return of such narrative will not be fruitful. The industry is hopeful of a reduction in corporate taxes in the Budget and also expects some measures for creating jobs and accelerate investments which floundered after demonetisation of high-value currency. Forbes reflects on that and more in this extensive interview.

Q. What are your expectations from the budget?

We expect a milestone Budget that will enhance the long-term potential of the Indian economy. We expect four areas of intervention in this Budget.
The first is to revive the economy by accelerating investments. The Budget must set aside resources for public investments in infrastructure projects and create the right environment for the private sector to invest. We have recommended that the government privatise 100 PSUs, address the pending PPP disputes through the Kelkar Committee mechanism and modernise 50 railway stations using the PPP mechanism. If these three actions can be implemented by 31 December 2017, some urgency will be infused into the process.

Second, we have recommended a reduction in the corporate tax rate accompanied by a removal of exemptions, as promised by the Finance Minister in the last Budget. We have calculated that if the tax rate is reduced to 18%, then all existing concessions and incentives can be removed and there will be no need for grandfathering these incentive regimes. This will simplify the tax code and make India an attractive investment destination for domestic and foreign companies alike. Personal income tax may also be moderated in a similar manner.

A third priority should be to encourage a much higher level of innovation and research both in the public and private sectors. Industry currently invests just 0.3% of GDP in R&D, against a global average of 1.5%. A National Innovation Fund of around Rs 10,000 crore needs to be created to support innovation projects through a competitive bidding system. This can be funded by using the cess on technology imports that has already accumulated Rs 8,000 crore. All incremental public funding of R&D should be directed towards higher education institutions rather than to autonomous government R&D laboratories. This will increase public funding of research in higher education from the current level of 0.04% of GDP towards the global average of 0.4%.

Finally, an important priority should be to create good quality jobs by providing flexibility to firms while giving adequate protection to labour. The new textile and apparel policy has allowed fixed term employment and state provision of the employer’s Provident Fund for the first year. This should be extended to all sectors. All new firms should be exempted from regulatory burden by allowing them to comply with regulations through self-declaration for the first five years.

Q. What is the feedback from your members on impact of demonetisation on businesses? How deep is the demand crisis?

Demonetisation has had a one-off impact on the economy. Initially, businesses faced a demand shock which is getting reflected in a decline in sales in November-December for the consumer facing sectors. However, as remonetisation has picked up pace, a recovery is expected which will accelerate over the next few quarters. With the use of cashless payment instruments already quite widespread, at least in urban areas, consumer demand is picking up as the initial tendency to refrain from large ticket purchases is overcome.

Q. Which sectors have been impacted most?

Purchases of big-ticket items such as automobiles (including two-wheelers) have been affected, as also food items that are non-essential such fruits and vegetables. There has been little impact on the sowing of crops, which has exceeded the normal area for the rabi crop. As this crop is harvested, one should expect good growth in the agricultural sector and a revival in rural demand.

Q. What are the implications of slowdown on employment generation?

Some jobs have been lost especially where daily wages were being paid in cash such as in the construction sector. This will certainly have an impact on livelihoods and will depress demand. It has been reported that many workers have returned to their villages and dependent on unemployment allowance under the MGNREGA scheme.

The Union Budget is therefore likely to take measures for a revival in job creation through measures such as those suggested above. As new jobs get created, we are likely to see a decline in the practice of paying daily wagers in cash. The government is also likely to work on a social security scheme for better protection of workers.

Q. Do the efforts by the government to project itself as pro-poor make you worried?

Some of the debates post-demonetisation have projected the rich as dishonest and the poor as honest. This is disturbing. India has moved on from the days when wealth was associated with dishonesty. A return to this narrative would not be fruitful.

Q. There is a strong feeling that there might be some changes in the capital gains tax law for listed equities in the budget. Market also fears a hike in Securities and Transaction Tax. What do you think?

Imposing taxes on capital gains from equity investing is taxation at multiple levels for investors.  More importantly it would be a disincentive to long term investing. If one applies tax on long term gains as is being applied on short term gains, it may push good investors into trading mindset, and drive people away from  investing. The Government has indicated stable and consistent tax policy as one of its key priorities and therefore any changes in terms of LTCG tax on listed or redefining the tenure of long-term or short¬term would disrupt the existing framework that is in play . These are incremental measures which may have a marginal negative impact on certain entities. I hope that the Budget does not tinker with these taxes and instead concentrates on forward-looking reforms.

Q. What do you expect from the RBI’s next Monetary Policy Committee meeting?

I generally do not like to have any expectations from the RBI’s monetary policy. This prevents any disappointment when expectations are not met and also prevents exuberance when they are met. I believe the RBI will do its best to encourage growth while reining in inflationary expectations.

Q. When do you see the GST actually being implemented?

Most of the contentious issues on GST have been sorted by the GST Council.  Drafts of supplementary GST laws are proposed to be discussed and approved by the GST Council in its next meeting scheduled on 18 February 2017. As per the Finance Minister, 1 July 2017 shall be a “realistic timeline” for GST roll out. These developments have eased the apprehensions around GST roll out which now looks certain.