Budget 2022: TV Narendran, Sanjiv Bajaj Find Healthy Balance In Policy Priorities

The leaders of two of India's biggest companies welcomed Budget 2022's focus on public investment and striking a balance in addressing the short-and-medium term issues in the economy with those that are further out.

TV Narendran, global CEO and managing director of Tata Steel Ltd., said public expenditure is vital in enhancing overall competitiveness as well as fueling construction activity that yields immediate results on job-creation. That then allows time and space for private investment to kick in, creating jobs that are higher up in the value chain, Narendran said.

Sanjiv Bajaj, chairman and managing director of Bajaj Finserv Ltd., said the policy response to the Covid-19 pandemic has been a result of very close fiscal and monetary collaboration, and called for that to continue.

Below are their views as narrated to BloombergQuint.

Putting Each Building Block Of The Economy Together

• TV Narendran, President, CII; Global CEO and Managing Director, Tata Steel

Capex Focus

One of CII's proposals to the government has been to continue the focus on infrastructure. The government has not only done that but also enhanced the expenditure. We are at a time when private sector investment is just about starting to happen and I think the government needs to support with public sector and government investment in the infrastructure sector. The Finance Minister, in her speech, used the phrase 'crowd-in private investment'. Now the onus is on the private sector to get the investment going

What happens in the private sector is that investment comes back when the demand is strong, capacity utilisation improves, profitability is good and balance sheets are fixed. We think we have seen a lot of these factors come in for many capital-intensive sectors, like metals for instance, which have suffered from that for most of the last decade. We are seeing sectors like steel announcing a lot of investments because it fulfills all the conditions I have described. We are also seeing chemicals as another area where there is investment coming in.

If you closely look at the private sector investment of ten years back, three sectors largely drove it – metals, chemicals, and power. Now, the power sector has changed in the last 10 years. It is not investing in building thermal power plants. The investment focus has now shifted to green energy, which is a different kind of private-sector investment. I think the capital-intensive sectors that were investing 10 years back, two of them are coming back in a strong way, which augurs well. We also see other sectors following the same trend.

Capex And The Bigger Picture Of Nation Building

If you really look at the capital expenditure, the biggest part of it is going to the railways and road building. Both these sectors are important when you look at the cost of doing business. Logistic costs in India are around 14-15% of GDP. In most of the developed or developing countries, the cost for the same is 6-7% of GDP. This has a huge impact on big and small companies. When you look at driving competitiveness in India, there is some element of competitiveness that industries can take care of within their factory gates so to speak in the context of manufacturing, but a lot of competitiveness gets eroded outside of the factory gate. These investments help address that in a big way, in addition to creating demand for products like cement and steel, etc.

The second part is rural infrastructure. When you look at rural infrastructure, there is physical infrastructure and digital infrastructure and the Finance Minister talked about both because that is important to drive inclusion, improve connectivity. So, as the roads are important, the optic fibers, electricity, and water supply are also important because clean water supply has a huge impact on health outcomes in rural India and elsewhere as well. I think there is a broader-based approach to address some of these issues, slightly longer-term issues are getting addressed. Every year we see progress in schemes like affordable housing, clean water for all, which I think is an extremely important scheme.

Is Private Investment Returning?

It's a very complex situation. Some sectors have already announced investment plans, including the company I represent. So there's a lot going on there.

But, having said that, private sector investment doesn't necessarily mean enough private-sector jobs, right, because capital intensive segments, create some jobs but not as many jobs as you would like to have. For that, you do need construction and that's why I think infrastructure spending creates jobs in construction, which is more immediate. Private sector investments in manufacturing create higher-skilled jobs.

That's important but, at the same time, some of the initiatives of the government are addressed toward that.

The job-creating sectors are the high-contact sectors—restaurants, hospitality, tourism—a lot of which have been significantly impacted by the pandemic. The extension of the credit guarantee scheme (ECLGS) to these sectors is good.

We also need to look at capital and labour-intensive manufacturing like textiles. I'm happy to see textile exports going up, but we need to move along on that. In other areas such as electronics manufacturing, the PLI schemes and other policies have helped. India has seen a lot of investments come into electronic manufacturing, which again is very employment-intensive. So, you need to have employment-intensive private sector investment as well as capital-intensive private sector investment because each has its own value.

In the interim, you need construction spending because that takes care of a lot of jobs between agriculture and high-end manufacturing or services. Then, you need the services sector to come back, particularly those which have been impacted by the pandemic.

There are multiple actions to be taken, but till jobs are back or sentiment on jobs comes back, incomes start growing, and household expenditures on health—which people have had to do more than they would normally do—go down, consumption will always be a bit fragile. That's why the investment focus should be there. At the same time, we need to nurture consumption back to normal levels.

Are Consumer Companies Investing In New Capacities?

The biggest area where we've seen investments is electronics manufacturing. You see a lot of announcements happening. India was the biggest importer of mobile phones in the world, now India is going to become an exporter of mobile phones very quickly, if it isn't already.

The other area where we see a lot of investments is logistics and supply chain. The e-commerce supply chains need to reach all parts of the country, have warehousing and logistics systems, etc. To that end, the government has also talked about logistics parks. All these are areas where we are seeing investments coming in.

On healthcare, I understand the money kept aside [in the budget] is not much higher than what it was for last year, but one needs to see whether from last year's money how much was spent on vaccines. Some of those were one-time expenses in FY21 that are not ongoing expenses. How much of it can be spent on health infrastructure? We also need to build medical devices in India rather than importing them.

The Finance Minister also talked about [onshoring] the capital goods industry. A lot of money that is spent on that in India flows out of the country for capital goods. We need to see how to preserve that in the country. There are a lot of opportunities beyond the traditional sectors, and some of the policies that the government has in place are directed towards that.

Did Services Need More?

The budget does focus on the credit guarantee scheme for MSMEs. In the high-contact sector, that's a positive. There are some incentives for startups, which a lot of are in some sense services. Otherwise, yes, I would have liked to see a little bit more on tourism.

Maybe this is not the right time, maybe next year's budget, when travel is back to normal is the time to act on that. India has huge potential to get more tourists coming in this year. Hotels have survived because of domestic tourism. I think that is a huge opportunity for us because, again, a sector which is a big employment generator in India does have the ingredients to become a very, very important tourist destination.

Cost Of Capital To Rise

In some sense, rising bond yields were inevitable. We had four years of low-interest rates. Companies like Tata Steel and many others like it have deleveraged, we brought down debt. So we are better prepared to deal with the rise in bond yields than we would have been maybe three or four years back. To that extent, companies have been prudent and been thinking about it.

Also, this time we are not seeing the kind of investment cycle in commodities that we saw in 2007-2008. Of course, in countries like India, where demand is growing, there are investments, but nobody's building steel plants across the globe. There is now far more prudent capital expenditure setting across the world. People are aware that interest rates are going to go up. In India, we are in a slightly different position because you have domestic demand, which could be positive if you have a deleveraged balance sheet.

'God Is In The Execution'

• President-Designate, CII; Chairman and Managing Director, Bajaj Finserv

Budget Impact On Financial Markets

A lot of the way to look at the market impact is the short-term versus medium-term point of view. Very clearly, the focus is on growth and on putting in more money into high-quality investments, into infrastructure investments. That will have an impact on jobs, which will help consumption, which will help the overall economy grow, and that's where you're seeing the equity markets react positively. But, there is a chance that in the short-term there could be inflationary pressure, that's where the bond markets are reacting.

In the last couple of years, there has been very close collaboration between the Finance Ministry and the RBI, to help in creating a path for ourselves on fiscal and monetary stimulus, and the balance that our country, compared to what many other western countries have done. My hope going forward is that again between the RBI and the Finance Ministry, there will be collaborative discussions. What you see is a moderate policy taking into account realities, both on growth as well as inflation, and the fact that we don't live alone in this world and being aware of what's happening around us.

Steepening Interest Rate Curve Ahead?

There is already some tightening, but that is for a shorter period of time. As the output from not only the new infrastructure investments but infrastructure investments even made in this current financial year, plus additional investments coming in from the private sector, which is now stepping up on new capacities after the last three or four years, all this should help moderate that in a period of time.

Budget Missed Relief For Lower Income Groups?

We were hoping for allocations to the urban poor, and there's no announcement of that. On rural poor, MGNREGA has been tightened up actually. So those were unfortunate surprises, so on this, the budget was mixed. I'm sure it's something that they are fully aware of it and in our ongoing discussions, I'm sure that we will know more from them.

On the other hand, if you see on the MSME side, the credit guarantee scheme has been extended by Rs 50,000 crore especially for hospitality and related sectors. So that's where the positives come in as well. At the end of the day, every budget has to be balanced. This government, and every government, is very cognizant of the people at the bottom of the pyramid. If they have cut that down I'm sure they have good reasons and we will just hear about it hopefully soon.

How Will Consumption Revive?

If you see even in the last couple of quarters, we've seen many months of very strong consumption-driven growth coming back. We also then see it halting in particular months, and a lot of it has to do with consumer confidence in this pandemic period. The second wave of Covid-19 was a tough wave. Versus that, this third wave seems to be far better in control with all the investments that have been brought in on health care. The micro-containment strategy has had very localised lockdowns for short periods of time. This brings in confidence. For example, if I were to look at our own numbers on consumer financing in January, they've been pretty strong, although I know we are not necessarily the one swallow that a summer makes.

Where I would hope that the government continues to focus on, is on the next possible Covid wave. Focus on, with the right medical experts advising you, on expanding boosters, bringing the next-generation therapeutics. You could always have another worse strain, so prepare for that.

If consumer confidence stays on course, you will see demand coming back. That's one point. The second is that if you see this government over the last couple of years, they have not found favor for directly subsidising consumption.

Other Standout Policy Moves

What we are seeing is a wide variety of policies and areas that the government has talked about investing in or tackling and working on. Look at affordable housing, look at climate change, look at what they're talking about for batteries and the policy for battery swapping. The budget talks about incentivising startups, of defense production, 68% will be set aside for domestic companies, R&D and joint collaboration on defence happening. In the entire digital world, various investments over there will help set up many more years of growth.

Of course, all this has to be implemented right, which goes without saying. I would almost ask, are there too many areas? Now we need execution in each of those areas and we will all be monitoring those. To be fair to the Finance Minister, she has hence talked about this budget being not only for this year but really sowing the seeds for the next 25 years.

I'm sure there's more that's going to come, but it's a very wide-arching budget that tries to bring in a whole set of new areas into focus, tries to fund them, identify collaborations. For example, the green bonds they're talking about, hybrid bonds, where the government will invest up to 20% private sector separately.

There are just so many areas and as we get into more details, I'm sure we'll find out more. To me, the positives are that a lot of this has been touched upon, and we know this government focuses on execution. But, execution in so many of these areas requires the centre to work with the states and we hope that should happen. Additional allocation on spending has happened to states as well, we hope they see that. Eventually, the god is going to be the execution.

Disappointments

We were hoping, one, for some support to the urban poor that didn't happen. Second, is a lot more focus is needed on skill-building.

As a country over the next 10 years, we probably need 100-150 million jobs in the category between the highly-skilled and unskilled. That would mean very good quality electricians, plumbers, the entire vocational training part which Germany does so well. That's what the National Skill Development Corporation is supposed to do, but we need version 2.0 of that as well. Maybe we'll hear about it next year. These are two standout disappointments. Otherwise, the focus on policy continuity, no funny taxes, and the growth focus on infrastructure-related investments are all welcome