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'Budget not a defining moment in a nation's economic history'

Even as a major part of the Indian industry complains about the slowdown in the Indian economy, R Seshasayee, Managing Director, Ashok Leyland, exudes optimism about India's future.

While India Inc is busy debating what Yashwant Sinha's next budget will hold for the country, Seshasayee brushes aside the entire issue, saying that too much unnecessary emphasis is being laid on the budget, which is not a defining moment in the economic history of our nation.

Seshasayee talks to Shobha Warrier about the Indian industry as a whole, the maturing of the Indian market, what the government should do to attract investment in infrastructure and what the industry is expected to do.

The growth of the Indian industry is not up to expectations. What according to you are the reasons for such a poor performance from the industry?

If you draw a matrix of the Indian industry scenario and divide it into four quartets, you will find a pattern emerging. On the right top end of the square is the service sector, and that is clearly on the move notwithstanding this dot com debacle or the fact that the US economy is slowing down.

Some even say that because of US economic slowdown, there will be a shift to sourcing from outside the US and therefore India can perform very well in the service sector. So, you have got a bright spark at the top end.

Diagonally below is the manufacturing sector, which is driven by sentiment of the future. I am making a distinction between the manufacturing sector of the present and the manufacturing sector of the future. There, I think is the sentiment issue. There is clearly a lack of positive feeling about what the future holds. This is a cyclical kind of situation, which happens all around the world. It is nothing new.

In a way, we have sort of bottomed out on that if you look at the cement and steel industry. I would think that it might be on the rise.

If you look at the other two squares, we see a neutral kind of position with manufacturing for current goods. I don't find any precipitous fall in those items. It has not grown very robustly but it has not fallen either. That means there is a reasonable amount of wealth creation in the rural economy but there is not enough future investment.

You said that the consumer industries are doing reasonably well. What will happen to them once the cheap Chinese goods flood the Indian market?

Again, I have to make another division. One half of the industry, which is unfortunately the small-scale industry, is very vulnerable. But the organised industry will probably not face such a serious threat, for two reasons.

The organised industry is capable of delivering more competitive products because of the fact that there is a greater degree of technology, access to market and distribution channels are available to them. So, they will fight and come out.

But the unorganised small-scale industry, where there is negligible use of technology and which is starved of finances and the necessary strength to fight a brand-battle, will be most adversely affected.

It is very unfortunate because this sector is employment intensive and the sickness in this can have a domino effect.

As far as Chinese imports are concerned, I have a feeling that they are testing waters. They have just got their toes in. The Chinese intent can't be safety pins and bulbs. They will be looking at a much larger basket including high-end goods and branded products.

The organised industry will have to recognise that China is capable of mass production at lower prices in comparable quality. A combination of big production volume, huge market size and different labour laws has made this possible. The state pays 50 per cent of the labour costs one-way or the other.

How do you think the Indian industry will face the Chinese threat?

There is no choice. There is very little point in saying that you ban China! I would say that we could do two things. One is at the government-to-government level where an agreement can be reached about what kind of products access will be allowed by each. That is a new way of looking at Sino-India relationship, and I feel it is feasible to do this.

In so doing, the Indian industry can get a foothold in the Chinese market. There are some industries that are going to be hurt when the Chinese imports come in but there will be some other industries which will think of expanding their market to China.

Who has to take the initiative for that to happen?

The government has to. It is perfectly legitimate for the industry association to start talking to China but the overall environment has to be created by both the governments but that initiative not very evident. It has to be more active.

You said that the future of manufacturing industries is not driven by positive feelings. What could be the reason for this lack of positive feeling?

The future of manufacturing industries, like cement, steel etc are not only affected by the future sentiments in India but also by the future sentiments of the world economy. The slowing down of the US economy is bound to have a major impact on these industries because US steel prices and non-ferrous metals are coming down.

So, there is no way we can stop this situation but some areas of the Indian economy are showing positive growth, particularly the cement industry.

If the government had invested in infrastructure, the future of some of the manufacturing industries would have changed …

Today, economic problems and solutions are reading like an elementary book and everybody talks about the right kind of solutions, right kind of answers.

The issue is, how do you make that happen given our level of savings and investment. Now, you are not increasing the savings rate in India. In the context of savings and investment being slow, how do you make infrastructure investment happen?

The only way is to get FDI (foreign direct investment) because you cannot grow unless you get FDI to come in. How do you get FDI to come into infrastructure?

Unless there is a fair return for the investment, there is nobody anywhere in the world who is going to put roads here. It has to give him an economic return; it has to give financial return. How do you take the user charge implemented in power and roads unless you have people who can participate in that and pay user charge? 25-30 per cent of our population cannot participate in the market. So, how do you make them pay user charge?

It seems to be a vicious circle...

It is, but you have to break it somewhere. This is not a sustainable process for long because subsidies cannot be sustained for long. Enabling the population to move up to participate can come only from a social development process. Then, with the right kind of employment capability, they participate in the market and pay the user charge. The short-term solution is for the government to step in to pay for the user charge in favour of the investors in ports, roads, etc, which have commercial linkages. Other countries have done it and this is the only way to make it happen.

When the government began liberalising the economy, everybody said the trickle down effect would help the poor. But this has not happened and the gap between the rich and the poor seems to be increasing. Any comments?

It is true that the trickling down process has not taken place. I think the issue today is that we are harping too much on the central government. The focus has to shift to the state governments. We must advice the state governments on the need to create investment in social development and physical infrastructure. Unless you bring the action from the centre to the state, it will not happen. For that, you need fiscal reform.

Can we solve social problems through decentralisation and giving more power to panchayats?

Yes, undoubtedly. Decentralisation on expenditure alone will not solve the problem. Decentralization of revenues is also necessary. 55 per cent of the revenue being collected today is taken by the central government. That must change. The finance commission must start moving revenue back to the states. There must also be a kind of proximity to the revenue raised in the state and the money spent. Today, we have an anomalous situation where some of the better performing states like Kerala, Karnataka and Tamil Nadu are raising revenue which is being spent in UP or Bihar because of allocation.

I don't think it is possible for the politicians in Karnataka to keep explaining to their constituencies for long that while you are creating wealth, a lot of it has to be spent elsewhere. The guys who are creating wealth would like to see that their roads improve and their education system improves. All this will point towards better reforms on the fiscal side.

Do you expect anything of that sort in this budget?

Budget is too small a thing. We are unnecessarily putting too much emphasis on budget. Budget is not a defining moment in the economic history of a country at all. It is nothing more than an income expenditure statement. The growth plans of a country and the policies relating to infrastructure don't get expressed in the budget, and rightly so. A lot of things happen right through the year. But somehow, all of us have become so focused on the budget, we think that the budget is going to make or break.

It merely captures what the revenue potential of all that has happened in the past in relation to various policies, various growth initiatives and it states the intent in terms of how that money is going to be spent.

Last year, the finance minister talked about downsizing the government, cutting down on expenditure and investing on infrastructure for the economy to grow but nothing happened.

That proves my point. A statement can again be made but what is necessary is to get things done. For example, the FM mentioned about downsizing the government. But positive developments in devolution of powers from centre to state should be taken alongside. You find even welfare expenditure is going back to the centre, which is wrong in my view. It must come from centre to the state, and from state to the Panchayats because accountability is never ever established between the beneficiary and the person spending it who is some 2000 kms away.

In the last two months, sales of cars, two wheelers and commercial vehicles have shown negative growth. Is it because agricultural growth is slowing down and the huge rural market is getting affected by this?

Yes, the automotive industry has been experiencing a negative growth. The rural market today is creating enough wealth to spend money on everyday needs. I don't see any problem here. We don't see a collapse in the market of FMCG items either.

But the rural market is not creating enough wealth to invest in a consumer durable for a long time, and it has not been doing so because it has no faith in the future. Every man who is buying a motorcycle or a car is taking a toll on his future income.

Now, he is afraid to do that because he is not sure that the revenue earnings will sustain. This is known as a negative saving in terms of borrowing and investing in an asset.

It is also partly due to the fact that the rural economy is going through a roller coaster ride in the last two years. It is not an even growth. If you can sustain even growth, the sentiments can come back.

How are you going to face the negative growth in the automotive industry?

We continue to make statements about what the industry should do but I think, ultimately we have to do something about the company. At Ashok Leyland, in the last five years, we had two big cycles of recession, and in these five years, we have moved forward and we have bucked the trend. That means even if the market goes down, we will be moving up like we did in 1999.

How did you manage to move up despite the slowing down of the industry?

By looking at both pushing sales to get the market share and taking better value from the company in terms of improved profitability. So, 2000-2001 again was a year, which was bad compared to last year.

The market is down by about 20 odd per cent but hopefully, we will do better than last year, again by improving market share and also improving profitability and productivity.

Therefore, what you can do for the company is to try and see whether you can buck the trend and continue to do an upward chart regardless of the market going up and down.

It is not easy and I don't think you can guarantee that it will happen every year. But it has happened in the last four years or so. That was partly because the value of this company is so high that we need to sort of rough cut the diamond. When we polish a diamond to bring the lustre out, it shines even when the market is bad.

Do you feel the government is pampering the new economy at the cost of the old economy because they are brining a lot of money now?

I don't think the government is pampering them in any way. It is not fair to say so. I will say that despite the government, they are bringing in money. I would not say that the government has lost interest in the manufacturing industry. Actually it is not attending to any industry in particular.

Since substantial public expenditure, infrastructure expenditure and consumption are still in the hands of the government, it is they who will have to ensure economic growth.

Contrary to the US economy which is driven by entrepreneurial successes because government has less control on that, Indian economy is relatively less mature as a free economy.

The government still occupies tremendous space in the economic management and therefore, it is possible for it to stimulate or slow down growth through good or poor management.

Individually the sectors will have to find their own feet.

Even though it has withdrawn from micro management or sectoral management, it can still macro manage the economy, and it should too. By doing that, it can create an environment where growth is possible. Within that, each industry will have to capture the mind of the consumer and see how it can push for power.

Why is it that the government is not creating such an environment and the industry is not pushing for such an environment?

It is the question of breaking the vicious circle that I mentioned earlier.

Where do you want the government to break the circle?.

Three things have to be done to get the infrastructure investment growing. The government has to move towards getting user charges that is possible in ports and power, which have commercial linkages. It will be more difficult in water, road, etc where not every movement on the road or every drop of water you take is for a commercial purpose.

But every movement within a port is a link in the chain of commercial movement and therefore, wherever the infrastructure usage is commercially based, user charge must be paid and the management of the infrastructure must be commercially driven, which means corporatising.

The second is, if you look at subsidies, we must use and distribute it efficiently so that it reaches the person who is unable to participate in the market. You don't have to increase the subsidy but make it more efficient.

The third thing is to invest heavily in social development. Our education system has to be revamped. Our public health system has to be revamped to the extent that it has to be corporatised, that is, creating machinery that will do the work efficiently.

Do you expect the government to tax the rural rich?

No. I don't think the budget has been used or will be used as a document or means to make this communication. It has to be a part of the political manifesto, or, it has to be a part of the ongoing reform process. I don't think the budget is a place where you will find this. I don't expect something new this time.

But the industry and the market look at the budget and decide which way they should grow.

They read too much into the budget and say the budget is going to influence the economy. You have seen very good budgets subsequently bring very bad economic growth and vice versa. It simply proves the point.

Are you optimistic about the future of Indian economy?

I am optimistic about the future because of three things. One is, despite all that is happening, the urge to create wealth, is growing very rapidly. I think it is a very good sign.

Enterprises are also becoming internationally competitive. You see this happening not only in software and dot coms, but this is evident in every department.

I have great hope that this enterprise will ultimately be the driver.

The second is, in spite of all the impediments, the government will provide for better infrastructure. Without this it is impossible to run a country. As the market matures, as consumers mature, they will ask for better infrastructure.

The third is, at the end of the day, you get a very global kind of a picture. India is such a strong market that people in the developed countries will have to find a way to get India to move up in terms of maturity. It is in their interest to make that happen. Otherwise, they will find it restrictive. It is too much of a temptation for the developed world to let the opportunity.

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