‘If the Centre needs to slip on fiscal deficit, there’s no harm’

New president of industry body Ficci (Federation of Indian Chambers of Commerce and Industry), RASHESH SHAH, chairman of financial services major Edelweiss, tells

Subhayan Chakraborty that increasing the fiscal deficit to 3.5 per cent of gross domestic product (GDP) may not be a bad thing if capital expenditure gets a major boost. Also, the norms for non-bank financial companies (NBFCs) should be brought on a par with those of banks since they now form an important channel for smaller firms to get credit, he argues. Edited excerpts:

What are the key Budget recommendations Ficci has given the government?

The Budget is a balancing act and this year there are constraints due to oil prices rising. This is the last full-fledged Budget before the elections. If the fiscal deficit slips a little and goes to 3.5 per cent of GDP, I don’t see a problem. A little bit can be traded off for making sure that investment isn’t reduced.

Now, the key theme will be around growth, capital expenditure, and rural investments, and those will need spending. An increase of 30-40 basis points would amount to roughly $8 billion, which is close to ~500 billion.

On the tax side, what changes are required?

A key issue is tax incentives for capital expenditure. The government had promised a cut in corporate tax rates. So some beginning should be made on that, especially since the United States has cut its tax rates significantly. From the point of view of global competitiveness, we have to make our companies stronger. We are also hoping that interest rates come down because that will also influence capital expenditure.

Reduction in the corporate tax has remained a perennial issue with industry. What changes are expected this year?

In 2014, the government had indicated it wanted to bring down the corporate tax rate over five years. I think we are getting close to that. While it may not be able to do it in a year, it can show a path towards that goal.

What about smaller firms, which have borne the brunt of both demonetisation and the goods and services tax (GST)?

It’s true that most micro, small and medium enterprises (MSMEs) are bearing the brunt of their shift from being in the unorganised sector to the organised one, but those which had been in the organised sector, to begin with, have not been affected much. That is the trade-off. Finance is important for these companies and having some financing schemes or subvention, as has been the case for affordable housing, is required.

How can strong growth in the financial services segment be cemented?

The segment is doing very well and it is looking at a growth rate of 14-15 per cent annually. Smaller firms such as NBFCs are growing faster, clocking about 25 per cent growth. The biggest thing the government should do here is to put NBFCs on a par with banks since they are now an important channel for providing credit to MSMEs. When NBFCs provide loans, they don’t get income-tax (I-T) exemptions on provisioning, while banks get I-T exemptions on it. Their provisioning is considered an expense.

Apart from pumping in funds, would you suggest any key structural changes in the manufacturing segment?

Manufacturing is still recovering from the changes put in place by the GST. We recommend a further convergence in GST rates. The GST is a structural reform and the GST Council is India’s first proper federal council.

When do you see the domestic investment cycle reviving again?

I think the revival is eight months away since that is when the demand will pick up strongly as is evident from October onwards. The key to the investment cycle is also capacity utilisation. Ficci has done a lot of work on this as well as business confidence. Average capacity utilisation in the country is low, estimated 72-73 per cent. We have seen that when it moves into the bracket of 75-80 per cent, investments start.

On that note, when do you see the services sector recording an uptick? It has been performing badly over the past couple of months?

With manufacturing activity rising, it is only a matter of time before services pick up.

When do you see exports firmly placed in the growth books?

Exports are doing well now since the global economy is booming. From the second half of the current year, major nations like the United States are doing well. The problem with India is that when the global economy is doing well, oil prices rise and the import bill grows.

Also, we are now firmly part of the global supply chain and export a lot of commodities. Since commodity prices generally tend to go up during periods of global growth, I expect exports to go up, but the oil bill to also inflate.

“AVERAGE CAPACITY UTILISATION IN THE COUNTRY IS LOW, ESTIMATED 72-73%. WE HAVE SEEN THAT WHEN IT MOVES INTO THE BRACKET OF 75-80%, INVESTMENTS START”