Recovery from demonetisation is a foregone conclusion

Commenting on the aftermath of demonetisation, MURLI SHANKAR SAMBASIVAN, Vice President, Association of Indian Forging Industry and Joint Managing Director, Super Auto Forge, Chennai, says that the period between November 2016 and January 2017 will see the liquidity situation flatten out. He expects the recovery phase to start picking up from February 2017.

What is the expected impact of demonetisation on the forging industry?
There is definitely going be a short-term impact of demonetisation on the industry. The November 2016 sales of two-wheelers, four-wheelers and the automotive industry in general has taken a beating.

But looking forward, the impact of the slowdown will be felt over the next two or three months. Starting with the end of the first quarter, we will experience much better recovery. Recovery is a foregone conclusion due to the following reasons:
a)We perceive that a lot of funds will become available within the banking system. The liquidity so generated will need to be deployed into industry for infrastructure building and other business activity of development.
b)When so much of a large quantum of funds becomes available with banks, interest rates will come down, we estimate by around 2 per cent to 2.5 per cent.
c)People making purchases in the automotive and real estate sectors will benefit from fixed EMIs going down because of the interest rate cut. Moreover, in real estate, because of demonetisation and the government´s emphasis that all transactions should be through banking transactions only, it should lead to an automatic correction of real estate prices by 20 to 25 per cent or more. That is going to make realty more affordable for the middle and upper middle class. This will drive growth.
Another factor that will push growth is unrelated to the demonetisation exercise – the rampant levels of pollution that we see. The Union government will face huge pressure to condemn polluting vehicles. This will result in scrapping of vehicles more than 15 years over environmental concerns. This is bound to happen in six months if not in the next three months. Once this happens, 50 per cent of vehicles will be scrapped. A banking sector flush with funds and a Central Government initiative of subsidy is going to drive the entire industry. If you look at the commercial vehicles segment, 40 to 50 per cent vehicles plying are in that target range (over 15 years old).

How do you forsee the interim period for infra development with large infra projects announced even as demonetisation has resulted in cash contraction?
The period between November and January will see the liquidity situation flatten out. From February onwards, the recovery phase will start picking up. Already, some infrastructure projects have been kicked off. Then there has been a good monsoon in the north of India this year. The tractor industry will pick up strongly. Demonetisation will not put a general dampener on the economy, but bring in positive tidings as there are a lot of positive developments as well. Post February, there should not be a further slide down and stability should be achieved in the Indian economy that will grow slightly from the first quarter of the next fiscal (2017-2018), that will exhibit positive figures.

What about the implications of GST on industry? Will efficiencies improve?
Definitely, GST is going to make a lot of our work simpler. Today, we have a multiplicity of taxes at the Central and state government levels – Central Sales tax, Service Tax and Octroi – to name a few.

We anticipate costs to come down by 2 per cent as an impact of GST. Frankly, this depends on the finalisation of the GST tax rates. Currently, the progress at the GST Council meetings indicates that a 2 per cent reduction in our costs is achievable. This will be a huge positive we anticipate from GST.

Short-term industry processes that are affected by the contraction in cash-based transactions have ground to a halt. How does industry transform to a digital way of doing business?
Actually most of us were in Delhi in the first week of December. We observed how salary payments were being processed, especially for contract workers. Even though the contractor receives payments by cheque, he in turn distributes money to workers in cash. Most of us – in the forging industry – have been working closely with banks from the 15th of last month to ensure that contractors registered all their contracted labour and opened bank accounts for all of them.

I have been holding consultations with a lot of CEOs, pan India, through the forging industry platform that represents 280 firms. South India was already paying through banking transactions, for some time now. Even in the north of India, the last 15 days has seen a strong engagement between banks and forging companies in the context of opening of banking accounts for contract workers. Debit cards have been issued to all of them, while there may be those exceptions where the accounts have not been opened due to the absence of Aadhaar Cards with the workers. By January 2017, all the glitches should also be eliminated. Two things will happen: The functioning in industry will become easier and every transaction will be above board.

For this recalibration exercise to be effective, where do you expect the impetus to come for the sought transformation of doing business?
To be honest, availability of cash is very scarce. But once it is done, people will find it very easy. In my company, we digitalised operations two to three years back. All of our contractors are paid by cheque and they, in turn, pay contracted workers through banking transactions.

On Finance Minister Arun Jaitley´s GST Council meetings, how do you react to the planned rationalisation of GST rates over the next five years? What do you expect from the Budget for the 2018-2019 fiscal?
Rs.1,00,000 crore is expected to be raised additionally through tax base mobilisation leading to increased money availability with the Union Government. In developed nations today, GST is in the range of 13 per cent to 15 per cent. The same rationalisation is expected in India as well. In another five years, this process transformation should be complete in India, I believe.

The rationalisation of tax rates, as promised by Union Finance Minister Arun Jaitley, may not result in a single GST rate due to existing disparities in Indian society. It may probably result in two or three GST rates eventually.

Are there any infrastructure projects that enthuse you for being development accelerators?
One is the Metro projects being simultaneously undertaken across India. These are good for the forging sector. Cities are vying with each other to ensure that their respective Metro projects reach finalisation quickly.

Again, the Private sector is keenly involved. Foreign firms like General Electric have set up branches in India in anticipation of a huge requirement.

Secondly, the opening up of the defence and aviation sectors to outsiders is a positive step again and India has signed on a lot of agreements with foreign players like Rolls Royce and Boeing. These agreements entail procurements from India to the extent of 10 to 12 per cent of the total contract value. So if Boeing is awarded a $1 billion contract, it means $ 0.12 billion will have to be spent over the next five years in India, which offers a huge opportunity for Indian forging companies. Take for instance manufacturing contracts given out for building battle tanks.

How does´Make in India´help Indian business?
Let me put it this way. In the Indian automotive sector, till Maruti came in, our industrial abilities were limited to the Ambassador and Fiat cars for several years as the two versions of luxury and sleek design respectively. Our quality and exposure was limited to that.

Once Maruti came into India, our automobile industry was exposed to new technology. Today if you look at the Indian automobile industry, there is a sea change. Volkswagen for instance will release its latest brand concurrently across the globe and in India as well, which has become one of its centres of production. Indian industry was able to scale up with regard to quality and technology to meet the global challenges and requirements.

In a similar fashion, the defence sector will also transform, although today the Indian industry is not well versed with the sector. The moment this exposure becomes available, we have the inherent capability and wherewithal to meet any professional demands. And this will definitely happen.

Another important facet regarding the emphasis on ´Make in India´ is the plans by Maruti to locate a plant in Gujarat. This plant will cater, not just to India, but also become a hub for exports for the company with the sea port located nearby. This will become the channel to export to South Asian countries. Gujarat is similarly becoming the hub for automobile exports with Volkswagen, Hyundai and also Porsche to set up plants there. Car and truck manufacturers are locating to India as a base for producing vehicles intended for distribution across the globe. This offers a huge opportunity for us in the forging industry.

Are there any incentive requirements from the government for the industry to make it globally competitive?
We have made representations to the Union Government for a dispensation for the forging industry that is similar to what was made available to the textile industry. Currently, there are big players like Bharat Forge, MM Forge and Amtec which are the top rung players in the sector. However, there are a lot of industries that comprise the Rs.500 crore to Rs.1,000 crore segment of our industry. We have access to technology and the international markets and many of these players export over 50 per cent of their production. The small and medium sector should also get into this area through technology upgradation and incentives from the government. Industry must be able to harness the initiative of ´Make in India´ and the phase of globalisation to participate in the international markets to grab a market share of global business through the upgradation of technology.

Are there any pain areas that need intervention from the government or self regulation by industry?
One major pain area is the hard fact of steel prices. When we compete in the international markets, we are handicapped by a minimum `3,000 difference in steel prices, to our disadvantage.

We cannot blame the Indian steel industry for this situation. The Indian government is the maker of iron ore in our country. The figures released by these Public Sector Undertakings exhibit huge profits. The government should reduce the prices of iron ore so that Indian steel prices become internationally competitive. This will help us in turn to become competitive and benchmark us with global standards. The government must take a decision in this regard.

The second pain point relates to the variable prices of power in India. Gujarat, for instance, has a power cost close to Rs.9 per unit while Uttarakhand and Punjab offer much lower rates for power. There must be some arbitration and balancing out of that difference in power tariffs in different states for industry does not exhibit a variance of more than 10 to 15 per cent in power rates.