Consistency in policy needed to drive sustained investments

The government needs to have consistency in policy to build confidence and drive in investments from the private sector if India aims to become a globally competitive market and have products that are in line with global standards, experts at panel discussion at The Hindu BusinessLine’s Countdown to Budget 2022 event said.

The panel discussion featured Preet Dhupar, Chief Financial Officer, IKEA India, Martin Schwenk, Managing Director and CEO, Mercedes-Benz India and Hetal Gandhi, Director, Crisil Research where they spoke on the topic ‘Reviving private investments, what more can government do?’ 

“We need growth strategy for mid- and long-term. Schemes should not run for 2 or 3 years. We need a longer period for a sustained investment into new factories and products. We need a holistic approach,” Schwenk said.

from bottom (anticlockwise)  Preet Dhupar, Chief Financial Officer, IKEA India; Hetal Gandhi, Director, Crisil Research; Martin Schwenk, Managing Director and CEO, Mercedes-Benz India; and  N Madhavan, Senior Associate Editor, Hindu BusinessLine

The Government is making a simultaneous push for new fuels for the automotive industry as a means to cut down on the country’s fuel import bill and push for cleaner or zero vehicular emissions. While the push for electric vehicles and CNG has gained significant momentum, the Centre is now betting on ethanol (flex-fuel vehicles) and hydrogen. 

 “The auto industry needs a clear signal about the expectation from it and the strategy thus adopted going forward. If it is going to be EVs then create a suitable framework like charging points,” Shwenk added. All these fuel technologies are very different from each other and require independent investment cycles.

The incentive scheme titled Faster Adoption and Manufacturing of Electric and hybrid Vehicles (FAME) has provided a boost to electric vehicle adoption but the government has not clarified if the scheme can be continued over a longer term. 

“Are we going to support EV over long term with subsidies? What is the strategy that the government has in mind? Are we going to rely more on investments or capex incentives or are we going to do a combination of demand incentives and capex incentives? That clarity will help trigger green capex on the transport, power and oil and gas which will help in a sustained recovery in the overall investment cycle,” Gandhi said. 

Driving Investments

The panelists, however, agreed that new initiatives by the government such as the Production Linked Incentive (PLI) scheme will help boost investment from the private sector significantly over the course of next two years. 

“There should be investments of ₹2.25 lakh crore under the PLI scheme. This investment is very huge. It can almost drive entire capex for one full year. We believe that only 9-10 per cent of the total capex of FY22 will be driven by PLI which will shoot up to 20-25 per cent in FY23 and FY24. If it wasn’t for the PLI scheme the industrial capex would not have gone to the pre-pandemic levels,” Gandhi said. 

As of last financial year, close to 15,000 industrial units invested ₹3.5 lakh crore. A large portion of it came from the large 100-350 companies which account for 55 per cent of the investment. 

Lately the government has allowed 100 per cent participation of private companies in infrastructure projects, which had been a government-dominated area so far. 

“While the share of private sector in industrial investments is high at around 70-75 per cent of ₹3.5-lakh crore, its share is only 14 percent in infrastructure investments as a large portion gets funded by public investments,” Gandhi added. 

Lower import duties

The panelists also pitched for lower import duties which would raise the level of competitiveness that would lead to improved levels of quality. A portion of the automotive industry wants the government to cut down custom duties on fully built vehicles. US-based EV giant Tesla has been lobbying for a duty cut since the past several quarters though it is yet to launch its first product in the country.

“From the time we started in India we have seen protectionist policies come in towards furniture with constant increase in custom duty rates. This is where we ask not to get tempted to do short term protectionist measures because such measure hurt in the long term. We underestimate the potential of India by putting in the protectionist measures. Our industries can withstand competition and stand up to global competitive levels,” Dhupar added.

There have been discussions over trade agreements with the UK and EU but India has remained non-committal. Companies like Mercedes-Benz, BMW and the Volkswagen Group want lowered duty rates to import cars at cheaper prices.

“If we want to improve our cost and quality competitiveness and want our products to be competitive in the global markets then we have to adopt global quality standard. We have to move to standardisation. The government can also look at having trade agreements where they do not exist. There are conversations happening with the UK and EU and those will promote investments,” Dhupar added. 

This discussion was moderated by N Madhavan, Senior Associate Editor, TheHindu BusinessLine.