Harsh Pati Singhania, President of FICCI, spoke to Bloomberg UTV Senior Editor Mini Menon about the industry expectations ahead of the credit policy review and the budget 2010.

Singhania said companies are getting in the investment mode and the onus is on the RBI to ensure growth amidst fear of tightening of liquidity with an imminent rate hike.

Edited excerpts:

Why is India Inc so worried about a hike in rates when balance sheets are looking much better?

Singhania:  We have been seeing good growth particularly in the last two quarters. As you have seen the GDP numbers are good and the IIP numbers are good but we believe a lot of this is stimulus led so that is one part of it. The second part of it is that we must also realise that corporate results have been good because globally there has been a reduction in commodity prices. If you look back 12 or 18 months ago we saw oil prices touching all time highs. The global commodity prices are on a roller-coaster - on the upside now - because oil price has come down and you have seen input cost reduction in businesses. This commodity price cycle is probably bottoming out. The third factor is companies have tightened their belts and businesses have become more efficient and the systems have become efficient.

There have been some reforms and forward movement from the government side as well. So it’s a combination of these factors. Therefore at this point when growth is rather fragile, if we see tightening of liquidity or interest rate increases it will hamper things. I believe it’s due to lower interest rates on the credit side as well. In the past what was fuelling our growth was cheap credit for things like consumer durables, autos, and housing. If you have cheaper credit coming in people are encouraged to buy. The fear factor has also receded. Six months ago, people were not tempted to change their car models saying the cars are working fine so why we should change. But now the mood is positive and I think an interest rate hike at this stage would hurt on the consumer end and also on the investment end. We have been hearing a lot of announcements about big investment and everybody is in a positive frame of mind. A business confidence survey from FICCI clearly shows people are upbeat about investment. The question here is to what extent the investment is being made. I think there has been little bit of a disconnect and still there is little bit of a pause. It’s not that people don’t want to invest but I think they have a finger on the pause button. We are still to see how solid the revival is, what kind of traction is there and then the people are going to press the play button.

What is the picture that you’re getting from your meeting with the finance minister?

Singhania: Well the finance minister and his team are in a listening mode and they can’t react at this stage. It’s budget formulation time. They listened to us patiently and one view which is unanimous across chambers, associations is the stimulus packages need to continue for some more time. The reason is not a matter of give and take with the industry asking and the government being the giver. The industry is excited about the forward movement we have seen but we still believe it has clearly come from the great amount of help the government has provided on the fiscal side with the stimulus and of course the monetary thing which we talk about. It’s early days and that’s why FICCI has said let’s wait for at least another six months into the new fiscal and then we can review it. The key point is, if we are able to implement GST then we can dovetail the so called withdrawal. In fact the overall rates of taxation come down so you don’t have to, in a sense, withdraw…

Do you expect a bit of tightening starting with this budget?

Singhania: Well, I certainly hope not and that would be my comment on that. I think the governments has quite a
tightrope walk on and it’s not going to be easy. At the same time, there are some avenues, if business itself grows and then you starting get more collections. The excise collection would not have been good obviously because you have reduced the rate of excise but if you see the advance tax collections they are showing some positive signs and there is some hope there which means that the businesses are doing much better. The second is clearly the one point that you mentioned in terms of disinvestment. I think the government can raise money through that source and third is the issue of subsidies. I think subsidies clearly need to be targeted better. there can be more efficiencies in the administration of the subsidies and there can be clearly some reduction in non planning expenditure so it's not huge thing. Its not going to solve the problems of fiscal deficit by no means but I think these are small steps that will be taken. I think the action has to be more from the state governments than the central government because that is where the real action is and that is where the real investment is going to be. The real consumer buying is happening in towns and villages, so governance issues and the efficiency of states is an issue that we need to focus on pro-actively to bring growth.

Talking about scaling up and the challenges ahead, is it an inevitability that in the next 10 years  Indian companies will have to scale up?

Singhania: I think clearly you will have to have much more large scale operations in India. Infrastructure is a big area because that is going to allow movement of goods and transportation and a whole lot of things across the country.
And the second thing is going to be the issue of taxation which is GST and other taxes that has to be simplified.
The third big area is clearly skills and human capability. I think that is a softer area which will take even more time therefore greater urgency to address it. See when you are building big factories, an area where you run into bottlenecks, is the land acquisition environment. There are whole lot of issues which don’t get reported often, for instance you don't get skilled labour like masons, carpenters, electricians or whatever. We need to have much greater focus and appropriate skill formation. People go to colleges and pass out as graduates and then everybody complains I’m not getting a job and I have done this but I have to do that kind of work. That's why the whole quality of education needs to be improve and the appropriate skills which are good for getting employed are required rather then everybody aspiring to get a BA degree or BCom degree or whatever. So skills and human capital formation is going to be very-very important.