Mark Weinberger, Chairman and CEO, Ernst & Young Global in an interview with CNBC-TV18 said that more FDI is crucial if India wants to grow at its full capacity.
Indian economy is still not out of woods. However it remains comparatively insulated to concerns that are causing ripple effects in global economy. While the economy has seen some positive signs of recovery following spat of reforms over last five months, regaining fast pace of growth may take some more time.
Increasing foreign direct investment limits in sectors such as retail and aviation, has come across as a key reform initiative. Mark Weinberger, Chairman and CEO, Ernst & Young Global in an interview with CNBC-TV18 said that more FDI is crucial for Indian economy to grow at its full capacity.
"One of the things it is going to have to do is continue to get increased manufacturing. The service sector has been strong here but getting those companies to invest here, create jobs and then bring that capital into India is really important and things like raising the cap are moving in the right direction," Weinberger said.
On recent tax reforms in India, E&Y CEO said that like other countries India is also trying to fill up the fiscal hole created by recession through expansion of its tax base. However he stressed that government must continue its focus on not only simplifying and reducing tax rates but also on having consistent and fair enforcement of tax policy.
He hopes to see positive development on the immigration visa issue which Indian are currently facing in US and UK due to increased nationalistic tendencies across the world.
India has kept its barriers high when its comes to sharing information with global auditing firms and also has stringent rules on the entry of such companies. Despite these, E&Y feels that there is tremendous growth opportunity for auditing professionals in the country.
"I think profession is thriving in India. Frankly we are all investing in India because we see growth and opportunity here in terms of markets and companies that will need to be audited," he said.
Below is the verbatim transcript of the interview
Q: The first question is to do with this large debate in India about tax havens, taxing the super rich, ensuring that the tax base does not get eroded for a developing country like India and some moves that have been taken by the Indian government in the past currently of course put on hold which have attracted a lot of global criticism. How do you see this entire debate?
A: The taxes are obviously being debated across the geographies all around the world. Governments are trying to do the same thing, trying to raise enough revenue to deal with the fiscal hole that was created by the great recession. Yet they are trying to attract capital and labour from around the world. There is less of it in this slower economy so everyone is trying to attract investors, employers to come into their markets. So India like the rest of the world is also focused on balancing austerity with trying to raise growth and attract capital and labour. The trends we are seeing around the world are basically lowering corporate tax rates. That discussion is going on now in the US, it happened across almost all the OECD countries and we have seen that in the emerging markets and broadening the base and trying to deal with taxing more elements of the tax base to offset that reduction. We are also seeing increases in indirect taxes such as goods and services taxes to offset some of the revenue loss from trying to attract business either through lower corporate rates or from manufacturing some of the things we have seen in India. So India is really trying to find their right balance. The policy is certainly very important, you want to have a lower rate and to attract that capital but the stability of that right policy and how taxes are enforced are very important. So it is not only what the tax rate is but it is then where is the enforcement, how are the laws enforced and do businesses feel like they have certainty with regard to their planning when they come in the jurisdiction. And India has obviously been in the spot light on that. So both are very important, the overall territory in simplifying and reducing but also consistent and fair enforcement.
Q: Let me ask you a broader question. This is to do with the fact that a lot of Indian companies are going global and they face different regulatory architectures, different tax administrations all over the world and they are internally building up capacities to deal with that. and also the issue of transfer pricing when it comes to overseas companies operating out of India. On a larger time frame next three five years what is it that you would expect from the government of a country like India as far as its tax administration is concerned if revenues are going to come under threat, if fiscal consolidation becomes the imperative need given the slowdown which we have also been bitten hard by? Is it fair therefore for overseas companies to expect a continuous lowering of rates or would you advice them to keep the needs of a country like India in mind when they operate and set up units here?
A: It is a great question. Remember when companies invest in different parts of the world taxes are only one part of the equation and India has a lot to offer. Obviously a great talent base, it has got a very strong and growing population for demographic trends. We are seeing some government reforms start to kick in that would be more favorable for foreign direct investment. All of those things are positive and then how the company is taxed will figure in as well on the margins as to whether or not a business would want to invest. When you look at one of the factors that our clients tell us are most important when they are making tax decisions it is a fair and stable tax policy and as you said India has had stable rates, enforcement and clarity and confidence in how it is going to be administered. It is very important where there has been a lot of issues.
And then how the government of India will deal with other governments? One of the things that is going to be really important going forward is you may be aware of the OECD, at the direction of the G-20 it is looking at a whole range of things about how the tax global corporations and how to allocate their profits and then how to collect taxes. I think being part of that debate, being part of the discussion the emerging markets as you identify need to be part of it, can't just be a western approach to how to deal with those issues. But until the governments come together and figure out how to collectively work and make some decisions, you are constantly going to have global organisations who are taxed in various countries running into conflict as the countries trying claim more and more of the revenue of the global corporation and sometimes resulting in double taxations. So the coordination and discussion amongst tax administrations will be very important and India's government should well presumably be part of that.
Q: Let us talk about another recent initiative proposed by the Indian Finance Minister P Chidambaram in the recent Budget and this is to come up with a pretty fair and new definition of foreign direct investment in terms of the percentage level of the share holding and foreign institutional investment. At 10 percent being the trigger cut off to distinguish between these two kinds of investments. How do you view this? It is still work in progress but those rules and the policy will perhaps soon be finalised?
A: It is a great point that the movement on the reforms need to be implemented to have a real effect but the direction to try and allow for more foreign direct investment is going to be crucial for the Indian economy to grow at its full capacity. One of the things it is going to have to do is continue to get increased manufacturing. The service sector has been strong here but getting those companies to invest here, create jobs and then bring that capital into India is really important and things like raising the cap are moving in the right direction.
Q: Global economy is still not out of the woods. Every week, every day concerns continue to cause ripple effects. Indian in some ways still remains insulated although domestic growth has fallen off the cliff so to say. How do you see the world economy at this stage?
A: The world economy remains uncertain. It is a lot of local economies that are very interconnected coming together and so we are seeing lots of different things across the world. When you look at Europe it is a very different place than it was two-three years ago where the financial crisis in terms of whether or not the European Union is imminently in danger of dissolving is abated and the real challenges do remain. Over the last couple of years they have really proven that they can come together and deal with big challenges with the central bank providing the necessary assurances on liquidity to keep the European Union, the individual countries from defaulting on their debt, very positive. That being said obliviously the next focus has to be on growth. Where is the growth going to come from? When you look at Europe it is many different stories in one big union, but many countries. The peripheral countries have very, very high unemployment rates specially amongst the youth. Income disparity is way too high, so that needs to be addressed, where is the growth going to come from within the European Union.
When you look at the United States we are seeing stability. The housing market has come back. There is liquidity. The banks are in much better shape than they had been. Manufacturing is starting to return at a slow pace. There is still stubbornly high unemployment and underemployment where people are finding jobs that they are overqualified for and taking those or they stopped looking. So there are still challenges there, but we are seeing momentum and the financial markets have reflected that. Longer term a lot of the US economy will be dependent on this whole issue around shale and energy independence, but real progress there.
In the emerging markets we are seeing some stability. In India as you said, yes it has slowed down. Inflation last month jumped a little, but has been really focused on. The growth is not as robust as you would hope here, but it is picking up a bit. I think the opportunity is certainly there. When you look at China we are seeing some growth, some stability. Exports have increased at a higher rate than they had in a long time over the last couple of months and the real key for countries like India and China will be investing not just as a government investment, but having private investment now start to come in and particularly China take the place where government investment has provided a lot of the growth and funding. So those longer term investments are what are going to be important. Obviously in India, we have things like infrastructure and things like that. So it is really a different story in different parts of the world, but if you had sum it up we are ticking to the positive. When you look at all the indicators you would think there is certainly opportunity for growth. One of the biggest issues is politics and government sometimes getting into way of business around the world and that will always be the case.
Q: You mentioned US unemployment. Let me ask you a question which is related to that and this has to do with the increasing sense and facts also support that to some extent about US protectionism when it comes to something that has led to grate relations between the United States and India over the last couple of decades and this has to do with Indian software exports, Indian software personnel moving out of United States. The fact that a backlash on this entire issue from the United States seems to be impacting Indian companies and more than Indian companies impacting young professionals who obviously look up to the United States as a possible place for employment, for the studies, the crimps that we are seeing in some ways on H1B visas. Do you see this overall sense of US protectionism increasing or do you see this stabilizing at some point of time and the relationship between these two countries on that point moving ahead?
A: Generally nationalism, protectionism is one of the biggest risks to the global economy continuing to improve. Obviously every country needs to be responsive to its own populous and so you do see governments come in and do things to encourage local job creation and buying of the local products and like. However, if every country did that it would have severe barriers to global free trade and that would of course be a big problem. In the United States what you are seeing now is a real debate and probably some real opportunity around immigration reform which would include some of the issues that you are talking about increasing opportunity for these visas and for workers coming into the United States and getting an education and frankly even staying longer to get some great experience in the workforce and like. I do think you are seeing questions about national issues of defense and the like on certain types of investments and certainly each country needs to do what it needs to do and have policies in place where there really are issues with regards to national defense, but they cannot be used as a shield to prevent capital inflows from other countries, investments from other countries. So I do think that they are moving in a good direction. I think that as the economy increases as well you will hopefully see even less nationalistic tendencies across the world, but I do think there is a positive movement particularly on the immigration visa issue.
Q: You sell less nationalistic tendencies so let me sort of turn the mirror inwards. The fact is that as far as the counting profession is concerned, India has, to some extent, kept the barriers high and you have sort of seen a situation where we have this structure which is perhaps not fully transparent and would perhaps not be to the best liking of people like you. What would you have to say as far as any demands or points or suggestions to make to the Indian regulatory system as far as our accounting structure is concerned and the entry of foreign professionals and firms and their operations in India is concerned.
A: I think profession is thriving in India. Frankly we are all investing in India because we see growth and opportunity here in terms of markets and companies that will need to be audited. For example, on our audit business but we are also continuing to invest in all of our businesses because we have talent hubs here that serve the world and we see increasing opportunities to help companies invest in India and understand how to do so the best way and we advice clients on that too. I think the Companies Bill which has been introduced does have a lot of positive focus on making sure that our profession remains independent, professional scepticism is very important and making sure there is confidence that us as auditors doing what we can and doing our job best we can so that there will be stakeholders in the capital market who have confidence to invest in India, Indian companies and everywhere. So, we are working to discuss with the government as the bill moves forward on any issues they may want input on. But bottomline is we do think that we have a great opportunity here in India within the profession. Everywhere around the world we are trying to find that right balance which is to respond to the concern that there is not enough in the independence or scepticism, that there was something within the financial crisis that we can try and prevent next time. We are recognising that we have an important role to play and to make sure that we can be successful in auditing business because we have a very important role in helping to provide that stability in the capital markets.
Q: My final question to you today and this is to do with you taking over as the CEO of Ernst and Young in three months from now - what are your immediate priorities?
A: What we are trying to do at Ernst and Young and frankly across the profession is to make sure that we are helping to do overall in building a better working world. So we are trying to make sure that we can bring confidence to the capital markets to help companies to continue to invest in new capital, to help sure we can make companies, try and pay their fair taxes all around the world on the issues we are talking about earlier so making sure we have strong businesses and continuing to grow and train great people. We have 170,000 people around the world, we have 15,000 people in India alone. We hire 40,000 people a year making sure that they are prepared for the challenges that the world brings making sure that they are prepared to play their role in bringing confidence to the capital markets is something I focus on each and every day.