Pursue divestment aggressively, simplify GST, implement schemes in labour intensive sectors: Rajiv Memani, Chairman, EY India

Pursue divestment aggressively, simplify GST, implement schemes in labour intensive sectors: Rajiv Memani, Chairman, EY India

EY India Chairman Rajiv Memani stresses on divestment, reducing tax disputes, and targeted schemes in labour-intensive sectors to drive economic growth and reforms in the upcoming Union Budget.

The upcoming Union Budget presents the Modi government with an opportunity to advance the narrative of economic stability by focusing on lowering tax rates, adopting a more proactive stance on addressing low-cost imports from China, simplifying GST, and implementing additional schemes in labour intensive sectors.

Rajiv Memani, Chairman, EY India tells Moneycontrol that the government needs to take a more aggressive stance on disinvestment which could give it more fiscal space and create greater room for capex. Edited excerpts:

What are the big events that stood out for you in 2024 and what would you like to see changed in 2025?

I would say at a high level, 2024 has been, in terms of economic policy, a continuation of what we have seen in the earlier years. From a government standpoint, I think their focus on macroeconomic discipline, whenever they get an opportunity to reduce the fiscal deficit, that has been there. You know, the reform journey continues and the broad themes under which reforms are being carried on continue. Some of which, I think, the government has been more effective in implementing and some of them probably because of either political issues or maybe it'll take more time to get some of them implemented. I think one can question the speed of implementation.

One thing that happened in 2024, the big event in India was obviously the elections. And the elections had an impact on the economic growth, as is visible in the last quarter's GDP growth numbers. A lot of Indian economy spend was being front-ended by government capex. I think the great thing that this government did was really to, you know, enlarge the quality of fiscal deficit, really improved as more and more of that money was being spent for capex. A few months, two or three months before the elections, I think that capex started slowing down as most people were anticipating. But it took more time to pick up than what people thought it will. Part of it was also to do with the seasonality issues that we had, which was a very long summer and a very long monsoon, an intense monsoon. So I think that caused the delay because of which I think the capex spent slowed.

So I would say overall, you know, from a government standpoint, the broad themes of macroeconomic discipline, of ensuring that the banking sector continues to be well protected, big focus on inflation, because that has an impact. And that balance between inflation and growth is a matter of debate. Ensuring that Atmanirbhar Bharat is constantly getting more and more encouragement, looking at building out the India stack more and more on technology. I think those things broadly kind of continued.

In 2025, any big changes that you're hoping for? Because we also saw that consumption has not really picked up. Private investment continues to be a bit subdued. What are you banking on to see this turn in 2025?

Yeah, I think for 2025, at least my view is that once the government capex starts playing out, the economic growth should accelerate. There is a lot of bullishness in the US from an economic standpoint. So hopefully that will also have a positive spillover effect in some sectors in India. I do hope that we start seeing some signs of interest rate reduction, although it's not easy to predict. But this challenge of inflation really being caused by agri products, food products, so much more supply on the agri side, you know, how does interest rate play in that? Because eventually, that's what is impacting consumption.

And I do hope that manufacturing starts picking up in a more and more meaningful way. We are seeing early signs, especially in sectors like electronics, defence, engineering. I think things are playing out. But I would say even more and more on labour intensive sectors, if we can see more action on the manufacturing side, I think things should look up well. I think the technology sector should be doing better than what it did last year because of the uptake, especially in the US, which is the largest part of the demand side from a technology sector viewpoint.

So I would say that the thing one would want to see change is the government taking more steps on the manufacturing side. But the acceleration is slightly slowed down because of the activity coming in from China. And if the government, I would say, takes a more proactive stance on how do you deal with, you know, low-cost imports that come from China, whether in terms of anti-dumping or anything else. I think that will help, once there is clarity on that policy. I think that will help in encouraging more and more large-scale private investment, especially in sectors like steel.

If we can make some more reforms, realise schemes in labour intensive sectors, employment linked incentives. I think that is the other thing because eventually, I think the more employment we can create in India, the greater will be the economic activity. So I would say, those two, three things. And if we can probably have a more aggressive stance on disinvestment, that gives more fiscal space to the government and in some ways also helps in creating greater room for capex spend by the government, reducing the fiscal deficit, and therefore having a more positive impact on interest rates and capital availability with the private sector.

You said that there's a need to focus on manufacturing. Do you think the business environment in India at the moment is conducive? Is there enough ease of doing business? Is there enough stability in the taxation regime that companies would be interested and they would get the return that they would hope for by expanding their manufacturing capacities?

Yeah, I would say these are not moments where you feel you have achieved something, but I would say if you compare it with stability in taxation over a period of the last three years, I would say things have definitely improved. On ease of doing business, things have definitely improved. Now, there's much to go there. Still has a lot of room to improve, but definitely, things are moving in the right direction. Are people getting the right returns on manufacturing? Yeah, I think there is a muscle memory of on ease of doing business, on manufacturing in India that because of which sometimes especially from a foreign direct investment standpoint, things get stalled. So if I look from a domestic standpoint, I think it's much more demanding. It's not so much to do with taxation, ease of doing business and everything. It's much more on how they see demand.

In terms of FDI, that's where ease of doing business comes in a more bigger way. For domestic business, ease of doing business slows down the expansion because land acquisition is going to take so much of time and everything, it slows down the speed and sometimes adds to the cost. But it's in FDI, which has been constant over the last three, four to five years, almost stagnant, big number, but stagnant number. I think there are things like, you know, how proactive are we from a taxation standpoint in providing comfort in some areas? And also ease of doing business whether it's in terms of enforcement of contracts, acquisition of land, or number of approvals that have to be taken. I think if we can find a way that it can be speeded and this is both Centre and states, then it will further give greater impetus to those multinational companies that have set up manufacturing in India or Indian companies. I think returns are generally quite good.

Do you think there's a case to give demand a push in the coming Budget, like a direct push in this Budget? Is that something that the government should be looking at seriously?

The big question in this is how? So I mean, the government’s view is that if you do anything to give a push that will stick on, it's not something that will go away. So, for example, during Covid when subsidy was given, food subsidy of 10 kg, once Covid was over, it was very difficult to withdraw that. Okay, 10 kg became 5 kg, but it becomes very difficult to withdraw the grain subsidy. So anything that the government does, I think they are very mindful that once they provide it, it's very difficult to pull back. So if you make such a large provision and you're on a fiscal deficit like path, which is to go down, then I think it becomes difficult. But I definitely think that if they can reduce at least in the lower income bracket, if they can reduce the income tax, a personal income tax rate, I think it creates a little bit more, you know, demand impetus.

If they can give —if we can look at more simplification and rationalisation in GST rates, at least for some products. For example, there's no reason why some product like cement — I mean, I don't want to talk about a particular industry — should be taxed at 28 percent. Most of that consumption is for housing, and housing is one of the highest multipliers in tax. So I would feel that if they can make some of those tweaks, definitely it will give greater impetus from a demand standpoint.

Obviously, interest rates are coming down, as we know, some part of the income is also going away in higher interest rates. So if interest rates do come down, it creates a greater impetus for consumption and doesn't cost the government, provided they feel confident about managing inflation.

The third term of the Modi government presents a stupendous opportunity to really push through reforms that have been on the back burner for various political reasons. So in terms of the tough reforms, what would you like to see the government really focus on in its third term?

Yeah, honestly, I don't feel that there are any big reforms. I mean, there are some reforms that have more political noise around it. We saw that in terms of farm laws and everything else. I think if they can bring it in a smaller way, not the full thing, but in a smaller way, I think that would be good. Labour reforms, again, if they can encourage most states to implement it, even if not in the entire state, but in pockets, I think that would be very helpful. And then there are reforms that are related to ease of doing business, which honestly don't require that much of political will. I think most people will not have a political reason, but that's where I think it more — the more we can lean on simplicity and trust. I think it goes both ways. I think it's incumbent on industry also, as well as government to ensure that we are encouraging that behaviour. I think the entire layer of ease of doing business will be very important. But practical labour reforms are important. Also, the availability of more parcels of land so that it's easier for people to acquire large pieces of land at affordable prices for setting up manufacturing so that the cost doesn't go out of whack. I think I would say that's also something that they should look at.

So, disinvestment is something, privatisation is something that I think will be very good, but the government may find it difficult, except maybe some of the banks that they're looking at privatising. I think hopefully they can complete that process quickly. That creates lots of efficiencies in the system. But disinvestment, if they can do it in an accelerated way, I don't think it's a large reform. It's just accelerating and executing some of the things that they have announced in terms of employment. I think the internship scheme that was announced, obviously, it's facing some issues. The number of people applying for it, everything. But if again, that is something they can tweak and accelerate, that will be good. The Anusandhan scheme that was announced would have Rs 1 lakh crore allocated to it, to actually implement that and make that functional will be very important.

So I don't think there are that many of big bang reforms. I think within the art of possible, there are lots of things which can be executed better and more efficiently. I think that's good. That's what will give the results.

What are your expectations on the new IT code and the direct tax code?

So, as you know the government has set up an internal group and they are evaluating or putting together their thoughts. They've also invited comments from public and they have broken those questions into four buckets. One of it is suggestions that lead to the simplification of laws. The second is suggestions that lead to taking obsolete provisions away. Suggestions that will lead to a reduction in compliance. Suggestions that will lead to a reduction in litigation. I'm hoping that once they receive the feedback and start working on this, you know, they will start putting it together. And there's a lot of work that's already been done in the past. So I think there's a lot to learn from that.

It will be good for them to put the entire new Income Tax Act together. I think we will see snippets of that in the Budget and some things that are obvious will come through. I'm hoping that at least and we can discuss some of those things. But I would say the draft bill of sorts or the draft Income Tax Act, you know, having been part of the process, it is a complex process and they may want to put it to a committee or something like that. So it may take some more time than the Budget date before they're able to bring it. So I think it should hopefully happen sometime between this and the next Budget.

But what are the changes that you're expecting to come through in this Budget, the small ones that you mentioned?

Firstly, I think from a tax rate standpoint, I'm hoping that the personal tax rate does come down. The second is that if they can find ways in which disputes, you know, a number of disputes that are coming into the judicial system or the CIT appeals, CIT appeals is where the biggest clog is. If they can find a way to do dispute resolution or create schemes of dispute resolution and the existing ones if they can improve, increase thresholds of that, then the number of disputes that are clogging the system come down, so that at least people have an opportunity to settle before that. The third is, you know, the alternate dispute resolution mechanisms. I think they have to be strengthened.

So whether it's advanced ruling systems, whether it was the APM mechanism that was set up, various mechanisms, I mean, they are working, but they are not working at the speed, scale and efficiency as they should. Advanced ruling was when foreign companies came in, they wanted some certainty, they applied for advanced ruling. The idea was that they'd get a ruling in six months. Things have been pending for six, seven years now. Likewise, EPAs have almost 800, 900 cases of pendency. At an average, you are getting, you know, things 200 to 300 cases get solved every year. They have to find ways in which it can be efficiently dealt with.

Likewise, I would think TDS simplification is an important piece, withholding tax simplification. Also, not-for-profit taxation is something that is creating a lot of concern. So whether in the new bill or in the existing one, I think they should try and address, it's becoming very complex. They should address not-for-profit taxation.

Any specific areas?

No, I think whether it's in terms of, you know, how much money, when it has to be spent, what speed it has to be spent. How do you deal with not-for-profit schools, education versus for-profit medical institutions and everything? People have to go for registration every five years. So I think we should look at all these things and some of which obviously government has put in to plug some things that were getting misused. So that is one area where I think they need to look at, whether they look at here or in the new bill. I think that's something that has to be seen. I also think I've been — I believe that a lot of wealth creation has happened in India. A lot of people want to direct it towards philanthropy. If we can find ways and means of making it efficient, consistent with what happens in most of the world of using some of the wealth created for, not for personal gains, but for philanthropic benefits without creating a tax event, I think that will be very helpful.

Your last comments on GST, the way we see it in its current form and the way it was envisaged. It seems this is a very complicated piece of taxation that completely runs opposite to making doing business in India easier with the goal of making doing business in India easier.

Yeah, I think GST has been one of the biggest tax reforms that India has seen. And I think the level of change and automation that the government has done to achieve GST is really credible, especially in terms of automation. I think the two challenges that the government is facing, one is obviously there is some level of misuse that has happened, especially in terms of credits that have been utilised, which shouldn't have been availed of. And second is states are feeling a greater amount of revenue pressure. And as you know, most of the states have announced lots of schemes.

And then there is the mindset, right or wrong. I think they're both sides of the argument that, yeah, if a shoe that's sold for Rs 500 and a shoe that's sold for Rs 50,000, should they be taxed at the same rate? And there are some people in the government who believe that the tax rate should be higher for those people. And there's the other side that, you know, the rate on that is 10 percent. This 10 percent is not the rate, I'm just using for simplicity. Then you're paying 10 percent on Rs 500 and you're paying 10 percent on Rs 50,000. So the numbers as it is are quite different. So, when you add up all this, I think where the government seems to be going is I think there is the ability to take the bet of reducing the slab rates, going for more simplification, and keeping things simple may create some more revenue challenges. And there's a lot of resistance, I would say, not only from the central government, there's a lot of resistance from states also in doing that.

But I strongly believe that the more simple regime we can create, the greater will be the level of compliance, the greater will be the level of ease of doing business, greater economic activity and greater revenue collection. So I think if the government can move towards a basis where they have to protect from any kind of evasion that happens, but keep things simple and maybe three slab rates without distinguishing. And you can have some additional duties for sin products or whatever else it is. So if they can do that, then I think it will become much easier to implement. And I'm very confident that the revenue collection will also be higher. Maybe there will be some pain for a few months but I think the consumption will accelerate.

And finally, I would say is that the big challenge in GST right now the government needs to address is if I'm a company that's operating in 15 states, do I really need to get 15 assessments? Can I just get an assessment done by the Centre and maybe one more state the other states can follow? You know, can there be adequate safeguards? That the notices are just not raised at a junior level. The entire GST administration, the way assessment, audit is being done. The number of agencies that come when the assessments are happening. The way you deal with disputes. That is creating a lot of confusion. One is the rates side and one is the assessment — both require some level of handling.