India needs to act quickly in terms of pushing reforms as it is still very tough to do business in India, said David Cote, Chairman and CEO, Honeywell in an exclusive interview to CNBC-TV18's shereenBhan.However, now the government seems to be doing something about the ease of doing business and he is hopeful that everybody will be supportive of the government. “I am enthused about where things are going,” he said. David Cote is also the head of US-India CEO Forum.
Below is the transcript of David M Cote’s interview with CNBC-TV18's Shereen BhanQ: You are here in India; you met with the Prime Minister, but let me take you back to an interview you did in 2012. You said: “As bureaucratic as I may feel the US and other countries are, it is like India took the complexity of the British system, doubled it, added ten times the people, it is mind boggling and I am amazed how long it takes to get anything done. I have no math to support this but I have always felt that the government bureaucracy cost India about three Gross Domestic Product (GDP) points a year, but you have also said that you are a big fan of the country. Have changed significantly since 2012 for you?A: I would say all those things that I said then are still true except that now it is changing for the better. I was ready to say the exact same thing if you hadn’t quoted me, I was going to say it again.
Q: These are long term structural reforms. You talked about the ease of doing business, we continue to be at 142 as far as the World Banks ease of doing business rankings are concerned. So, it is going to take time but what are you most enthused about because the sense that one gets at least as far as portfolio investors are concerned that expectations ran ahead of reality, expectations ran ahead of fundamentals but as a strategic investor, as a long term India investor what is your sense about the strength of the recovery and the strength of the policy action taken by the government so far?
A: Let back up a bit, I would say expectations always outrun reality because it is just how people are, emotions takeover and you get excited. The thing that I would take issue with is when you say these things will take time because when it comes to I would say just how herd instinct works in people, you have a brief window of time to get things done.
So saw this happen 20 years ago when Manmohan Singh got a bunch of changes done, India lived off those changes for 12 or 15 years and then everything started to slowdown because there were no more changes coming. They happened in two or three years and then they stopped.
So, as far as I am concerned the country should be looking at it now and saying get everything done you can because this is the window and once the window passes then things are going to, there is very good chance things slowdown again. You shouldn’t just assume once we are on the path to change we are going to stay on the path to change. 20 years ago India was on the oath to change and then stopped. It could very well happen that way again. So, get the changes done as fast as you can and the country will benefit for a long time.
Q: This government is completing a year in office at the end of this month. They have four more years technically to be able to push forward with the reform agenda that they have put together but how much patience do foreign investors currently have with the Indian government and the Indian reform agenda?
A: I would say the whole concept of patient money is often times an oxymoron. That is why I am saying get the changes done. If people don’t start to sense that the change is real, that it is really happening then they hold back which will cause change generally to hold back and you end up with this kind of effect where you just work your way down when what you could be doing instead is working your way up. You start to see a lot of changes, money comes in, more changes, more money and you get the build-up instead of build-down.
Q: Speaking of the build-up now, on the basis of the action that has been taken by the government so far, further liberalisation for the defence sector where the FDI cap has now been hiked to 49 percent, the FDI cap for insurance and pension being further liberalised as well. Retail of course is off the table for now. How enthused do you feel by the reform measures taken by this government so far and what does that then mean for companies like yourself and your investment plans?
A: These are all good steps but we should not assume that because we have made those steps that’s it and that is as far as we need to go because getting back to how difficult it is to do business here and how often local businesses are protected which can be a good thing sometimes if you are trying to get change done, you got to the be very careful about that because if you want foreign money to come in they have to feel like the changes are real and their money is going to be safe and that it is going to grow.
I have often used this phrase, I wish I had made it up because I like it so much but it is that capital is a coward and that is really true. So, if you want money to flow into the country they have to feel it safe and it is going to grow. The only way you get that is by more change. So, all these changes that you talked about are all good first steps. However nobody should assume that it is done and that is one of things that we try to accomplish with the CEO Forum that has been established between our two countries, India and the US to start driving change on both sides, the things that we can do in the US and the things that we can do in India. It will just create a better environment for investment and build even stronger commercial ties and increase the prosperity of both countries.
Q: You were talking about creating a safe environment for capital in India and one of the key concerns has been the retrospective tax issue. This government doesn’t seem to have been able to address that issue specifically though they continue to maintain that they don’t believe in an era of retrospective taxation, does that continue to be a significant risk while putting in money into India?
A: This is another phrase that I did not coin but I really like it, and one of your politicians talked about India tax terrorism, it is true. This is I would say overall one of the most difficult tax regimes we deal with in the world. It is almost confiscatory sometimes and this is not to say all companies are doing things all right all the time, we are not, I know that. That is just how not all companies behave. So, that is not to say that every company does things right however the tax regime here is really difficult. You have tax collection agents being measured on how much they collect and you have a system where they can put in claims that they know they will lose in court some day but the penalty for losing at some point so exceeds, the interest benefit that you get that you just pay it, fight it in court and 8 years later you get your money back. So, this whole system is geared towards giving tax free loans from companies to the government and it is true for domestic companies and it is true for international companies.
As part of the CEO Forum I once mentioned this to a number of government ministers in a semi-public forum and I was really concerned that I was offending my Indian government hosts here and interestingly after the meeting it was all the Indian CEOs who came up to me and said thank you for saying some thing. We are afraid to say it because we are afraid of the repercussions but it is the truth and we need to do something about it.Q: So it continues to be as bad?A: Oh yes, it is still an issue. The thing is at least now the government is doing something about it and that makes a huge difference because as things start to get better then business starts to get better which causes more change to happen, which causes business to get better. Back three or four years ago it was just stultifying. In fact what you were feeling in that interview was just total dismay on my part for a country I believed in and felt had wonderful potential, it just couldn’t get out of its own way and now I feel like that change is happening.So I am actually quite enthused about where things are going. I just hope everybody is supportive of the government in making these changes; making it easier to get business done, getting things like Goods and Service Tax (GST) finished, just ease of doing business everywhere, extraordinarily important for the growth of the country.
Q: So, did you bring this matter up when you met with the Prime Minister two days ago?
A: We talked about it, yes.
Q: And did he give you any assurance? Did he give, through you foreign investors any assurance that this government is going to be able to address this issue?
A: I would say he is well aware that there are a lot of changes that need to occur in the country. It is not just on the tax side. But, ease of doing business, the ability for foreign investment come in; he is well aware the energy efficiency needs to be done there, he is well aware of all this stuff. This is a very smart man.
Q: If I were to look at the India China comparison specifically from Honeywell point of view, India contributes about two percent to Honeywell’s global sales, China contributes about six percent currently. Do you see India playing catch up anytime soon?
A: Let me put it this way, 13 years ago when I came to Honeywell, our sales in India and our sales in China were about the same. Today China is the second biggest country for sales for all of Honeywell. The biggest country outside the US because, during that period of time, the China economy and the changes that they were driving in the ease of doing business, all the things that we just talked about, they did. India did not. India is now starting to do that. And that is one of the reasons I am so enthused about where things can go. I have 13,000 people here. We already have a terrific presence. If the economy can grow at the rate that I think it can, with the kind of changes that the government is looking at making, this could be spectacular. Absolutely spectacular. But that pace of change needs to continue.
Q: But how long, if the pace of change continues, to follow the path that the Prime Minister has laid out, how long do you think India will be able to be at par with China as far as Honeywell’s global portfolio is concerned?
A: Next year.
Q: Next year?
A: No. It takes some time because for a long period of time India did not do anything. So, now you are. In the mean time, China was doing a lot. So, that pace of change is going to be important. Who knows how things unfold over 10 years if India keeps making those changes, keeps making it easier for business to be successful?
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Q: How excited do you feel about China currently because perhaps for the first time in several years, we are going to see China deliver a sub-seven percent growth rate? Of course it is nothing to scoff for, but do you get a sense that we are going to see a significant pain as far as the Chinese economy is concerned?
A: I should say first, I am very much a long-term bull on China. I just see them constantly evolving.
Q: And significantly more bullish on China than India?
A: I would say based on track record, yes. Because, they have shown an ability to evolve. So their government is constantly changing recognising when they have issues, and they do have significant issues. It is not like they do not. But the US has issues, Europe has issues. I see China really doing something about theirs. There is always something that could go wrong. It is entirely possible. They could have a hard liners take over who create a territorial dispute that gets out of hand. There could be the middle class who wants more authority or a vote. There is number of things that could go wrong. But they have shown a real pension for being able to figure it out and evolve their system to be able to handle it. Corruption is another one.
Q: You were talking about global growth and global economies. What is your sense about the recovery that we are currently seeing the US? And the big question emerging markets are dealing with and grappling with is when the Fed is going to act. You are on the board of the US Federal Bank in New York. What is your sense of when the Fed could perhaps start to move on rates?
A: I have to say I have been a little surprised because back in December I said that with the impact of lower oil prices was going to provide a significant boost to the economy in 2015 because if it used to cost somebody USD 100 to fill their car, it was only going to cost them USD 70 now. That is USD 750-1000 per household of after tax income that they just received. I fully expected that they would spend it. They have not. And historically consumers in the US spend about USD 75 percent of new found money. Whether it is a tax refund or lower gas prices, they spend it. This is the longest they have gone with new found money and not spending it. Now, they are buttressing their balance sheet which is a good thing which creates a pent up demand if you would. So, I fully expect that is going to come through. I do not know anything on interest rates. I do not know what the Fed is going to do. I am far from being an official spokesman. But I would say there has to be some confidence that the recovery is real and right now we are still not seeing it. I fully expect its coming. But so far we are not seeing it.
Q: You have also said that you have been able to sort of ring fence Honeywell from global exposure because you have been able to pinpoint the hotspots and you forecast that Europe is going to continue to see a difficult phase similar to what Japan went through. At this point in time do you continue to believe that Europe is not out of the woods by a long shot and which are the other exciting areas outside of India and China that you would like to focus on?
A: Lot to talk about there because if I take a look at Europe, I said five years ago that they would have a Japanese decade and the reason for that is they were not politically willing to make the changes that they needed to in their social systems, in their labour systems that was going to allow them to truly be competitive and get their economies going again. I haven’t seen anything other than a couple of countries Spain for example where they have made the changes, in general none of those changes are happening. They are going to do better this year and maybe next year largely because of the Euro-Dollar exchange and oil prices making fuel less expensive but my concern is that they are going to take this better growth which could be like one and a half percent, maybe two and congratulate themselves for being out of the world.
Q: And push back the structural reforms that they need.
A: Exactly and not do the things they need to. Getting back to your question on India China what else, there is this economic shift that has been going on for 20 years and is going to continue for another 20 and I won’t get my numbers exactly right here but this comes from global insight so well regarded come from high growth regions with biggest drivers being China and India, it includes everybody, Indonesia, Africa, South America…(interrupted)
Q: Let me continue with that. Acquisitions, is that likely to be part of your strategy here in India because since 2002 you have been fairly acquisitive as far as Honeywell is concerned globally but could we expect acquisitions being part of your strategy?
A: Of course, we are always open to ideas when it comes to acquisitions. I have a very rigorous process for doing it, we have done about-we are proof that the view ‘acquisitions never pay’ is not true. It can absolutely be true if you have a process to do it and do it right. We have a very rigorous process we follow that has my personal involvement from the beginning to the end. We have done about 80 acquisitions for USD 12 or USD 13 billion in my time here and that can very much be a part of our India strategy but it’s got to be a business that makes sense…(interrupted)
Q: Any sector specific areas that you are looking at?
A: Oh, all the stuff that we are in but one of the things I like us thinking about in high growth regions is how do you solve some of the issue that already exist and we perhaps aren’t exactly in that business today. So examples, air quality, water quality, fuel quality, all three things we are in a bit but we don’t have an overall solution yet.
Q: Staying with India, defence and that seems to be the big area of opportunity that most foreign investors are talking about at this point in time. In your conversations as part of the US-India CEO Forum, how confident do you feel about real money, big money coming in soon into the defence sector in India?
A: Well again it is going to get back to how welcoming is the government…(interrupted)
Q: Is 49 percent enough?
A: It is a start, it is better than when it was 25, not as good as if it were a 100…(interrupted)
Q: It could go to 100 on transfer of technology?
A: It could so that is all the stuff that needs to get sorted out but I can say defence firms are very interested in the US, there is a lot of interest in India or amongst Indian companies to develop that capability working with US’s partners and I would say there is a lot of interest in both US government and the Indian government to develop those relationships so yes absolutely this is an area that could develop very well for the country and for US defence firms.
Q: USD 100 billion to USD 500 billion, that is the bilateral trade target that both Prime Minister Modi and President Obama spoke of, do you really see it happening in the next few years?
A: Depends how much change happens…(interrupted)
Q: Given our past track record and given where things currently are, do you feel confident?
A: If the pace of change that I see right now continues, yes absolutely. If we get done with the GST and go ‘thank God that is over with’ then no it won’t happen. The pace of change has to continue, we are just beginning.
Q: So would it be safe to say that…(interrupted)
A: I used to have-if we took turbochargers that we produced in our plant from one state to another, we used to have to stop at the border for two days, the state border. It is not like we were crossing into Pakistan, we were crossing from one state to another; that is ridiculous. That hurts productivity, hurts consumers; that is the sort of stuff that has to get blown up.
Q: So if I were to ask you to prioritise what changes you would like to see this government take in the next twelve months because you said it is a very slim window that this government has at this point in time, what would those be?
A: GST is a big one, that is a bigger effect than people think. The second one would just be this drive on ease of doing business everywhere, just everywhere in everything and to the extent we can see those changes on ease of doing business,so instead of dealing with 13 different agencies somebody-you have a bureaucrat who is always figuring okay, here is how I can get this out of my inbox and put it back on whomever, that whole mentality has to change.Q: Whether it is the US or India, economics has often been hostage to the politics of the day. Do you feel more confident that perhaps in the US, post the elections the USS is going to be able to break free of the shackles of economics being hostage to politics?
A: I would say, if you are in a democracy, politics is always in the middle of everything. It is painful as hell, no matter what country you go to. It is always, economics is always a hostage to politics. And I have always said, a government has two roles when it comes to business. The first one is to regulate it. That part they understand really well, they like it. It gives them a chance to talk about evil companies and get some votes. But it is important. I am not an anti-regulation guy because I really think there is a least common denominator problem that you run into if you do not have smart regulation.Q: You said in an earlier interview that you do not have to be right at the beginning of the meeting, you have to be right at the end of a meeting and it is important as the CEO to get the direction of a company right, more than charisma and wit and all of those things, which you have in abundance by the way. But in terms of strategic direction, which of the area is that you are not currently in that you would like to take the group into?
A: I can say there is two areas that I have always been intrigued with. And by the way, your research was tremendous, because I have said all of those things. There is two areas I have always been intrigued with that I have found difficult to get into. The first is water quality and the second is medical because both of those are just going to be long-term demographic trends. So, both of those I would like to be in.
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