Interview | Govt should consider some form of direct income support in order to spur consumer sentiment and demand, says Assocham India's President Vineet Agarwal

India is currently experiencing an economic slowdown due to a fall in consumer sentiment after the outbreak of the second wave of COVID-19, which was not the case after the first wave of COVID-19, said the new Assocham President Vineet Agarwal

In an interview with Moneycontrol, Agarwal said that in order to help spur consumer sentiment and demand in the market the government should consider some form of direct income support especially for the marginalized sections of the country.

The Assocham president said that despite the outbreak of the second wave of COVID-19 and lockdowns across the country the association expects India's GDP to grow 9 to 10 percent in 2021-22.

The Assocham president said that apart from the COVID-19 related issues such as lockdowns and waves of the pandemic, rising fuel prices, low availability of working capital loans, high inflation rate, farmer protests, high unemployment rate, and relatively low percentage of the vaccinated population in the country are the major reason behind the slowdown in the Indian economy.

He once again requested the government to include petroleum under GST and also consider lowering GST rates in order to boost consumer sentiment and drive demand.

Edited excerpts:

What should be the main way to deal with the current slowdown in demand?

 This time around the slowdown in the economy has been more from a demand-side versus supply-side because a lot of the factories were still open in many places in the country even during the lockdown.

So, definitely, this time recovery in demand has been really much lower compared to the first wave of COVID-19 and there are adequate supplies available.

And I think the government has done a little bit in terms of actually supporting the businesses but more importantly, what needs to be done is that certain demand-related push from a consumption side needs to be activated specifically, for example, some kind of GST rationalization can help customers.

What we have seen is that there are certain sectors that require a higher GST rate and certain sectors might require a lower GST rate. So, whatever is the right balance that can really spur demand would be essential.

I think from a demand creation perspective, also ultimately, job creation will be also equally important.

So, as and when we see new industries come up, we will see job creation happening and that will lead to an increase in demand.

Good factor here is the agricultural side, agriculture seems to be doing relatively well. And that should certainly help in demand in the next few months.

Do you think direct income support is the need of the hour to boost charge economic activity at the ground level?

Yes, so, some amount of it is important, but not nearly for every level of income strata.

I think for the on the rural side, there is definitely you know, the Prime Minister Kisan Yojna is giving direct support to farmers who are below a certain poverty line etc. So, I think that is very good.

And some amount of support might be needed for the daily wage workers, clearly, those are the people who are also struggling.

Then there are also the very micro-enterprises very small shopkeepers or even the vendors that are on carts etc, selling fruits and vegetables, some of those who have been really badly hit. So, certain specific direct income support might be needed, mostly in for people who live below the poverty line.

Which sectors have shown the fastest bounce back after the outbreak of the second wave of COVID-19?

We are seeing that there is some amount of movement on the auto side as personal mobility has really picked up because of the pandemic, there is a demand for the auto sector.

Auto is really big for the economy, almost 50% of the manufacturing is from the auto and auto-related industries.

Then, other than that, we are seeing certain steel and cement also picking up which means that certain construction activities are going ahead and more or less this has been front-ended by the government were to pick up and which means steel and cement demand has increased.

The export sector has really picked up also. So, as we've seen the numbers in the last few months for the export has been quite good. So, I think those are also really positive trends.

The export sector is witnessing a resurgence in foreign orders. But the lack of working capital remains a major challenge. What is Assocham's suggestions on improving the financial capabilities of MSME exporters and firms?

So, the MSME that is directly related to export, I think, what the biggest challenge they are facing is cashflow related.

So, what we have proposed is the extension of the ECLG and that has happened so, more credit is available.

The other thing that we have suggested is to increase their working capital limits by 20% without any collateral.

We also believe that certain restructuring of the loans of MSMEs is also important.

But most importantly, some of the money that needs to come back from the government, whether it is in terms of access taxes paid, or in terms of certain schemes that are there, for example, the rod tip that has been discussed, that needs to get implemented, so, that all companies that are in the export sector start getting back the extra taxes that they paid and that will help their cash flows to improve.

Inflation rates for items such as minerals, edible oils, oilseeds, dairy and poultry items have gained momentum over the last one year, how do you think this will affect consumer sentiment? Will this delay a revival in the industry after COVID-19?

So, inflation is a consequence of three major areas. So one is clearly fuel. So fuel-related inflation is quite high and that is directly impacting consumer sentiment.

I will say high fuel prices are both directly and indirectly impacting consumer sentiment, because if in the basket of my expenses, fuel tends to increase much more rapidly, then certainly I will try to cut down on my demand for other products.

The other is of course, a little bit on the supply side issues for certain industries, for example, edible oil and certain minerals suddenly saw an increased demand for those products. And we saw the supply could not match up. So there was an increase in the rates of those.

I'm sure some of these will start coming down in the next few months and will normalize.

If the consumer sentiment starts changing, and some of that will happen because of the festival season coming up, we see that the inflation impact should get moderated in the next few months, and consequently, spur demand.

I think the festival season will have a positive impact on demand even if inflation is slightly higher because what happens is there is also in the last year, year and a half, I think the kind of expenditure people have done has also come down.

So maybe there's a little bit of revenge shopping that might happen or some amount of positive vibes with vaccination picking up. Vaccination is a big confidence-building measure. So certainly that helps in putting people at ease in terms of spending a little bit more.

So with confidence improving and hopefully, some inflation coming down by the festival season.

Overall we should see a spur in demand for sure.

We are already seeing that stocking up has already started, where businesses have been asking for products.

Simultaneously with the festival season coming in, which is seen as an imperative to boost demand, we also have predictions that the third wave of COVID is likely to hit the country in the middle of August. And if it's delayed, might hit the country at the starting of September. And if that overlaps with the festival season, how do you think demand will pan out?

I think that could be an impact clearly with the third wave. And that can definitely hamper demand.

However, we've seen that once things open up a certain amount of demand starts coming back.

See, I think we have to see, note that in the second wave also, and before that, a lot of people's savings got used up specifically for either medical expenses, or also for building up more insurance.

So several factors have played around in the last, I would say few months, where the sentiment has gotten affected. So a third wave can do the same. And people can get affected with their savings, also, and that can impact demand.

But on a positive note that if we are prepared better for the third wave, then the impact can be minimized. And I think the difference is also that the vaccination is much more compared to the last time around. So we should hopefully see a milder third way.

Assocham had earlier said that the farmer protests in parts of North India were leading to losses of around Rs 3,500 crore daily, what is the situation currently? And do you expect a resurgence of these protests in the coming months? If there is a resurgence how would this affect the industry?

As you know that the protests are still going on there are blockages in certain parts of the highways coming into the city of New Delhi, and also parts of NCR.

So, it is having an impact because there is a diversion that is taking place for all the transport that is going in and out of the city.

We don't have a recent study to show what is the impact of diversion but in time operations for a lot of companies have been affected, businesses have been forced to keep extra stock, or sometimes they're out of stock.

So certain level of operations has been hampered, and they continue to be hampered. And this leads to extra costs, whether you're going for a diverted route, or whether you're keeping extra stock, or you're losing sales because you have no stock.

I cannot say there is going to be a resurgence or not. But we have heard of course that you know there is a protest planned on the 22nd, for example. We have heard that there could be an increase in these protests.

I think the government is trying its level best to make the protesters understand really the farm laws and the positive implications of the farm laws.

The farm laws are a game-changer for the country as a whole and the government has given all the reassurances to the farmers.

The government has announced new expenditure plans to scale up the APMCs which means that the government is committed to seeing the benefit of farmers in the long run.

Given that the Amazon big billion days are and Flipkart sales are around the corner and the government in its new draft rules has proposed to limit flash sales, what are Assocham’s suggestions to the government on the same?

Assocham fundamentally believes that we need to build a free market for one nation in the country while ensuring that all levels of society and enterprises whether it is MSMEs or large players should work in a cohesive manner.

The government has issued its draft guidelines and there are specific issues that both sides have and we have set up an expert committee internally and we have deliberated this several times over and we are giving our recommendations to the government.

I cannot specifically comment on those recommendations yet. But, certainly, it is important and we are working very closely, both internally and externally with the government.

We've spoken about a lot of challenges that the industry does face, but there's also a positive sentiment given that the vaccination rate has really picked up in the last month, what are Assocham’s overall expectations for India's GDP growth in FY22?

The impact of the second wave is certainly being felt, but we are hoping that we are able to pick up much faster. So we're looking at a low double-digit kind of growth, possibly between nine to 10 percent.

In the first wave, there was a shortage of PPE kits, masks, then during the second wave a major issue was the shortage in medical supplies and transport of oxygen, do you think the industry is now well prepared with stocks of medical equipment and logistic issues have been sorted to handle the third wave?

We do not know what is going to be the need in the third wave, what kind of variant will really cause the increase in the third wave.

And in the first two waves, as you rightly said, we've really been gearing up for the most obvious things, which are medicines, oxygen, the PPE kits, other equipment, and so on.

So I think it's just that we need to really keep working on these areas, but mostly also build the hospital infrastructure which is very important.

Because creating an adequate number of beds, whether it is regular beds, or ICU beds, or neonatal beds, pediatric beds, would be very important in terms of building shoring up the entire hospital infrastructure across the country.

The government has announced that it intends to spend Rs 25,000 crores will be very useful.

The other thing is that government should make it mandatory for certain hospitals, medical colleges, etc, with a certain number of beds to have a mandatory PSA plant.

And we are we've seen that they made it mandatory for the medical colleges. And a lot of hospitals have started implementing also and I think, almost 2000 plants are, are in the process of getting implemented and another, I believe another 2000 or plants are under the order.

But that would be a great step in terms of not just preparing for the third way also for the future.

I think that the awareness is definitely a lot more for the third wave compared to the second wave, which means that we are getting better prepared.

Of course, how well prepared the country is to be seen, but I'm certain that we will be definitely a lot better prepared.

What steps can the government take to educate people in especially in the rural areas and semi-urban areas to push people to get vaccinated? And what steps can the government take to increase the size of its vaccination drive?

I think the vaccination hesitancy has definitely come down quite a lot.

I think it's more the vaccination availability, and the push towards that availability is the most critical factor. As in when that availability increases and we get to a point when hospitals have vaccines available on call. When we are at that stage, we will see the vaccination drive really accelerate.

In some areas, we have to move to a model where instead of people coming for vaccination, vaccination should go out to people.

So that would be important to really increase the coverage of the vaccination drive because there are still smaller locations and village areas, where people have to travel long distances to get the vaccine.

At the village level, they have other things that are happening and it’s not so easy to really go to a center where they can get this vaccination done.

So vaccine to the people would be an important factor in really ramping up vaccination.

What are some of the steps that the industry can take to promote the vaccine? A lot of companies have come out and said that they will offer free vaccines to their own employees. But do you think mandatory vaccinations, in order to hire employees, or similar steps can be taken by the industry?

I guess in a society like ours, we cannot really say that it has to be mandatory. But we can definitely say that it is imperative because the confidence that people get when you are vaccinated if you're in a company is very high.

So I think it's important to build awareness about why it is important and how it can help versus making it mandatory.

There has been a major push towards self-reliance and make in India by the current government, however, are there any particular sectors that are still lagging behind in the move toward becoming Aatmanirbhar?

The whole clarion call of the Prime Minister for an Aatmanirbhar Bharat has to be understood better, in the sense that it is not just being self-reliant.

It's not just India for India, but India for the world.

Industries have to ensure that wherever possible, substitute the production in India, and then simultaneously build that capability to export and really be present in the global market.

I think that is the concept of Aatmanirbhar Bharat and not just being self-reliant in India.

I think every company has started to think about how it can substitute, either for its production needs or an item that I'm buying, with a local product.

I think the awareness that has started to come up with the use of more and more Indian products, means that we are going in the right direction.

There is a push towards the PLI schemes, which will also start creating the scale of certain kinds of products that were imported.

The PLI schemes would help the industry not only make those products in India and use it just for India but for the world as well.

So I cannot say any industries or sectors are lagging behind. But I think it's a work in progress. It's early days in terms of everyone picking up and really making an impact.

The government last week came out with a new draft drone policy, what are Assocham’s views on how the new policy will help the adoption of drones in India, and what are Assocham’s suggestions to the government for the commercial use of drones in India?

The use of drones is very critical for any developing economy because it really creates a lot of targeted interventions.

Those targeted interventions can really help us leapfrog a generation when it comes to certain impacts, case in point being things like agriculture, where if you're using drones, for effective, let's say, spraying of insecticides, pesticides, then we are really jumping ahead in terms of not only the effectiveness of those pesticides but also ensuring less wastage, ensuring better coverage and being more proactive.

Then it could have an impact on reading, reaching medical supplies to small parts of the remote locations in the country.

So I think the most talked-about ideas around drones are delivery of products, but I think the impact for a country like ours is far beyond that.

Inspection of pipelines, use of our drones in remote areas, can be groundbreaking innovations.

So the policy is really started to address some of those issues of clarity, the defense parameters have to be kept in highest priority, but the policy is certainly in the right direction to move towards effective drone policy.

What is definitely also needed is creating some sandboxes, where certain applications around drone usage are properly tested.

Do you think higher taxes on foreign institutional investors (FIIs) and high-income individuals will lead to lower tax dodging?

The idea behind taxation is to ensure that there is a certain sharing that happens of the income that you're making with, for the social sector, for the government needs, that's the principle of taxation.

However, specifically for foreign institutional investors (FIIs) and high-income individuals, taxation is because they can afford to do it more.

But the important thing is that the balance is necessary so that you don't scare off investors.

So it should essentially lead to more transparency for sure, and should not scare investors. And that's the balance that the government needs to keep for the taxation rates.

As you are the head of the Transport Corp of India as well, I had a few questions about the sector specifically, How the second wave of Covid has hit the logistics sector, and what is the current demand scenario in the industry?

As I said earlier that this time, it's been more of a demand-side, slowdown, and factories were operational supply chains were not broken, as it had in the first wave. They were disrupted in certain areas, but not really broken.

We did not see how late last time truck drivers were not available, etc. This time around, it was all people were there, and they were moving things.

So overall, I think the supply side issues were not that high comparatively.

And the impact has been that fuel prices have led to an increase in freight rates across the country.

And we've seen that there is a gap in terms of new trucks that have been added also because I guess, people have been skeptical of purchasing new vehicles.

So that meant that the freight price rates have gone up. And that is having an impact, again, directly on inflation also. So it's a combination of things that have happened last few months.

What are some steps that can be taken to reduce freight cost?

Fuel needs to come under GST, I think if that happens is when we will see that the cost of freight will start reducing.

Right now fuel is outside the purview of GST so we cannot claim any input credit, it's a cost to any organization, till that doesn't happen freight rates will not come down.

Secondly of course with the demand and supply gap, hopefully coming down with new addition in trucks, etc should also help freight rates come down.

The other factor that's a little bit of on the outside is that the mix is also started to change a little bit, instead of all products moving only by roads, products have also started to move by rail and other modes of transport. So, that would really help in terms of reducing freight rates because freight rates on rail and coastal shipping is definitely lower.

Currently, shipping container traffic in India is at very high levels due to a shortage in containers globally, do you think this issue is likely to persist for a long time?

International shipping rates have, of course, really gone quite crazy, at this point in time, it's really high.

And essentially, we think that this is not going to come down so fast because there is a mismatch or other imbalance between containers, availability in the right places. So, you know, there are some places that are extra containers in some places, there's a shortage of containers. So, that is creating an issue.

The second is the shipping capacity has also come down a little bit okay. So, that is also had an impact on the increase in or rather, it is creating an increase in the freight rates right.

The third is, of course, the fuel prices are also high so bunker prices.

What we are hearing from the market is definitely till the end of this year, it should continue to remain high and then it should start coming off slowly soon.

 The Federation of Indian Export Organisations has called for the setting up of an indigenous Indian shipping line to transport products, what would be the biggest challenges in setting up such a line and how viable will it be?

I don't see a need for creating a dedicated shipping line for the country. The government is already giving incentives for Indian shipping lines that are importing products for government bodies so that there is an incentive structure.