Tepid private consumption holding back investments: Ficci president Mehta

India needs 'virtuous cycle' of demand prompting capital spending that will lead to job creation, he says in an interview.

Sanjiv Mehta, chairman and managing director (MD) of Hindustan Unilever, took charge of industry association Ficci when the Budget is two and a half months away. He tells Indivjal Dhasmana that the government should keep spending on building infrastructure as private investment is low due to muted private consumption demand. He says inflation will start easing from the second half of 2022 as production ramps up.

Edited excerpts of an interview.

You are taking over as the FICCI president at a time when the economy is still not out of the woods. What will you recommend to the government to expedite the economic recovery?

The classic thing we need as a country is the virtuous cycle where you have robust demand which leads to more capital spending which in turn leads to more job creation and more money in the hands of people. If you look at it from this lense, I think private consumption has still to reach a level where you can say that we are happy with that. The private investment cycle has to kick in. Capacity utilization is still in the 60s and 70s. Once demand moves up, that is when the capital investment cycle kicks in. The other important bit we have to look at from the private consumption perspective is in the rural areas. While the government has done a good job in ensuring that the people get free food grains and direct transfer of money, the real wage rate increase has been rather tepid over the years. So, while we were seeing some good resilience growth when it comes to basic products like FMCG in rural areas, whether it is two wheeler sales or FMCG volume sales, they are a bit tepid. They need to recover because the headroom to grow is so massive. 

Is there a case for increasing the threshold of income tax exemption to raise disposable income of the common man?

The government should look at what it needs to do to fuel consumption. The first bit is that government spending should not stop during the intervening period. Because that will not only build infrastructure, required from the long term perspective, but the short term perspective also creates more livelihood and puts money in the hands of people. There are many sectors which we need to look at to have multiplier effects. Over the last two years, the sector which has been impacted  adversely is the service sector especially the contact services. We know that restaurants have been closed down, for instance. Hotels, tourism all got impacted. These areas need support. MSMEs by their nature are more fragile unlike big corporations which are much more resilient. They will need more support. Then we have to ask ourselves how we put more money in the hands of people. There is always a risk associated here -- whether they will spend or save. What we need now is spending because that will start the virtuous cycle.

What is it that is not letting the private sector to invest more?

If you take a company like Hindustan Unilever. We have maintained investments because we did not have spare capacity. We have had robust growth over the years and we put in investments in tandem with the demand increase. But if you look at the broader picture -- a lot of capacity got created in yesteryears. That is the reason why capacity utilization is still in the 60s and 70s. The good bit is today that the banking industry is on a much stronger base. Most of the NPAs have been provisioned. They have been able to enhance their capital. A few years back, we used to talk about twin balance sheet problems. That lexicon has now faded away. Companies have deleverage. Banks have recapitalised. There is strength to lend. But the lending will start when the capacity utilization goes up which would be based on demand and then investments would happen. But, I don't think the risk taking capacity of Indian businesses has gone away.

The government came out with a production linked incentive (PLI) scheme for 13 sectors to make India hub of manufacturing and attract investments. HUL also got a government nod for PLI. Do you think the scheme will be able to meet its objectives?

India has to focus on areas it has natural advantage or create competitive advantage in some areas. At the end of the day,  we must appreciate that the scale has massive benefits. PLI allows you to create scale in certain sectors which will give us the competitive edge that we are looking for as the country. As it is based on incremental capacity, incremental turnover, it could be self paying in many ways.

The Omicron scare along with taper by the US Federal Reserve led to a bloodbath in the stock markets on Monday. Do you see capital flight away from the emerging market economies?

My assessment is you won't have the taper tantrum that happened in 2013. Our position is far stronger when it comes to forex reserves. You are talking of a $600 billion arsenal which is a pretty robust financial position we have. At the end of the day, money moves where it sees better return on capital invested. If India keeps growing, I don't think that money flow into the country will stop. In fact, if you listen to the sound bites coming from many investment managers, they feel India will be one of very attractive markets. They are going  long on India. If you take multinationals like Unilever, we are very bullish on India. India is one of the most important markets for Unilever globally.

While stock markets tanked on Monday, bond yields rose in anticipation that the RBI will raise rates. Do you think this will happen?

There will always be a challenge to maintain a fine balance to ensure that the growth keeps happening and inflation is contained. That is what RBI will keep a tight watch on. That will require monetary maneuvering. I believe RBI should be able to maneuver.

Since we have come to inflation, companies have been facing increased input pressures. They are passing some part of it to consumers. HUL has done it in some products. How do you see the inflation trajectory going forward?

For some commodities, inflation has been unprecedented. If you take HUL's business, tea prices went up significantly over the last two years, especially last year. But that is more a supply constraint. Oil prices and derivatives like chemicals have gone up significantly. When all three come together, you see a kind of inflation that you have not seen in many years. Yes, inflation is there. But there is no one to one correlation between input price inflation and finished product prices because we always try to optimize different levels of business and then look at price increase. And when we look at price increase we always try to ensure that the price value equation remains intact. Consumers do not look at absolute prices alone. He looks at the price value. So you have to ensure that price value, whether it is linked to product superiority, whether it is linked to relative price index remains intact.

Sebi on Monday banned new futures in six commodities. Will it be effective to control inflation in these commodities?

It is very difficult to say because a lot of inflation in commodities, whether it is palm oil, crude oil, is an international phenomenon. Lot of inflation is coming from the supply side. I believe that as production gets ramped up, as things start easing,  maybe from the second half of 2022, you will see moderation of inflation. 

Given that the government has repealed farm laws, do you see hindrances in further agri reforms by the government?

It is very difficult to say what the stance of the government is. Agriculture has a very small share in GDP but employs 40 per cent of the workforce in the country and has a low single digit share in the global grains market. If you look at the size of the land which is under cultivation, then potentially India could be a granary to the world. It does require far better management of resources whether it is water or value chain from the farm. Just take a small country like the Netherlands, it has $100 billion of exports of agri and horti products. I think a vision for agriculture has to take into account the potential that the country has. Agriculture should remain a key priority, going forward.

After protestors forced government hands on farm Acts, there are apprehensions that the government will also bend on labour codes and privatization of two public sector banks. How do you see it?

As Ficci, we are pro-reforms. And we believe that the country has to move towards reforms. Take GST for instance. A few years into it, teething problems have stabilized. If you look at my business, we used to have 40 fulfillment centers, which we were able to reduce by 50 per cent. You look at the tax collections. These very clearly indicate long term benefits of the structural reforms.

There has been much debate on crypto, whether it should be banned or regulated. What are your views on this?

I think we should at this stage leave it to the RBI to determine what is in the best interest of the country.