India’s lower-middle class section is facing a consumption challenge, with rising food inflation reducing people’s discretionary spending kitty, and a slow growth of salary increases making matters worse, Harsha Vardhan Agarwal, the new president of the industry body Federation of Indian Chambers of Commerce & Industry (FICCI) said. In an interview with Aggam Walia and Soumyarendra Barik, he also spoke about when the private sector may ramp up their capex spendings, and why the industry’s research and development (R&D) budget is low, among other things. Edited excerpts:
Very clearly what we see in the consumption area, the challenge is more at the lower-middle, middle-class area because we have seen even in FMCG, rural is doing better. Premium products have been doing very well post-Covid. It is in this area of lower- and middle-income group where the real challenge is. If you see the average retail purchase, 75 per cent of it is in the food and grocery area and only 25 per cent is in discretionary. So, any impact on food inflation has a direct impact on the discretionary spend. We all know food inflation has been a bit high in the past few months and particularly in the areas of vegetable, oil, etc. But going forward, because that’s a concern area for the government also and it is taking a lot of measures, we are hopeful that maybe in the next quarter or so – we are seeing some green shoots also – the inflation rate may come down a little bit. Also, because of people’s salaries, it has not been able to keep up with the pace of inflation. I think these two things may be coming back and it will have a positive impact.
The FICCI-Quess Corp report pointed out that while private sector earnings are at an all time high, wages of people have not kept pace. Why is the private sector not compensating its employees commensurately?
I wouldn’t say it has not kept pace, because ultimately in the free economy, obviously in such a competitive world where there’s always a dearth of capable people, if a company is paying less, nobody is going to stay with the company, right? And hence, I would say it’s wrong to have that view that the industry is not paying well to the people. If you see, ultimately the people can move around.
But what if everyone is paying low?
People can’t talk to each other because as a competitor, I would always like to have the best people and get the people from the competing companies. It’s not that the whole industry can discuss and say that we won’t pay. I wouldn’t say that it’s the challenge from the industry perspective that the pay is low. And again, profit has gone up, but it’s cyclical so it might also go down sometimes. It will depend industry to industry and company to company. In many industries, the salary rise has been phenomenal.
Despite the government’s big public spending push on capex, the private sector has not started investing in a big way. Why is it not rising to the occasion?
There was an estimate by the RBI (Reserve Bank of India) that private investment this year will increase by 50 or 55 per cent in comparison to last year, and that is on the basis of approvals from banks, project reports, etc. So from that perspective, it’s not that it’s not increasing. Another important data point is that the capacity utilisation of the manufacturing units right now is somewhere around 74-75 per cent. That’s a sweet spot according to us where a lot of private players start looking at expansion and going into the capex mode. We are very hopeful that in the times to come, we will see more participation from the private sector.
The fundamental question there being why has it not happened yet?
If it’s the question of the last 3-4 years, because there was Covid in 2020, obviously there was a big disruption due to that. It has taken 2-3 years for the companies to normalize and for demand to normalise. Now, the companies seem to be doing better. That is why we are very hopeful that private-sector investment will increase going forward and as the RBI data also suggests, it has increased substantially in comparison to last year.
You do not see the lull in consumption delaying private capex in the short term?
Again, it will be sector-agnostic in terms of what kind of impact it has and hence what kind of investment challenges it might have. Yes, if the consumption challenge continues for a very long time, it might have some impact. But overall, private capex will increase because ultimately, the country is growing by 7-8 per cent, so it has to.
In some sectors, we are seeing bigger industry players call for more protectionism, which could be detrimental to smaller companies. How should the government strike a fine balance?
If we see the trend, countries are becoming more protectionist. They want to protect their economy, their industry. And hence, what is important for the industry’s perspective is how do we become more competitive? How can we compete with the global companies? Yes, I think the government’s focus also is wherever there is some kind of dumping happening, it has been proactively looking into those areas as to how they can protect those industries. With the downstream and the upstream, they have to look at both the angles, balance everything and then take a view. Yes, from the industry perspective, there will always be some industries which want more. But I think the government is trying to do its balancing act.
It would be wrong to say that the government is only meeting or hearing from the larger industries. If you take the example of FICCI, we have a lot of small and medium enterprises (SMEs) as our members and any member, in case they have any genuine problem, we take it up with the government. Broadly, wherever I have interacted with the government machinery, be it bureaucrats, be it ministers, they want to do a lot of initiatives around the small and medium enterprises. It’s not that in their radar they are only looking at the larger companies or they want them to grow. In fact, for them the focus area is SMEs because they also understand if the country has to grow in the long term in India, SMEs are very, very important.
In India, companies spend very little on R&D compared to their global peers. How would you diagnose overcoming that without another government scheme?
The private sector can only increase its R&D spend. They have a good balance sheet now. It’s now up to the industry to increase that spend. Yes, the government is working on what more can be done so that the private spending in R&D, which is somewhere around 0.7 per cent, can go up to at least 1.5 per cent, which is very important and critical. As a country, one has to continuously innovate and that can only happen if the R&D spend is there. The intention of the government is there and I think for the companies, if they have to stay relevant, they have to increase their R&D spend and a lot many companies have started doing that.
In some PLI sectors, the employment generation has not been as expected. Why is the private sector not hiring enough people?
I wouldn’t say the private sector is not hiring enough. Obviously, they have to hire as much as needed. From the PLI perspective, some of the sectors have done really well. We have also recommended to the government whether they can extend the PLI scheme to some other sectors because that is a very important part to become a self-resilient economy. So again, things like that will help in employment. Yes, many large companies have spent more on technology, which is very capital-intensive, and hence it has not been able to generate as much employment as one would have liked. But yes, the government is again very cognizant of that fact and hopefully we should see some good initiatives there.
Now that we are seeing a gradual easing in India’s relationship with China, what would your recommendation be to the government? Should they ease certain things, or keep things strict as far as trade with China is concerned?
From the industry point of view, national interest comes first. The government has been taking steps to protect our industry as well, because it has to be a level playing field. If Chinese companies want to come and manufacture here with the same kind of infrastructure set that we have, I don’t think the Indian industry has any problem because then it’s a level playing field. But yes, in case they are getting a lot of benefits out there and which is ultimately becoming a challenge for the Indian industry, that might be a challenge. So, the Indian industry is very open to compete with anyone who has a level playing field. If they are forming a joint venture and setting up some manufacturing unit here and then compete with the Indian industry, it’s good.
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