'What we need now is spending'

'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.'

Sanjiv Mehta, chairman and managing director, Hindustan Unilever, took charge of industry association FICCI when the Budget is two-and-a-half months away.

Mehta tells Indivjal Dhasmana/Business Standard that inflation will start easing from the second half of 2022 as production ramps up.

The first of a two-part 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 lens, 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 utilisation 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 utilisation 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 utilisation 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.

Feature Presentation: Aslam Hunani/Rediff.com