‘Incentivise reduction in farm input costs’

Pawan Goenka, managing director of auto and farm equipment major Mahindra & Mahindra, on the Budget’s move on the farm sector, the long-term capital gains tax, corporate tax rates and more. Excerpts from a detailed interview to Fortune India immediately after Finance Minister Arun Jaitley’s Budget speech:

Q: Would you call this a populist Budget?

A: Look, there’s nothing that has been done which I can argue against. So even though the Budget favours a section of society, I don’t think anyone can say we should not have done what has been done for that section of society. There’s nothing that has been done which is a waste. No dole-outs. To say I am going to improve infrastructure, healthcare, education, electricity supply to rural households or to say I am going to give some revenue benefits to the farmers; I don’t think any of these things one could call populist.

But the devil is always in the detail. The question is, how do you implement all of these things? I am sure that will probably be worked out as time goes by. The 1.5X [minimum support price above the cost of produce] is a very good thing... 50% contribution is reasonable. But one has got to be watchful... how do you calculate the input cost? And how do you incentivise reducing input cost? In India, per unit of output, of almost any agricultural commodity, the input cost is very high. Therefore, to simply say ‘now I am going to get 50% more therefore I am OK’ is not good for the long run. We have to ensure there is incentive to reduce input cost. Otherwise consumers will suffer and we don’t want to rob Peter to pay Paul or rob Paul to pay Peter. I hope something is being done to incentivise the reduction in input cost. I would like to see farmers have good income and consumers not have to pay more. Both sides have to be addressed.

Q: How do the moves on the farm sector impact a company like yours?

A: Before that, let me make another point. Our quick calculations show that this [MSP move] will cost Rs 30,000 crore extra in terms of subsidy for food. And because of fiscal expansion, despite 3.5% becoming 3.3%, Rs 30,000 crore happens to be available. It’s just a coincidence that those two numbers are matching. The net increase in taxation [long-term capital gains and other moves] will probably pay for the rest of the schemes. I firmly believe that as GST takes deeper root, tax collections will go up and I would not be surprised if tax collections are more than what they have taken into account. So, overall, I am not too concerned that the 3.3% fiscal deficit target for FY19 will not be met. Unless, of course, there is some natural disaster or some such thing.

Q: Coming back to Mahindra, what do you see as the impact of this Budget on the company?

A: The tractor growth has been very good last year. If you see the tractor growth that has happened last year and the year before, one would not say there has been any farm distress. In fact, for January we had a 40% growth. In fact, tractors are not discretionary purchases. They are tools of the trade. Therefore, buying tractors don’t necessarily mean the farmers are well to do. There are a lot of things they want to do that they can’t do. Because all the income is going into essentials. Therefore, of course, it will have a positive impact on our business because a lot more discretionary income becomes available. But we weren’t hurting even earlier. Therefore, for our business, which is agri and farm equipment, it probably doesn’t make too much of a difference. But for consumer products, appliances, other discretionary purchases, it will probably make a big difference. That’s where the distress was showing more, which will get corrected.

The way I look at this is, this is all about improving the quality of life of a farmer. It’s not just about some populist measures. He says he wants 4 crore households to get free electricity... that’s quality of life. I grew up without electricity. So I know what it’s like. The way he talked about rural education, rural infrastructure, toilets... it’s about quality of life. If you look at it that way, it’s not about populism. One cannot deny the fact that it wins votes. And why not? A politician is in the business of winning votes. If you were the FM and you said a section of my society needs to be supported without hurting the economy, there couldn’t have been a better way of doing it.

Q: Disinvestment has been a sort of a success story this year. So do you think the Rs 80,000 crore target for next year is too modest?

A: I think it’s a very prudent thing to do because it keeps money in the pocket. So if some other things don’t happen, they can dig deeper and make Rs 80,000 crore become Rs 1 lakh crore. It’s like a mine. If you dig more from the mine in one year, there’s less left for future years. Therefore, you shouldn’t take out more than what you need and should do it slowly.

Q: On the long-term capital gains (LTCG) move, Deepak Parekh made a comment after the Budget, that one year isn’t long term by any stretch. What do you make of the LTCG move?

A: One can look at it in different ways. If I was looking at it–and I am not an economist by any stretch of imagination –I would, instead of imposing a 10% tax, make the tenure two years. The reason for that is different. Now LTCG is 10% and short-term is 15%. So what is my incentive to remain invested in the long term? Companies like long-term investors. They don’t like day traders. Now the gap is only 5% and that’s not enough gap for me to wait for it to become long term. To me, a tenure of two years rather than taxing it at 10% would have been a better option. But I don’t see it as a major dampener because I am used to the U.S. taxes where the LTCG is 20%. To the best of my knowledge, most large economies have LTCG which is 10% or higher. My only problem is the gap between short and long is too little.

Q: You are clearly worried about the decision not to reduce corporate taxes for large companies...

A: Yes, I am. One thing I want to point out and I was hoping will happen is a 2-3 percentage point reduction in corporate tax rates. There’s a view that the effective rate is only about 24% which is not true. I got some numbers crunched, and it’s higher and it’s gone up in the last two years. Particularly when the U.S. has reduced it so drastically. It’s not about helping or hurting a large corporation. Everything is connected. Nothing is in isolation. If you want investments, it will happen only if I am getting a good return on my money. This means I need a certain internal rate of return post-tax. If tax rates are high, my return has to be high. If I don’t make that high return, I don’t invest. So I either go to shareholders or the banks. If I can’t return them enough, they won’t invest. Therefore, everything is connected. In the current environment, the level of taxation is too high. It has to go down.