Steps taken for economic revival will have a positive impact: Baba Kalyani

Baba Kalyani is Chairman and Managing Director of leading forging company Bharat Forge. In an exclusive interview with Govindraj Ethiraj on the show Bottomline, which airs on Headlines Today, conducted at the Bharat Forge campus in Pune, he talks about the economy and what to look forward to in 2013. Edited excerpts:

Q: It has been an interesting year - 2012. Most people felt that, perhaps towards the end of the year things would start looking up. We had a new finance minister, new announcements were made, there were new directions laid out. Are you getting a sense that finally things are looking up now?
A: Let me answer that in two parts. First of all, I think the steps that are being taken now will definitely have a positive impact but I think it is going to take some time because an economy as large as India's and as diverse has a tremendous inertia and anything you do takes couple of months (to show its effects). So you are going to see a few quarters (go by) before you start seeing results. If you look at 2012/13, the fiscal year, the first half was very good. Most people did very well, but suddenly the second half doesn't look so good. We are beginning to see contraction in demand in almost every sector and I think this is largely due to the prevailing system or circumstances that we are seeing around ourselves. The whole decision-making process getting frozen, not much activity happening, projects getting blocked either because of land or environmental issues or political issues - all this resulted in a sense that it is better to wait and watch rather than start moving and making investments.

Q: Let us talk about the automotive component business, the forging business for which you are known all over the world. That's not growing as fast today because of demand contraction in the auto business, right?
A: Yeah. We have seen a demand contraction largely in the commercial vehicles' side of the automotive business. That's a large part of our portfolio, not only in India, but also outside India. And in India, we are seeing a demand contraction of almost 25 to 30 per cent in the commercial vehicles' segment. Outside India it is 10 to 15 per cent, Europe is 15 per cent and North America is about 10 per cent, China is as bad as India - 25 to 30 per cent. So, there has been demand contraction this year. But I think that it is cyclical, temporary. We have seen this before and I am sure you know, since demand has contracted, we will see - in the next two more quarters maybe -  demand increase quite substantially. So, I am not very concerned about it.

Q: So you are very optimistic about 2013, at least for the automotive part. What do you think is going to spur this turnaround?
A: It is different reasons in different markets. If you look at India, I think we have had a very difficult year in this sector. Demand has contracted, production is low, consumption of products is low. I think it is largely related to overall issues within the economy and I think with the steps that the government is taking, the finance minister is taking, you will start seeing an easing of this situation in 2013 and demand will come back because the potential demand is pretty high.

Q: You announced at least two projects, one in Madhya Pradesh which is a sponge iron plus power plant, and one in Maharashtra, a power plant. Where are these projects stuck and what are your own experiences?
A: The Madhya Pradesh one we have just announced. It was at the global investors meet, so I think we are just starting on this. For us, this is a sector we would like to grow. Steel, energy, these are the sectors we want to grow in because we honestly believe that irrespective of the problems we are seeing today, India as a country and its economy will continue to grow and if it continues to grow it needs more energy, it needs more steel, it needs more automobiles, therefore it needs more components. So, you know it is a matter of time. I mean, you have to have faith in India and the India story from a long term perspective. These are all medium to long term projects.

Q: Are you seeing any differences in the way the states are responding and the speed at which they are growing compared with the way the things are happening at the Centre?
A: Some states clearly are very pro-active. I have to confess that we don't work in too many states. We are limited... you know our home base is Maharashtra. This is where we started and we have grown our business. We are very happy with Maharashtra. We are trying to go into Madhya Pradesh. So far we are extremely pleased with the way the system works, the way the government works and supports the industry to establish itself and the way it deals with the processes. So, you know our experience is really limited and we are in Karnataka. There we have had a mixed experience. We have had some good experiences, some not so good.

Q: You mean, the roads business?
A: You know, this is life (laughs).

Q: Can we look at investment decisions independent of what is happening at the centre? In your own experience, or the experience of fellow business leaders, is there a future for India which is more dependent on states when it comes to investing as opposed to the Centre?
A: See, if your businesses are not dependent on natural resources or basic infrastructure, then I think you can make decisions independently based on what is happening in different states. If you are in the automotive business, for example, you can do that. That's not a problem. Most B2B businesses are moving in that direction and whichever states work most efficiently with businesses are getting more investments. But, if you are dependent on anything to do with natural resources, if you are in the steel business for example, you need natural resources, you need coal, you need iron ore, you need energy or if you need to be in the energy business, you are connected with the government in one way or the other. Then I think it is extremely important to get the right signals from the centre.

Q: Companies like yours have also in time become global. I think most of your acquisitions, for instance, happened between 2003 and 2005. That was also a strategy. It was may be to de-risk, to look at opportunities overseas. Now, when you look back, how does the strategy look? Is the India opportunity looking better or worse?
A: Two things. First of all, that strategy has worked extremely well. We grew 10 times in eight years because of that strategy, because we took a measured approach to globalise ourselves. Before we started this process, we were a $100-million company and by 2008, we were more than a billion-dollar company. So, it was rapid growth in a short time. That strategy clearly worked. Second, that strategy has great meaning for the future growth of India. Many of the players in the Indian market are the same players we serve today in Europe and North America. They are all coming here, whether it is Daimler, Volvo, Volkswagen, whether it is Audi, they are all getting into India and they are going to have significant market shares in the next 10 to 15 years. That has significance for us. That strategy has played out extremely well for us. So, we see growth in this business for many years. Now, this business is cyclical. Every three to four years there is a cycle - right now it is a down cycle. So, things don't look as bright as they look in an upside but the upside will come very quickly.

Q: The bottom line question, therefore, is: to what extent does the India story matter to a global company like Bharat Forge?
A: The India story for the next decade is extremely important for two simple reasons. If you look at the automotive business, we are going to grow from three million vehicles - four wheelers - to almost nine million or more. So, it is going to be three times growth in the next 10 years. Clearly the opportunity for anybody who is in the automotive space here is tremendous. We are not only looking at growing in what we do today, we are also looking at growing in what else we can do in the automotive business tomorrow. That is one of the areas we are focusing on. Therefore, the India story is extremely important for us. Second, a lot of multinationals in the automotive space are beginning to now look at India from a strategic point of view, not just the market, to make it the supply hub for Asia. This is where India's manufacturing story, which I have been propagating for many many years, is going to start coming in. I think India is going to emerge a very strong manufacturing destination for technology products. 

Q: India has an advantage in manufacturing, particularly at the higher value-add level. And that's really our only advantage compared to China in manufacturing. When people say that, they really mean companies like yours. To what extent will this make the India story stronger?
A: This is true conceptually. There are companies like ours and others which have demonstrated that they are extremely competitive and savvy in technology and technology applications and in products. There are many companies in automotive - Bajaj, Mahindra, Tata Motors - which have done this. But we do not have the scale of China, which is six times bigger in size and scale in almost every space. If you look at automobiles, they are the world's largest. In railways, they have the world's fastest train. Similarly, in infrastructure and everything else. In spite of that, China has its own space in the global economy, it will probably be the second-largest economy. But in 10, 15 or 20 years, India can become the third-largest economy, and pretty much close to China. That's an amazing economic proposition. That largely will depend on how we derive our policy and systems. How do we get scale? Every time we take one step, we cannot get bogged down in environment, governance and legal issues. If we get into a mess every time, we are going to go in the wrong direction.

Q: We have lost a few years. GDP growth has slowed. What will be the impact of this on the economy and large manufacturing groups like yours?
A: Look at the Index of Industrial Production numbers, we are in a very difficult situation. We were counting on IIP being an average of 10 to 12 per cent. We are either in negative territory or in single digits. The Prime Minister has spelt out a manufacturing policy. He wants manufacturing to occupy 25 per cent of India's gross domestic product.

Q: Is that feasible?
A: It is feasible, but not if we are going to continue in the same way that we are today. If every project is going to be blocked, somewhere or the other, how do you go?

Q: What kind of manufacturing will create the number of jobs that will lead to this figure?
A: Let's start with infrastructure. Take energy. We need to add 25,000 to 30,000 megawatts of generation every year. That means that much of distribution, connectivity, etc. If we take a five-year average, we are adding six to seven thousand. We have a long way to go. That is one area which will add a tremendous amount of high-paying jobs. Then you have the railways and public transport. We have had a railway industry from before Independence. The British set it up, but we did not do anything to take leadership in it. Today, we should have been leaders in the railways' business. But we continue to rely on imports and external manufacturing. We need to give it a big push.

Q: Are you talking import substitution? Is that something we can still do?
A: Of course.

Q: In the hands of the private sector?
A: Look at China. How did China build its manufacturing strategy? Not just on automotives. China built its railway industry, power industry, aircraft industry. It took help from outside, but all the manufacturing was done in China.

Q: You are also saying there needs to be a clear-headed blueprint.
A: The blueprint is there. There are enough knowledgeable people in Delhi who understand all this, but somewhere in implementation we do not get it all together.

Q: What is the price we are going to pay for what we have lost? And what are the opportunities to regain it?
A: Take what GDP growth should have been possible; it should have been seven or 7.5 per cent. We are at 5.5. So two percentage points GDP lost. Multiply this loss by the GDP, which is $1.7 trillion. That is the price. It is a big price.  But nothing is lost. We have the ability to come back and regain this. I can see the steps being taken by the government. I am very hopeful that the second half of 2013 will see an upward swing in the Indian economy, and 2014 will be very, very strong growth.

Q: To what extent do you see private enterprise playing a more robust role or a different role from what it has done in the past?
A: Once our economy becomes a $5-trillion economy -- everyone says by the end of this decade we should be in the region of $6 trillion - the drivers become very different, the opportunities become very different. It took us 60 years to reach $1.7 trillion. It will take us 10 years to go to three times more than that. Which means the speed and velocity of activity in the economy will be tremendous, and that will be in every sector, and that is where job creation will come from. I am very optimistic. I only feel sorry, there was no need for us to have lost all this.

Q: Would you invest differently if you were to look at the opportunities in the next 10 years?
A: We will continue to invest in the direction we have set ourselves. You learn lessons from situations like this. Every lesson you learn, you do something slightly differently, you tweak your processes, you bring in a little bigger safety net into your decision-making process. I do not see ourselves diverting from our path.

Q: You think that will apply to most business houses today?
A: You have to take a longer-term view. I cannot take a three-year view of the economy. That will be a big mistake.

Q: Do you think some people have sounded more despondent that necessary?
A: There is a sense of despondency and negativism in the air. Let's face it, every business in this country is facing some problem of the other. There are real issues. At the same time, one is also getting the sense that something is being done to fix this and we will get back on track. End of 2013 should see us back on track.

Q: At Bharat Forge, you continue to focus on maintaining profitability. It has not been such a bad time for you.
A: It has been a difficult time. We have had two good quarters and now we are going to have two bad quarters. But you do things in a downturn that you wouldn't have time to do when business is booming. We are developing new customers and new products. We are getting our costs down. We are optimistic.