Fiscal consolidation a must for the budget : Exclusive chat with CA Mohandas Pai

Guest 
on 16 March 2012


Audio conversation :





First of all welcome to CAclubindia. We would like to thank you for taking out your precious time.

Sir, Can you tell me what is the vision with which you joined Manipal Group?

 Well I got 3 things to do in the Manipal Group. One of the not for the profit side, I am working with Dr Ranjan Pai to set up 5 universities in India in Bangalore, Jaipur, may be Bhubaneshwar, may be in the north of India, the rest of India. The first one is come up in Jaipur, the second one is coming up in Bangalore which will get legislative approval shortly and the hope is that in 10 years time we will have hundred thousand young people studying in these universities getting high quality education. This will be our contribution to get in great quality human resources from the Manipal group. The second one is that the Chairman of the education service company which runs universities outside India. We are setting up a university in Malaysia, we have got university going in Dubai and one in Antigua and may be will expand in other parts of the world and the idea is to take India’s soft power and demonstrate to the world the quality of India’s education. So within India and outside India we want to make sure that young people get high quality education and we demonstrate that India has a capacity to educate a large part of the emerging market. And the third is, I and Mr Ranjan Pai are starting a fund to invest in life science & technology Company. We have a fund of 50 million dollars which we have invested and we are bringing in management, we are bringing in an ability to understand business in the fund, to grow companies and to create a portfolio of companies which will be a leader in the next 5-10 years. So, these are the 3 things that we had. So, I am working with Dr. Ranjan Pai. I won’t say I have joined the Manipal group. As much as to say I am working with Dr Ranjan Pai to put all the 3 things into a place.

Ok. That’s a great work sir. Since you have worked with the Indian IT sectors so closely. What do you think is the future direction for the industry, considering changes taking place internationally?

Well, Indian IT industry has gone through two phases. Now it has to go to the third phase. The first phase was with the business was opportunistic the IT industry group from 3% of GDP to 9% in another stage with a shortage of human capital and all these companies focused on fulfilling the needs and that phase ended with a dot com burst in 2002 and later the Indian company started working for main state that means they were a delivery lead organization which provided high quality professional services, delivering high quality projects so they were extremely technology lead. So, they went from an opportunistic business to a technology lead business and now in the third phase they have to attack the enterprise. They must look at bringing the domain knowledge, domain consulting, add technology to that and work to transform business enterprises of the world because they have a very dominating presence in the entire area of the application development and maintenance and testing and the BPO and this dominating presence is all delivery lead, is based upon delivery excellence, is based upon execution excellence and is based upon day-to-day work. But they have taken care of the existing day-to-day work and dominant players. Now they have to go to the next level where they lead the enterprise to make the enterprises much more competitive in getting future businesses and changing business morals for which they have to get their consulting arms in play and this means that they have to hire people locally in the market who are consultants. They have to make sure that they have a greater local business and act much more like a local company from being a offshore global corporation. And even if you hear the noises about visas and all other things, let me tell you this that there is a great shortage of high quality technology resources all over the world. India is doing a fabulous job and they will remain great companies for the next 10 years at least. And I think all the noise that you hear about visas is because of the economic difficulties but we need to remember Europe & America will be unable to fulfill their own technology needs unless they work with Indian companies. So, I think the third phase is going to be exciting. After the first phase, many companies were there that did not do well. They fell down. The second phase saw some companies do extremely well, others did not do well. In the third phase too, we are going to see some companies do well and become truly global players. For e.g. the largest technology company in the world in terms of people, it’s going to be an Indian company, and the top 5 large companies in terms of people we are going to have at least 3 Indian companies by next March 30.

Ok. So, do you think that Indian government is doing enough to promote the IT industry? What are the measures you feel UPA should bring in this budget to further the glorious story of Indian IT?

Well, the Indian government has forgotten the IT industry and is not doing enough. They think the IT industry is a part of the landscape, is part of the hygiene that will grow irrespective of what they do or not. They need to nurture the Indian IT industry and understand the benefits they have bought and be grateful for the benefits that the industry has brought to this country. I say grateful because they need to remember that this industry is a global industry. It can go anywhere. India has a great management team in IT and the government has to woo them and not to cheat them with so much of disdain that they are doing today and making them feel unwanted within India itself. And to give you some examples of the benefits one, the Indian IT industry has brought respect to India and Indians globally. Before the Indian IT industry if you are an Indian passport holder, you went to any country, they looked down on you. Many countries did not respect India. They thought that we were a country with no technology and we are backward. Now they respect you and some countries are even very apprehensive of Indian workers because they think they would take away all the high quality jobs. Two, the Indian IT companies are bringing in about 70 billion dollars of foreign exchange to India this year. Please remember our trade deficit is about 180 billion dollars. It is an Indian IT and remittances of 60 billion dollars which is helping to fill the gap and make sure that the trade deficit does not lead to a massive depletion of foreign exchange as had happened in 1991. If not for the Indian IT industry will be last many years, our finance minister will be in Washington asking the IMF for money like Greece is doing, would have been in a very bad state economically. Third, it has created 3 million jobs, it has raised an aspiration of the entire educated middle class in this country, it has given hope to the middle class, it has created a militocracy brought in the good corporate governance, it has shown that transparency, merit and integrity can create a value. Next, they created market value of close to 5 lakh crores in the stock market and another places and this is a enormous and given for the employment states and everything else. So, this industry is the second-third largest industry in India in terms of employment, in terms of revenue, largest industry in terms of impact and the design capability skills built in the Indian people by this industry is helping the auto industries, finance industries and all other industries to compete in this world. So, I think this has been extremely critical and the better half convicts that new India has been built and the government has treated very shabbily and the government is not giving care and UPA too has done nothing to help them. Instead of that UPA too is internally harassing this industry because they think the industry is not paying the due share of taxes and they are denying them the benefits on all kinds of frivolous reasons. On transfer pricing of about 50,000 crores of revenue has been added back to the income of the IT MNC companies in India creating despair. They have reversed many of the established standards of IT in terms of income recognition for companies are demanding taxes by writing back expenditure, by disallowing many things and denying them the benefits. What the law gives us the benefits, the Income tax department is not giving the benefits because they are driven by the finance minister, who exhorting them to collect more taxes when there is no income. When there is no income, you cannot collect taxes but perverse incentive caused the tax officers to add back and because bill process is so long. It takes you 12 to 15 years to get a judgment from the Supreme court of the income tax officer writes back your income. So, I think the UPA too as far as the IT industry is concerned has really hurt the industry very badly.

Sir how much value do you attach to the corporate governance principles. Are you happy and satisfied with India’s current state of corporate governance?

I think corporate governance is the heart of being in the public market. If you take money from outside investors, you take money from outside lenders you have to follow the best principles of corporate governance because using somebody else’s money. When you use somebody else’s money you are a judiciary agent, you are the person who has to handle the trust of other people and that implies you have to use the money and follow good corporate governance. And, next if you are competing in the market place you have to be the best talent. The best talent will not come to you if you are doing something wrong and for that too you need corporate governance. And third, to make sure that you are competitive, there has to be symmetry of information between insiders and outsiders so that information flows besides decision making and for that you need corporate governance. So, I think IT demonstrates good corporate governance. So, I have attached the highest value to corporate governance because corporate governance is the heart of the capitalistic system, corporate governance is the heart of the Investor relation and corporate governance is the heart of the operating in a market economy and am I satisfied? Compared to what India was 30 years ago I am satisfied, that India can be better may be 25-30% of Indian companies are following the highest standards, may be another 30-40% are just absorbing, giving least sympathy not following standards but then the balance not there at all. So, I think the company following good standards should go up to 50% in next 3-4 years I hope they do it. But I am satisfied with the progress in last 20 years. But I am not satisfied where corporate India is in corporate governance right now.

Right. And sir do you miss your days in Infosys?

No my life in Infosys was over when I left Infosys in June 11’2011.The day I left Infosys I had bid good bye to Infosys. I spent 17 years, had a wonderful time, great time. I helped build that company to what it is today. I watched growth of an industry from 50 million dollars of exports to 60 billion dollars. I watched the industry grow from about 50,000 people to nearly like 2.5 million people. I watched the industry become the second largest industry in India. I watched the industry give respect to the Indian globally and I had been a witness, participant and I helped the industry in achieving all these and I think I have achieved my dreams which I had when I set foot in Infy in 1994. So I do not miss Infosys. I am nostalgic about my days in Infosys but I do not miss Infosys now because my days are over and because I believe that life is all about tomorrow and not about yesterday. If we dwell our yesterday too much we will miss our tomorrow and to me life is about tomorrow and today and I want to do well in whatever I do today.

 

Rightly said sir. So what is your opinion about GST and DTC ?

 Well, GST will create a single common market for India which is a broken up market and bring in efficiency in drive economic growth and I am all for GST and DTC will help simplify the income tax act and possibly make it better but the way the DTC is drafted is not very good because it gives too much power to the tax officers. It denied citizens the economic freedom that they want and put them at the mercy of the tax officers which is totally wrong; ethically, legally and morally wrong and I think DTC should be changed to bring in trust in to the tax administration so that taxpayers are trusted, to pay the right amount of tax. There is an audit mechanism to make sure that they do and in case they don’t they will be punished and also we need in the tax administration; simpler assessment. Assessment procedures are broken in this country, review process and the appeal process is broken and that needs to be fixed which is not being fixed. So, I am very skeptical about the DTC, the way it has been done because I think we need a much more modern and much more up-to-date law and the income tax and not the recreation the same bad principles that had been in the 1961 law.

So, what far reaching changes do we need to make in the overall country’s tax structure to make it more robust, efficient, dynamic and simpler?

First we need one indirect tax and one direct tax. Today we have got excise, we have got custom, we have got service tax and then multiple agencies doing everything and it is a mess so we need a GST to make sure all over the country we have one tax. Two, the total incidence of indirect tax should come down from 22-24 % to may be 18-19% to make us much more competitive like other countries and we make it account based rather than a broken down system that is there with all taxes paid on import getting set of against the taxes you receive from your sales. So, I think we need to make sure that the indirect taxes are reformed and there must be one tax, one administration instead of having 3 assessments. The income tax act has to be simplified. Many many complications has to be reduced. Trust has to be built in, arms led assessment has to happen, trust has to be built in with a tax payer, the audit mechanism has to be done and the corruption in the system has to be brought down. So, if I am the Finance Minister, I will make sure that I get a GST by giving the states what they want because the states are demanding certain things. I think the Finance Minister should give the state what is there and there is no harm in giving the states what they are asking because they are asking very little and I would make sure that the administration of income tax is done in a much better manner and as I said we have the Finance Minister exhorting the tax to collect more and more when there is no income. The CBDT chief writing to everybody, talking to them and telling them that their future career depends upon the tax collection is totally wrong and I will make sure that trust system is built in and that’s what’s need to be done to make it more robust, dynamic and simpler.

Sir, how do you see India’s education shaping up in next decade or so?


India’s education sector is driven by the aspiration of parents. Parents want the best degree of education for their children. Parents will eat one meal less, sacrifice everything to give education to their children and that is an extraordinary social situation we have in India. We don’t have such a situation elsewhere in the world, in many countries of the world where people are not so much focused in education. So, I think the people of India find it complicated. The government has not come up to the expectations of the people of India and the education system in terms of a policy is a disaster. We have had a HRD minster in centre who was ideologically inclined, we have another HRD minister who was incapable of taking decisions because he was not keeping good health. Now we have HRD minister who is occupied with other things and does not pay attention to HRD. For last 15 years there has been no strong person driving HRD in the way that the people of India deserves and I think the government has not done justice to the people of India. But the people of India, the parents of India have been pushing their children to get educated and that has been creating good education infrastructure. So, I would think that the education sector will tend to improve, there is flight to quality happening bad institutions are dying down, good quality faculties beginning to come. The next 10 years we are going to see a much more robust, much more high quality education system for India.

So, What can the government do in this budget to promote education sector?

To promote education sector the government should do many things. One give autonomy to all the central institutions because the government of India runs the central institutions. Two, create a national scholarship programme so that students gets scholarship to study in any universities or colleges they want to study and stop giving grants to universities or institutions who take money from the government but do not perform. Now, they have to compete for the students who will charge fees to them as they have to become fee-based and the students will be funded by the government and three very important to create a national science foundation and have may be 5000 crores to be given as a research grant for the year so that the research based culture, the progress solving culture comes in Indian education and government has to be the major funder because the public sources are the major funds of research all over the world. And four give total account like I said autonomy to the private sector in terms of legislative reform so that they can grow and students have a choice. We have to create an education sector where students have a choice of institutions and not get stuck with a few institutions and government should play the role of a facilitator rather than a controller, rather than a person who is today coming in the way of the better quality education.


Sir as a finance person what do you think are the shortcomings of the Indian GAAP system? Will convergence with IFRS solve some of these problems?

I think the Indian GAAP system should converge fully with IFRS barring 1-2 ideas like concession contracts and may be foreign exchange the impact of foreign exchange transactions. Apart from that I think we should confirm to IFRS because the gaps are very little, we should go along with the global standards with the set of research facilities so that we can give inputs in the creation of the international standards and I think barring this what the institute has done I think is totally wrong we have a “khichdi” system which is neither IFRS nor a GAAP of any quality because the institute does not have the research capability and the ability to create a high quality standards taken the IFRS standards adding something to it deleting something, diluting the standards and then issuing it as a Indian standards which is wrong because they are not based on research, they are not based on the understanding of the Indian standards but just a modification of global standards so I think convergence with IFRS will be very good and it is going to be difficult for the companies, convergence should be applied for consolidated accounts rather than a stand alone accounts because stand alone accounts may have when you mark to mark it or may be to fair value in certain transactions, tax impact and people are unsure of the tax impact so you must first apply undiluted IFRS for the consolidated account so that capacity built up and than for standalone accounts but I think that IFRS is way to go and India need not fear to adopt IFRS should adopt IFRS fully.

Sir, what are your expectations from the current budget? Which reforms do you think are much needed to give a flip to the growth of the economy?

My first expectation is that there will be fiscal consolidation in the budget. From the last year’s expenditure there is an excessive expenditure this year going to be incurred of 1 lac crores because the finance minister has not budgeted the expenditure properly and there is a shortage of revenues of may be 40-50 thousand crores because the lack of disinvestment, lack of 3-G auction and lack of enough collection from direct taxes. So I think there should be fiscal consolidation it means that you must cut cost and make sure that the budget is slightly more diverse and fiscal deficit comes down.


Two, I would like that the finance minster to make to reduce his borrowing because of high borrowing in last 3 years and this year’s borrowing is 5 lakh crores there is too much of money been pumped in the economy and inflation has become very high and uncontrollable. Inflation, tax and poor of this country is suffering very much, the middle class is suffering two years of high inflation because of the excess borrowing and excess borrowing is driving up the interest rates and making industry uncompetitive and industrial investment is coming down so we need them to control these borrowing and not to borrow more.

Three, he must reduce some of the subsidies because they are unjustifiable. The subsidies on petrol is unjustifiable on any grounds, subsidy on diesel should be cut down and the subsidy given for fuel should be cut down, food subsidy is good fertilizer subsidy is required, NREGA subsidy is required may be little bit of subsidy for exports they too should be cut down but overall fuel subsidy should be cut down. This year the government will have a subsidy of close to 3 lakh crores, I don’t know what the finance minister is going to account for the subsidies but overall all indications will be close to 3 lakh crores which is extremely high and is ruining this country and he must control his subsidies.


Fourth, the government should get out of business because the government does not know how to run business. Look at Air India it has a loss of 20,000 crores and government is committing 25,000 crores of funds for the next 10 years this is tax payers money going down the drain and I don’t know whether Air India will be able to compete. BSNL is getting ruined, they will probably make a loss of 8,000-10,000 crores this year and as far as they bail out for next 2-3 years. Government mismanagement of BSNL and Air India demonstrate that government should not run businesses where there requirement is not there. So to the extent government should start doing disinvestment so that industry becomes much more efficient and I would like the finance minister to look at that.

Next I would like the finance minister to increase outlays on education and cut unnecessary expenditure so my expectations are very less this year because I know that the fiscal situation is difficult, it is control your expenditure, reduce the subsidies for fuel, don’t borrow too much and make an effective spending.
 

Any advise do you have for aspiring CAs and professionals of the country?

Yes, My advice to all CA’s and professionals is believe in yourself, aim very high, dream big , work hard, study hard, develop expertise, become self motivated, be the best in whatever you can and don’t look at others to give you a helping hand or tell you how good you are and try to motivate you. You must depend on yourself for self motivation because self motivation is what can drive you to great performance. If you depend on others to give you some compensation or some pat on the back and a good work to motivate you, you are putting your life in somebody’s hands and that is not good for you but you must learn to be an expert because as professionals you deem to have some expertise. So you must be every ethical, you must stand for integrity not do anything wrong because you are a professional and above all believe in ethics, believe in the goodness of society put the interest of community before your interest, believe in yourself, dream big, aim for the skies to be the best in India or elsewhere and you will be a very good person.
 

That was very inspiring sir, Being a Chartered Accountant, how has it helped you in your journey?

I think being a Chartered Accountant I inherited the capability of a great profession. My number is 22317 I think, 22317 implies that I did my CA quite some time back, may be out of 22317 may be 10,000 are left because I qualified in 1982 and the numbers started in 1949 so there are very few of us before me and I inherited the benefits of the hard work that they have done so to the extent I am the beneficiary for all of their hard work and being a CA it enabled me to understand how countries are run, how enterprise are run, how economic condition is, how the situation in any economic situation comes up. It helped me to analyze data, helped me to understand laws, helped me to understand how countries work and companies work and given me great pride that I can converse with anybody in any part of the world and demonstrate my capability in a very big way so being a CA been a matter of pride and I also worked hard to make sure that the capabilities of the profession is enhanced and I think whatever I have done in my life and in my career so far has enhanced the reputation of that Chartered Accountant. I stood up for the independence of Chartered Accountant, independence of the auditor and for adopting higher standards. So I think being a CA helped me in my life’s journey.

Anything you would like to say to members of CAclubindia?

Aim for an excellence and believe in yourself.

Thankyou so much from CAclubindia Team, it was a pleasure talking to you.


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