It is that time of the year again where there would be a change of guard at the Confederation of Indian Industry. Sunil Mittal steps down as the President and KV Kamath takes over from him. It is also a time when Indian industry is perhaps faced with more challenges than it was in the past one year.

Inflation continues to be at a high, the government is talking about administrative steps to actually bring down inflation if industry does not toe the line, there is talk of cartelization, there is talk of slowing demand, there is also talk of slowing investments.

How will Indian industry respond? CNBC-TV18's Shereen Bhan spoke to Sunil Mittal and KV Kamath in an exclusive interview. Both of them clarified that the industry abhors cartelisation. If there are any ant-competitive behaviours at play; if there are truly some forces at play which are using the temporary shortages in the market place,  the CII's messages are very clear that if somebody in his mind feels that he is not being watched and will therefore get away with antiicompetitive behaviour; he is in trouble.              

Excerpts from CNBC-TV18's exclusive interview:

Q: The Finance Minister has issued a very stern warning as has the Prime Minister and the Finance Minister being very categorical in saying he has a whole host of administrative steps that he will bring into action if industry does not toe the line as far as prices are concerned, how worried are you?

Mittal: I think the signals have been coming from the last several weeks now. Government will have to take measures to control inflation, some parts of the industry are areas where the product prices have gone up really high. There may be legitimate reasons; I am sure there will be because input cost is really going up, steel people are saying iron ore has gone up, people who make products of steel are saying steel has gone up and so on and so forth.

Q: Two industries being brought up time and time again, cement was a battlefield even during the budget last year it continues to be an area where the government is battling with industry and steel once again, both these industries are under the spotlight?

Mittal: Big and very clear reason is the massive construction programme that is going on in India, the demand has really shot up and as has the consumption. The fact is industry from my personal point of view has been caught off guard in building capacities. There is a massive mismatch of demand and supply today. It takes time to build cement plants, it takes time to build steel plants but my confidence is that the Indian entrepreneurial spirit will ensure that if there are super profits they will dive in with create capacities.

Q: The days of wielding the chariot are over its time now to wheel the stick you think, how apprehensive are you?

Mittal: I am a bit in the middle on this one, I feel that the industry must respond in two ways increase efficiencies. If you do not have more capacities and absorb some of the input costs that are going up, industry needs to take some burden of price rise within the system, I think we have demonstrated in telecom - if you can increase supply, you can lower prices.

Q: Administrative steps - we have already seen cement and steel and a whole host of other sectors being slapped with duties in order to moderate prices, in order to tame inflation what to your mind are the likely administrative steps that he is talking about, would the government go as far as price control?

Kamath: I do not know because I cannot read the government’s mind. But I was there when this statement was made that the government is ready with a whole outline of administrative steps that they could take to control this if order is not restored in a market place. I would take it very seriously, I would take it like Sunil Mittal said - that we have to deliberate on and respond to in two ways; it immediately starts creating the process of putting into extra capacity.

Q: But that cannot happen overnight?

Kamath: Some steps we could take very quickly, debottlenecking and so on and the process of creating more capacity which is ongoing which will happen over the next two-three years. But I think there is a need to introspect as Sunil says because the message is very clear to me.

Q: As far as price controls?

Mittal: No. I do not think that we need price controls.

Q: What administrative steps? Let us take an educated guess here, I know that you cannot read the government’s mind. But as I said we have already seen duties across different sectors where we have seen the price situation go through the roof what other administrative steps could he be talking about?

Mittal: I think Finance Minister said that he can sacrifice revenue, let us speak that point up. Be aggressive with fiscal measures, take import duty to zero, give massive freight subsidies for importing cement and steel, lower excise duties, do whatever you can because Indian economy is still very buoyant. They have enough momentum there to use fiscal measures to lower product price and increase supply, get massive amounts of imports in the temporary phase.

Q: But you will not go as far as price control is concerned?

Mittal: Absolutely not, we never want to go and visit that zone one more time where we need to be having price controls in industry. I think industry has also done very well it is not that industry has not supported the country’s growth it is just that there is a massive mismatch of demand and supply.

Q: Let us talk about this business of absorbing the input cost hike - the Prime Minister also alluded to it. We have been speaking with a whole host of corporates at the Confederation of Indian Industry and they say it is impossible that the prices of steel have gone up about 30% in the last couple of months we cannot continue to hold the price line and we cannot continue to absorb this without hurting profitability any further?

Mittal: Yes. But the point is if the prices continue to be where they are or if they were to rise even further demand is going to go off and if demand goes off, where is the industry going to get these orders from?

So it is really a very clear situation for the industry; if you cross a particular zone your demand drops. To keep the demand going, you need to lower prices. I would again come back to telecom. We have lowered prices one more time when there was no demand because you can see that the demand will go up because of lowering of prices. To my mind, the industry and government; actually they are two sides of the same coin - government will get less excise in custom’s duty if the prices remain high because the demand is going to flag. Equally, if the industry does not lower the prices, demand will flag and they will suffer. So I think there is a merit in both applying their minds to lower and I would say balance out the pricing.

Q: Is corporate India not really applying its mind to the argument that Mr Mittal is just presenting?

Kamath: Corporate India very quickly applies its mind to that logic because ultimately if things are not stable we are going to see that 8%-9%-10% growth momentum that we now have flagging and if it flags below 7%, exactly what Sunil says will happen i.e. firstly all your plans in terms of fresh investments may come on hold and secondly the investments that you are now making will turn unproductive and fruitful for at least the medium-term which will mean that you are going to take a hit in any case. I think what the government is telling us, is take a signal and work in a way that you do not disturb growth. I think that is underlying message to me. Work towards getting inflation to rates which are meaningful and which do not give us a discomfort and this is the message I think we will have to work on that our own way.

Q: Talking about signals, the credit policy has come and gone. We have now seen an effective CRR hike of about 75-bps - 50-bps in the past and 25-bps in the policy. Reverse repo and repo are unchanged - are you a relieved man?

Kamath: Indeed, in a sense that the steps taken as of now, the 75-bps hike in CRR is not impacting the cost of funds because I was just tracking the movement in the last couple of days of government bonds - they have actually declined post the announcement of the second CRR hike; the rates have declined. I think that’s a good sign which also endorses the fact that the government is very sincere about keeping the growth path altered. I think that’s good news for industry and we have to take that onboard. So they are keeping interest rates in check. They are tightening liquidity a little bit in a situation where it is a very liquid market that we are in and saying - look, we want to control inflation - that’s our key objective. We don’t want to curtail growth, which should be a win-win for industry - both these things.

Q: There are several - I don’t know in this scenario. But what is it as far as interest rates are concerned? Where do you actually see interest rates headed given what you have heard in the credit policy? What you have heard from the government and from where inflation currently stands?

A: At this point in time, interest rates appear to be holding. As I said, I have seen actually a drop in government bond rates. The government bond rates actually create the sentiment in the market place. If that were the sentiment, it appears to be that interest rates are holding for the time being.

Q: Are you a relieved man because I know in your speech you said that if there were to be an interest rate hike, it would be a devastating blow to growth - it would be a devastating blow for corporate India?

Mittal: Yes I believe so. My view is that the world is struggling to create demand - the US, Western Europe, Japan and many other parts of the world. They are lowering interest to have demand go up. We are blessed as a nation that we have demand. We have consumption. If one were to increase interest rates so that the demand can be curbed - my view is they will be some short-term management of inflation but there will be catastrophic effects on a long-term basis on the industries.

Q: Give us a scenario of just how catastrophic?

Mittal: In 1997, some of these measures were taken. The economy went down from 3-5 years. We could have a similar kind of a situation. You create some very strong short-term measures in terms of raising interest rates and doing some other stuff in the fiscal management of inflation. You will see people getting scared. People are stopping to create more capacities and longer-term we are in trouble.

Q: Would you agree that in the quest to tame inflation in the short and medium-term, we are actually going to end up with a long-term catastrophic problem on our hands, we could end up losing 3-4 years as we have seen in the past in terms of the economy?

Kamath: Steps taken just now do not indicate that we will head towards that catastrophic situation. But Sunil has been saying please don’t take any steps which will and so far articulation has been that growth is paramount and we will ensure that growth is intact.

Q: But the focus on this inflation first policy, is that beginning to worry you? Is that getting under your skin?

Kamath: At this moment, it is not worrying me. It will worry me if two things happen. As a consequence of that action - let say interest rate action, corporate profitability starts suffering because demand just falls off, then corporate cash flow is unhurt; projects, which under implementation get impacted. There one could have a mess. As of now nobody is painting a mess because the numbers that have come in for the last quarter of the fiscal year also appear to be good. So given that, I am keeping my fingers crossed that we will all head towards inflation taming exercise where inflation comes below 5% and then things can be put on an even keel.

Q: In terms of corporate earnings as Mr. Kamath pointed out - so far we have seen the numbers continuing to look good. For most sectors they have come in looking pretty healthy. They have of course been some slips in some but that’s part of the game. But how optimistic are you that given the current context that we are operating in, corporate profitability will be maintained in the coming quarters?

Mittal: I am very optimistic and as Mr. Kamath said, there are no reasons for us to start panicking that the government is going to hit the panic button. Some management of inflation is only in order. The government in power has to ensure that the inflationary impacts are arrested. All over the world you are seeing this happening, even is developed world. So that part is okay. In Prime Minister’s speech of sustained investment in infrastructure, he clearly said that we will not compromise creating more demand and in matching up with the investments; this is a good signal. The Finance Minister said the same thing and I believe in the FM’s prediction. He said that in the next year or this financial year which is going, he still expects over 8% growth. So broadly the government of the day remains very optimistic and that gives me the optimism that if 8% growth is going to there or more then the industry is going to perform very well.

Q: You may not be pressing the panic button just yet as far as the sort of the inflationary measures that the government has taken but what about this entire business of cartelisation? We have heard about cartelisation as far as cement is concerned.  We are now hearing cartelisation as far as steel is concerned, we have even heard about cartelisation for telecom. In fact the Monopolies and Restrictive Trade Practices (MRTPC) has severed telecom companies like yours a notice, bringing this issue forward. How worried and concerned are you?

Mittal: I don’t run cement or steel companies. So I don’t have the broad idea of what the cost structures are and clearly, if there is something to suggest there is a cartel or signaling or anticompetitive behaviour as the Prime Minister said… 

Q: You said they should be punished and severely so?

Mittal: I would say, if anybody is indulging in taking short-term benefits out of this society, I think there is no place for them. To my mind, the government must institute for a detail study of what's going on? What are the input material cost and then accordingly move forward on some segments of the industry.

Q: What kind of penalties?

Mittal: I am saying take fiscal measures and start importing more. If the foreign products are available in the country - we got cement from Pakistan last year. So we can take steps like those to ensure that the industry comes down and settles down and not use those temporary shortages in the market place. Now coming to telecommunications, all I can say is, this is bizarre. When the whole world celebrates… 

Q: But the steel and cement companies would say the same thing?

Mittal: The steel prices, the cement prices - I don’t know how they correlate to the world. We are a fraction of telecom tariffs compared to the world’s, so I can only say about the telecom tariffs - there is no question that anybody can even say that there is a cartelisation. Yes, there is a cartel, if the MRTPC feels that one when one company drops tariff - everybody follows by the evening. If that is cartelisation, then that’s good for the country.

Q: Business of cartelisation - how worried are you because today it is cement, its telecom and steel - tomorrow it could be any other industry that we are actually talking about. There seems to government studies, there seems to be government reports but none of it is actually coming out into the public. It is sort of information is being selectively put out. There doesn’t seem to be much transparency that we are dealing with, with regards to this matter?

Kamath: Today's world on the long run basis to create a cartel is going to be difficult in an open economy. We are headed to becoming an open economy. If I look at the capacity creation that is taking place, no cartel can last very long. That, I am very clear but you may say that’s for the future, what about now? We don’t know and as Sunil has said, we do not know exactly what is happening and what is in the government’s mind but in any case, it is better to preempt, if there is a no cartelisation by taking the steps like fiscal measures, cut duties and allow imports in and I would believe that the demand supply imbalances are in the margins. The moment steps are taken you will see rates find correct levels.                                  

Q: You said CII abhors cartels, abhors cartelisation - is there a message that industry voluntarily, is sending out to its peers?

Mittal: Yes, I think we are because we don’t know if they are anti-competitive behaviors in play. If there are truly some forces at play which are using the temporary shortages in the market place - as CII and as the President, as the President Elect - our messages are very clear that it is unacceptable as an industry body, it is unacceptable as an citizen of India and we will invite trouble for ourselves as industry if we do not pick up these signals earlier on. If somebody in his mind feels that I am not being watched and I will therefore get away with anticompetitive behaviour, I personally believe that he is in trouble.