Stocks Are Back In Unsure Territory
TCS, India's largest IT services company, wants employees to proactively use AI, even if it means cannibalising revenue streams
On Episode 808 of The Core Report, financial journalist Govindraj Ethiraj talks to Ranjeet Mahtani, Partner at Dhruva Advisors as well as Dr Tapan Sahoo, Executive Officer – Digital Enterprise at Maruti Suzuki.
SHOW NOTES
(00:00) Stories of the day
(01:00) Stocks are back in unsure territory
(02:43) Indian IT companies are going all out to protect client relationships and stay relevant
(03:51) Exporters have one more duty to worry about and this time it as at home
(12:21) How Maruti leans on India’s innovation ecosystem to drive technology changes
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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.
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Good morning, it's Thursday, the 26th of February, and this is Govindraj Ethiraj, broadcasting and streaming weekdays from Mumbai, India's financial capital, our top stories and themes. And before we start, today was a clear day with obviously much better air quality index and some very clear views across the bay, particularly if you were driving from north to south Mumbai, or for that matter, even the other way around.
Now, our top stories and themes…
Stocks are back in unsure territory.
Indian IT companies are going all out to protect client relationships and stay relevant.
The exporters have one more duty to worry about, and this time it's at home.
How Maruti leans on India's innovation ecosystem to drive technology changes.
IT Services Companies
Tata Consultancy Services, India's largest IT services company, wants employees to proactively use artificial intelligence, even if it means cannibalising revenue streams. K Krithivasan, CEO and Managing Director of TCS, said on Wednesday that they were not afraid this technology will take away their livelihoods. He said, we believe it is going to open up more opportunities so you enjoy the benefits the more you do and not by resisting the change.
We're telling associates that if you find that you can do something faster, better, cheaper with AI, you should probably go and tell your customers, even if it cannibalises revenue. He said during a panel discussion at the 34th NASSCOM Technology Leadership Forum in Mumbai, which we were also attending, including this session. His comments came as investor concerns about AI disrupting the Indian IT sector's traditional labour-intensive operating model have wiped out something like $65 billion in market value just this month.
Krithivasan's response suggested two things. One, of course, is that the customer's needs come first and that protecting the relationship is critical to staying relevant. And second, the confidence that companies like TCS will be able to solve for the AI needs of enterprises.
Of course, enterprises need the services of IT companies, perhaps even more than before, but there are other things that might change. For example, the number of people implementing projects, the tasks that were being implemented, and the pricing for all of it. And that's something that we'll have to wait and see how it evolves.
Even then, not all companies are on top of the AI game and legacy systems will be there for longer. And there is no magic AI bullet that yet comes and addresses all the computing needs of large enterprises in a dependable way. So when I say not all companies are on the top of the AI game, I mean the clients and not necessarily the Indian IT services company.
Markets
So on the stock market side, the IT downslide has moderated a little, but then you never know what tomorrow will bring. On Wednesday, the market started fairly strongly, but then gave up a lot of their gains, but finally recovered to end a little higher. The Nifty finally closed 57 points up at 24,482.
The Sensex was up 50 points at 82,276. Broader markets did better. The Nifty Mid Cap and Nifty Small Cap indices were up 0.6 and 0.9% each.
And then there is more trade uncertainty. The U.S. has moved to impose steep countervailing duties on solar cells and panels shipped from some parts of Asia, according to a Reuters report. And the U.S. Commerce Department on Tuesday said that manufacturers operating in India, Indonesia, and Laos benefited from wide ranging state support that skewed competition in the world's most attractive clean energy markets.
Changes to the RODTEP
Sticking to trade, but on the other side, the government has reduced duty benefits available to exporters under the Remission of Duties and Taxes on Exported Products, or RODTEP scheme, by 50%, with immediate effect, according to a report by PTI.
The RODTEP scheme is designed to refund embedded taxes and duties that exporters cannot otherwise recover, which obviously aims to help enhance the competitiveness of Indian exports. The order came via a Director General of Foreign Trade notification earlier this week, and led to that 50% reduction in RODTEP rates and value caps of products covered under HS chapters 25 to 99. So RODTEP was launched on the 1st of January, 2021, so it's not very old in itself, and it offers unrebated central state and local taxes embedded in exports through e-scripts to improve competitiveness.
Now, RODTEP was launched on the 1st of January, 2021, so it's recent, and it refunds unrebated central state and local taxes embedded in exports through e-scripts, which obviously is aimed at improving competitiveness. So it's not an export subsidy, but a reimbursement of embedded levies, such as state taxes on fuel, electricity duties, and Monday charges. The President of the Federation of Indian Export Organisations of Fuel was quoted saying that only a few months ago, the industry had wholeheartedly welcomed the government's decisions regarding exports, and the appreciation was still fresh when unexpectedly the RODTEP rates are now reduced by 50%, and this has come as a major shock to exporters, and that he has written to the Commerce and Finance Ministers to review the matter and restore the rates, understanding how critical the situation is.
Now, there has been a reduction in budgetary support for RODTEP by around 45%. The budget, if you recall, was presented on the 1st of February, that's this month. I reached out to Ranjeet Mahatani, partner at Dhruva Advisors and a specialist in goods and services tax and indirect taxes, and I began by asking him what could have prompted this move.
INTERVIEW TRANSCRIPT
Ranjeet Mahtani: The answer to the why is something we all are looking for. It was quite unexpected, and there is some sort of response that we've seen from the FIO president which said it's shocking and it was quite unannounced. Yeah, so why now is unknown, but possibly, and these are maybe some reasons that I could think of as to why this has happened or what's been prompt for it, is that the depreciation of the rupee over the last, you know, few months, the spate of trade agreements that we sort of are going to ink or have inked.
At some level, the Ministry of Commerce, which puts out these rates for exporters, has mentioned it to be a rationalisation exercise. And what I sort of take away from that is they set up the rates back in 2021, they had some tinkering along the line, somewhere they may have felt that, you know, it's causing quite a large amount of outgo on their side, and perhaps it needs to be relooked. And purely from a budgetary revenue exercise, they've gone ahead and looked at a rationalisation.
These are speculations at my end.
Govindraj Ethiraj: Okay, so amongst the companies or clients you work with, I mean, who could be the most impacted or would all exporters be equally impacted?
Ranjeet Mahtani: Everyone will get equally impacted. The exporter community is going to have and stays this impact from the point that the rate that was previously in effect has been halved. So anybody and everybody who got a ROTEP benefit or claimed a ROTEP rebate rate in that way, is now going to see half of that comes through.
So now just understand in an international market, where I'm trying to be cost competitive, and this is exactly why ROTEP was there, it's going to impact my costing and therefore my pricing. So either the exporter here in India takes the hit, or it's the, you know, the customer on the other side of the customs barrier, who's to have to bear the brunt of a slightly higher price. So you know, everyone and everyone will get affected.
There's a section of products for which there has been a rate cut has not been brought in. So there's some food products and items like that. But beyond that, for a larger section of the commodities that we export, there is a rate cut.
Govindraj Ethiraj: Right. And you know, the budget and in the last few months, ever since the US tariffs were imposed, we've seen some other concessions being announced for exporters. So could you put this in context of that what we've seen been announced?
What if any benefits have already flowed? And to what extent either this adds or negates?
Ranjeet Mahtani: Govind, maybe there's nothing directly as for the exporter community. Maybe there is some sort of schemes in the form of a PLI, which is announced for the ECMS, which was there, they've enhanced it from some 22 or 1000 crore to about 40,000 crores. So that's some in some way beneficiation.
But outside of that, there's nothing really, you know, focused and targeted at the exporter community. So in fact, in the back of that, this comes as quite a shock.
Govindraj Ethiraj: Right. So you're saying that in the whole tariff trauma that we've been seeing or experiencing in the last few months, exporters have not really got any benefit or at least likely benefit? That's right.
Ranjeet Mahtani: So please understand, the US agreement is still in the making, right? We've not done the fine printout. The UK agreement, which was signed with last year, is also going to kick in and take effect only from later part of this year, right?
It still has to get into their approval. The EU agreement equally has to be, you know, sort of ratified and the documents have to be signed and you know, everything has to happen. So in a sense, while in principle, there is a rate cut, or rather there is a tariff sort of, you know, benefit to be given, there is no tangible on-ground benefit that we're seeing today.
I mean, it is to come into force at a later point in time.
Govindraj Ethiraj: Right. So, you know, the concept of, let's say, removing the impact of local taxes and levies for exporters, is that something that other countries also have, other exporting countries? I mean, China could obviously be one example.
Ranjeet Mahtani: Yeah, it is. In fact, it's not a new scheme that we've had in India. The ROTEP is the current prior to that, we had for the goods, we had a MEIS, which is the Merchandise Export Incentive Scheme.
And for services, we had what was called a Service Export Incentive Scheme, SEIS, right? But those two schemes and some others that we had from the Ministry of Commerce were considered not compatible with certain WTO agreements, right? Now, India being a signatory to that had to make a compliance with it, and those are not alike.
So, there was in fact, a order passed in, I think, back in 2019, in late of 2019, which found that all of these schemes, the MEIS, the ROTEP, including our SEZ scheme, our EOU scheme, were not compliant, and they were, you know, sort of in transgression of those agreements. Now, in all of those agreements, essentially, what was happening is, from an export point of view, we were trying to incentivise the exporter community by enabling them to be cost competitive. So, remove the blockages of what's not creditable, or give them a sort of incentive in some form or the other, such that their export pricing can be competitive.
As you rightly did identify, it's not India alone which did it. This was, you know, the avatar that we had prior to ROTEP. China has had it, and a host of other nations have had it.
They've always supported their exporter community, because it's a fundamental, you know, sort of principle which is followed across the globe, that export goods and services, not duties and tax.
Govindraj Ethiraj: And last question, Ranjeet. So, what's the way forward for this? I know the industry and the bodies will make representations and so on, but if that does not happen, then what?
Ranjeet Mahtani: I'm afraid if that doesn't work out, then there's nothing much that can be done. I mean, it'll be unfortunate that, you know, in a time when the government would be expected to support, they don't support the exporter community. I think one thing that should be done in a careful way, is not just make a representation or a request with the government.
It should be backed up by data to say that, look, you know, offering me prior to this date, a X percentage. Now, when it's gone down, my X has been become half. How and what is the impact on my price and my cost?
And what is it that the half does not cover for? So, you know, anecdotal data or hard, you know, information should be presented is how you would go about it. Yeah.
Govindraj Ethiraj: Great. Ranjeet, thank you so much for joining me.
Ranjeet Mahtani: Pleasure. Thank you.
Maruti Suzuki and AI
We've spent the last two days at the NASSCOM Technology and Leadership Forum, as we've been saying, interviewing business leaders, mostly in the technology space and from all over the world, and some of those conversations will play out in coming days. Now, there are two kinds of conversations, first with services companies like Infosys or TCS or Quest Global, and how they are responding to the challenges of AI. The other is, of course, how companies are using AI and technology as a whole to become more efficient and responsive.
I caught up with Dr. Tapan Sahu, Executive Officer, Digital Enterprise at India's largest car maker, Maruti Suzuki, and I began by asking him how they were using the deep tech ecosystem to drive value for their company and customers through innovative partnerships.
INTERVIEW TRANSCRIPT
Dr. Tapan Sahoo: Actually, we started our journey with the startup innovation system about five years back. Why we did it is that, when we looked at technology change, technology changing at a very high frequency, there is a book also called High Frequency Change, and to integrate that into an organisation which is, you know, 30 plus years old is a challenge. So, in order to bring in new ideas, new enthusiasm, new technologies to the loop, we thought of collaborating with the startups.
So, we started with one programme, but after five years, we have now four programmes which are running. So, starting with the base, for example, the Nurture Programme, doing partnership with IIM Kolkata. So, we look at startups which are idea stage or little bit of prototyping stage.
So, they are mentored, then they come to us, they give a demo, then we take up them for actually doing a POC. The next programme is the Incubation Programme, which we do in partnership with IIM Bangalore and SRSL. So, that also is a programme where they go through a six months plus mentorship programme, shortly straight, and then mentored along with our businesses, we give them business problems.
And after that, they're again given a paid POC and some award monies. And we run our own accelerator as well. So, that accelerator we are running in cohort 10 now, so far.
And if I tell you the numbers so far, I think we have screened about 6200 plus startups in India, 200 plus are engaged with us at different stages, and 60 plus are doing paid POCs. And 32 have become our business partners. So, just like the 1980s, when Maruti brought in technology and technology partnerships from Japan and other countries to Indian entrepreneurs, we think this is our way of giving back to society also and bringing technology, infused technology into the organisation, so that the whole startup ecosystem can grow.
Govindraj Ethiraj: Right. You talked about 32 business partnerships which are running and 60 proof of concepts. What would be the, let's say the top three or four areas where this is happening in the automotive ecosystem?
Dr. Tapan Sahoo: Actually, this is happening in various fields of operation. For example, starting with customer, customer experience, service, plant operations, safety, and even logistics. So, these are the areas where startups are working and they're working in 35 plus technology areas, including AIML and so on and so forth.
Govindraj Ethiraj: And what would you say are the top one or two areas where you've seen the maximum impact from your vantage point?
Dr. Tapan Sahoo: For example, we provide owner's manual in the vehicles, but you must be driving a car, right? Have you read your owner's manual ever? No.
So, people don't read it actually. And I know you digitised it. So, we have digitised it with AI enabled application.
So, it is there for our customers and they can just take a picture of the problem or take a picture of any part they want to understand and can get help from the application. Now, we have a Maruti Suzuki one app. So, they can take the help of the application and then it will tell step by step, what are you supposed to do?
What are the steps to follow? And in case you are not able to resolve it yourself, you can still call the Maruti on-road service. So, that has a very good impact in terms of customer acceptance and this thing.
The other one is in terms of safety. I mean, simple steps. People work in the organisation, work in the plants.
Sometimes you work with hands in your pockets, which may not be safe. So, we identify images, process it, and then give that response immediately that, okay, please follow the right kind of safety practises. So, inculcating such changes actually changes people's behaviour.
Also, it has a good impact in terms of this thing. And third is in terms of quality. I think we are deploying AI-based vision systems at scale so that we are able to identify defects which we were not able to identify earlier through human eyes or something.
So, these are the areas where we are having really good impact in terms of adoption. And these defects are sort of on the body outside? No, I mean, I think when the parts are being processed in the line, we are able to put the camera, detect it at speed, and identify the defects before it passes on to the next stage.
So, therefore, able to control the quality as well.
Govindraj Ethiraj: So, let me flip that question. The pictures that you're getting. So, you talked about, for example, working with 6,000-plus startups over the years.
Are the pictures also aimed at these kinds of problem-solving or are there other areas that people are looking at?
Dr. Tapan Sahoo: Actually, we were just discussing before this in another session that what is the problem today. Problem today is that startups have technology solutions, but they don't know what business problems to solve. We have actually flipped that problem.
We said, okay, let's first collaborate with our businesses, identify what are the business problems you're trying to solve with the startup ecosystem. So, we have identified business problems. So, when we invite applications, we share with the startups what is the theme of the cohort, what kind of business problems you are trying to solve, and therefore, apply based on that.
And in fact, in some of the cohorts, like what we do with G-Hub, we run specialised programmes. Either it is on, let's say, vision-based inspection or it is on cybersecurity. So, we run basic cohorts so that similar startups can apply for those programmes.
Govindraj Ethiraj: And there's nothing in this so far that's to do with the heart of the automobile, the engine or the transmission or electronics and so on.
Dr. Tapan Sahoo: It's basically, if we talk of that, no, not product-related. There is one example, which is one of the startups which is there for accessible mobility, making mobility accessible to people, the swivel seat. So, that also came through the NSSL incubation programme.
I think that's a product-based innovation, which we have done through the startup programme. But otherwise, it is operations, customer experience, and quality at scale.
Govindraj Ethiraj: And as you look ahead, what are the kind of problems or problem statements that you're putting out for the next round of startups to solve? One of the areas would be like cybersecurity, for example.
Dr. Tapan Sahoo: Cybersecurity is going to be one of the key areas which will be required at scale. And with AI coming in, I think that will be one important area for us.
Govindraj Ethiraj: What's changed in the production process? I mean, you said you've been in the company for more than three decades now. Or what can change or are there areas where startups or people who are, let's say, looking at processes or problems with a slightly different eye could solve?
And I'm talking about the production process itself.
Dr. Tapan Sahoo: As far as the production process is concerned, it has evolved over a period of time. I think the last three decades with a lot of more automation, robotics. What the startups are trying to solve, for example, is that earlier machines were not connected.
But when you are connecting the machines now, we are able to analyse this data with some of our startups, put that analytics, and look at predictive maintenance or preventive maintenance in that sense. So that's one definitive help which is there. The other one is that very rigorous quality inspection.
Human eye which cannot detect, we are able to detect with cameras and put AI on that. So we are able to look at multiple variants. For example, we produce about 18 models, but export to about 100 plus countries.
So there are multiple variants which are produced in the same line. So it may be slightly difficult for the operator to identify the defects. So that's possible when we are using technology developed by some of the startups and do it at scale.
Govindraj Ethiraj: And what would you say, I mean, not necessarily for the report, but from your own side, what are the lessons for the success of your efforts in working with the technology or engineering technology startup ecosystem?
Dr. Tapan Sahoo: I think key lessons, I'll say that if any accelerator or incubator want to be successful, first of all, need to have a dedicated organisation and a very dedicated team for that. Second, I think identification of business problems is one of the key requirements. We should not look at tech for the sake of tech.
We should look at what are the business problems we're trying to solve and therefore what is the technology which we can adopt. Third thing is that from a startup founder perspective, what we have seen also is that our theme, for example, is innovate, collaborate, co-create. So the flexibility to co-create is one of the key attributes to be required.
That I have a technology, but how do I apply that to the business context and co-create with my customer? So these are the probably three things which will be required for success. And fourth and fifth thing are money.
I mean, I think startups need funding. So paid POC is another one. And last but not the least, the market access.
So Maruti in that sense is able to provide the market access. We are our own market. We have 30 million plus customers.
Govindraj Ethiraj: Right. Dr. Sahoo. Thank you so much for joining.
Dr. Tapan Sahoo: Thank you for inviting. Thank you.
