Losing the edge

If you are not expecting too many people on the early morning flight to Aurangabad from Mumbai, you will be in for a surprise. Not only is the flight fully booked, the passengers are not tourists headed for Ajanta — they are corporate executives Blackberrying, arranging schedules and talking deals in unmistakable corporate lingo. More than a handful look like foreigners on business. The flight stewardess says it’s not a one-off phenomenon — it’s been like this every day for the last 2-3 years. She adds that tourists tend to take the later flights while the early morning flights are full of business travellers.  

The transformation of sleepy Aurangabad began in the early 80s when the Maharashtra Industrial Development Corporation (MIDC) set up industrial parks here. When Bajaj Auto arrived, local vendors like Sanjeev Auto, the Varroc Group and Endurance Systems sprang up to serve its component needs. Government sops also attracted companies like Wockhardt, Colgate Palmolive, Johnson & Johnson, Lupin, Orchid Chemicals, Sab Miller and Audi. Now, the turnover of the 30-odd vendors in Aurangabad’s auto ancillary industry alone is estimated at above ₹10,500 crore with an annual growth of 10-12%. 

Based on the growth momentum created till now, Aurangabad’s progress has been steady but slow. Now it needs a push. “We need another OEM (original equipment manufacturer) like Bajaj Auto to invest in Aurangabad and take it to the next growth orbit,” says SD Tambolkar, MD of the ₹275 crore Sanjeev Auto. “Without government intervention, this will be tough.” 

Companies like Varroc and Sanjeev Auto follow OEMs. Varroc, for instance, is now starting a plant in Bangalore as Honda Motors and Scooters India (HMSI) has started a plant there. 

In Aurangabad, many feel that the state government is not doing enough to court investments. “I had a top Mahindra executive in Aurangabad and he was amazed at the factories and infrastructure we have,” says MP Sharma, group vice president of Varroc’s ₹2,600 crore auto components business. “He said no one had approached him to set up an industry here.” 

Yet another limitation to attracting investment is the lack of industrial land. MIDC Aurangabad’s existing areas, including the new industrial zone at Shendra, have no space left. MIDC Aurangabad’s RK Gawde confirms that the government is developing Shendra-2 now but local industrialists feel that the new zones are largely being bought by investors in land, not genuine industry start-ups. Land prices are on the rise, too. “A piece of land that you could buy for ₹10 lakh 10 years ago cannot be had for less than ₹2 crore now,” says Tambolkar, who feels this makes the setting up of new small scale industries very difficult. “I left L&T to begin my own business in 1983 with just ₹50,000,” he says. “It would be unthinkable now.”  

Symptoms of malaise

The problems faced by the Aurangabad industry are symptomatic of troubles in the state. In recent years, the state has been losing out to Gujarat, Karnataka and Tamil Nadu when it comes to new investments. An Assocham survey of end-2011 found Gujarat overtaking Maharashtra as the most preferred investment destination in India — the former bagged investments of ₹16.28 lakh crore while the latter got ₹14.14 lakh crore. Maharashtra’s share of total FDI in India too fell from 45% in 2010 to 35% in 2011.

Faulty policies, a slow moving and corrupt bureaucracy and the lack of political initiative to promote the state’s image as being business friendly, are being cited as some of the reasons why new industries are not coming to the state in larger numbers. “Maharashtra needs to change and be perceived as a pro-business state,” says Lalit S Kanodia, founder-chairman of Datamatics, the ₹500 crore information technology company. “You go to Gujarat and Narendra Modi tells you that he will look at things personally. Maharashtra, too, needs to tell the businessman: ‘I want you, please come to us’.”  

The delay in permissions, especially in land acquisitions, mineral concessions and environmental clearances are hurting businesses hard. For instance, Rajnikant Ajmera, managing director of the ₹171 crore Ajmera Group says, “To begin construction, it takes one month in Ahmedabad, three months in Bengaluru and a minimum of two years in Mumbai. For the last three months, no real estate project has received environmental clearances in Maharashtra.”  

Sumit Banerjee, vice chairman, Reliance Cement, and a member of the Bombay Chamber of Commerce and Industry (BCCI), agrees that this is a problem faced by the state across sectors and is a consequence of sluggish bureaucracy. “Permits and clearances are taking much longer than in the past and they should be expedited to facilitate bona fide investors,” he says.

 Lack of affordable land with the required infrastructure also has companies looking for better options. “In early-2000, most IT companies moved out of Maharashtra to other states as staying in and around Mumbai became increasingly expensive,” says Kanodia. He adds that Pune’s Hinjewadi IT Park did result in some software companies shifting to Pune but now, even Pune has become too expensive. “And there are not many alternatives in Maharashtra now,” he says. His enterprise, too, is shifting some operations to Puducherry and Ahmedabad. 

Grassroot evolution

Meanwhile, in Ghodegaon village, 50 km from Aurangabad, the bright, pink school building recently added a computer laboratory with four computers. Two hundred students come here to study from Classes 1 to 7. A junior college (for class 7-12) is also nearby. “More girls from our village are now studying till class 12,” says Heerabai Jadhav, who lives in Chitegaon village. “Many boys now go to Aurangabad to study further.” 

Maharashtra’s village level economy grew at a rate of 12.5% in 2010-11 as compared to 3.4% in 2009-10. In Maharashtra, agriculture still accounts for 55% of total employment. And what controls the fate of the local farmer is the access to water. If you have water, you can easily earn ₹1-1.5 lakh per annum from an acre. “Without it, you may just earn ₹25,000 or lesser,” says Kishor Vaishnav, another resident of  Ghodegaon village. Shockingly, only 10% of Maharashtra has irrigation facilities. The government has sanctioned ₹2 lakh for digging wells now but there is still a lot that remains to be done.

With better awareness and connectivity, though, many villagers are taking to other livelihood options along with agriculture. “I own a dairy in Aurangabad with my brother,” says the white kurta-pyjama clad Anna Jadhav, flashing his new mobile. “We sell 1,000 litres of milk every day at ₹32 a kilo. I own four cars and have recently constructed a new house.” 

What has also driven income at the village level is the Maharashtra Rural Employment Guarantee Scheme (MREGS), which ensures a daily wage of ₹127 a day for 100 days a year. Wages are credited to the workers’ account which reduces the scope for corruption but does not do away with it. Government-appointed contractors bring their own labourers. “They sit idle. In the evening, they collect the cheque and they hand the money to the contractor, retaining a small amount,” says Gajanan Sabre, a Ghodegaon farmer.

Wage Rise at Ground Zero

But for all its ills, MREGS has caused wages to rise at the village level itself. It costs about ₹200-250 a day to hire farm labour now, as compared with ₹150 earlier. “No one wants to do the hard work when they can get money for almost free,” says Kishor Vaishnav, a Chitegaon-based farmer. “Those who do, want a higher price.” He adds that his profits have come down significantly as a consequence. It takes two-three men about two days to cut a tonne of wheat, which sells for around ₹1,800 at present.

At current rates, labour cost alone adds up to ₹400-600 a day. “You add the cost of seed, water and fertiliser to this, and we are left with little profits,” says Sabre, adding that the only way out is to charge higher prices. To increase his profits, Sabre has taken to selling his produce to private traders instead of the local mandi that buys at government-approved prices. “We have to then pay the middleman, wait in line and there is a long process,” he says. Maharashtra amended the Agricultural Produce Marketing Committee (APMC) Act in 2005 to allow local farmers to sell produce in the open market and not just in government controlled markets.  

With Maharashtra’s MREGS and similar schemes in other states under the National Rural Employment Guarantee Scheme, it has become difficult for labour intensive businesses to execute projects in cities such as Mumbai. What also adds to the price pressure in Maharashtra is the Minimum Wages Act, which stipulates that every area in a municipality will pay the same minimum wage. This means that minimum wage in Nashik is the same as the minimum wage in Mumbai.

“We have to pay even trainees a minimum of ₹8,000 plus in Maharashtra though we are just training them,” says Kanodia. “In places like Puducherry, we can do so at just ₹3,000-4,000.” Labour prices have risen across the state to keep up with inflation as well. “I used to earn ₹4,000 in 2007 and I earn ₹13,000 now,” says Bhopal Gade, a factory worker in Aurangabad, where most companies saw a 15-20% increase in wages for skilled and semi-skilled workers in 2011 alone.  

Living beyond means

What adds to Maharashtra’s problems is its status as the country’s second-most indebted state with a debt burden of a whopping ₹2,09,648 crore, or about 24% of the state’s GDP — this figure could hit ₹2,31,926 crore in 2011-12. The interest payout will then touch ₹18,000 crore or just a little under half of the state’s plan expenditure of ₹41,500 crore for 2011-12. The state’s debt has increased by an alarming near 70% over the last five year (see: Indebted state).

At this rate, the state will be unable to fund future projects like the ones it has planned for Mumbai. State chief secretary Ratnakar Gaikwad says that the government will invest up to $60 billion over the next two decades in Mumbai alone. He expects the first phase to be completed by 2016 at a cost of ₹1,10,000 crore. He will be hard-pressed to find this money. Even now, Maharashtra’s infrastructure earns only a ‘mediocre’ rating from industry. “You land in Mumbai at a congested airport and then take hours to get to your office or home,” says Rajiv Popley, promoter of Popley Group in India. 

Sriram Narayanan, MD of Endress+Hauser India, a ₹100 crore process automation company in Aurangabad, says his equipment is often damaged because of the poor state of roads near the city. “We have to use extra packaging material to ensure that the equipment reaches the client without any damage,” he says. Sanjeev Auto’s Tambolkar adds that it takes more than 24 hours for his products to reach the Jawaharlal Nehru Port Trust whereas a similar journey in China would take just four hours. The need gap is clear. Also, the increasing debt burden will eventually translate into even higher taxes hurting both individuals and businesses. 

Industry peers such as BCCI’s Banerjee, still believe that Maharashtra has among the country’s best social, physical and industrial infrastructure. “The state has a large base of skilled human capital, making it an ideal destination for the knowledge-based and manufacturing sectors,” he says. But if Maharashtra does not get its house in order quickly, it stands to lose the competitive advantage painstakingly built over the years.