State Of The Economy 2012

Paradise lost

Years of government inaction has prevented Uttar Pradesh  from realising its vast industrial and economic potential

Photographs by Vishal Koul

A group of four young students sipping tea outside Ram Manohar Lohiya Avadh University, Faizabad, 129 km from Lucknow, crack a joke when asked about their future. “All the money has been splurged on keeping elephants [referring to statues built by Mayawati in Lucknow and Noida’s parks],” one of them says. “There is nothing left for us youngsters.” Jokes about the elephant are quite common in Uttar Pradesh. A few miles away, Om Prakash, a small farmer in Malikpur village rants, “My crops are being run down by elephants. I have no power, no fertilisers.” Move a little west and a businessman in Kanpur, when asked about the major issues affecting industry, sums it all up, “It is BSP or rather, the lack of it — bijli-sadak-pani (power-road-water).” No wonder the elephant has been shooed away by discontented voters. 

However, the Mayawati regime alone is not to be blamed. All UP governments in the past 10-15 years have overlooked industry at a time when leaders of other states were going out of their way to grab investments and reap the benefits of economic reforms. “In 15 years, we have not seen a single big ticket investment in UP,” says DS Verma, executive director, Indian Industries Association (IIA, the apex body for micro, small and medium enterprises). Noida does not count because it is seen as a part of the National Capital Region. 

Unstable policies and partisan favouritism irks others. “One regime favoured the Ambanis [referring to the Dadri power plant] and the other Jaypee,” says a businessman who does not wish to be named. “Then they shot down each other’s favourites as they changed sides in the legislature. That’s definitely not how industrialisation happens.”

Farming does not pay enough

Landlocked UP is endowed with abundant fertile land irrigated by perennial rivers. More importantly, it has enough hands to do any work in any sector. The state is the world’s most populous sub-national entity with nearly 200 million people, only a few million behind the whole of USA. Agriculture flourishes in the state’s western flank and industry flourishes in a few isolated pockets, also mostly in the west. The east remains a laggard. 

Almost 65% of UP’s population depends on the farm sector. The state is India’s largest producer of food grains (20% of national production), potatoes (40%) and sugar (35%). The farm sector grew at 2.5% CAGR from 2004-05 and 2009-10. However, it falters when it comes to value addition, storage capacity, logistics and marketing. Arvind Mohan, economist and professor at Lucknow University, estimates the annual loss due to wastage and lack of storage to be around ₹40,000 crore. 

DS Verma, Indian Industries AssociationMoreover, Uttar Pradesh is a state of small farmers with limited means. Om Prakash from Malikpur who has just 3 bigha of land (1 acre is 6.5 bigha), has to double up as a part-time driver in the city to feed his family of three. Siddheshwar Singh, from Firozpur village near Ayodhya, feels farming and life for people like him is mostly “Ram bharose” (trust in Lord Ram). A doctor comes by to his village centre for only about an hour and he has no medicines to dispense. To have a tumour removed, Singh had to pay ₹13,000 as bribe for services and medicines in a government hospital. This doesn’t come as a surprise in a state where a minister was charged in a multi-crore National Rural Health Mission scam.

The agri parks and processing zones have mostly remained on paper. Empty, walled spaces with boards announcing agri-processing areas can be seen on the road connecting Hapur and Moradabad. Uttar Pradesh may be the largest potato producer but PepsiCo goes to Punjab. Marketing reforms and contract farming are still a no-no in the state. Professor Mohan feels there is scope for huge government intervention in every sphere. “Storage, logistics and processing capacity is negligible against potential and they need to be built from scratch,” he says.   

Policies on paper

In Uttar Pradesh, most promises and policies have not gone beyond the drawing board over the past 10 years. “After 1998, every government said, yes, we have a single window clearance system, but in reality it’s not implemented,” says IIA’s Verma. “Nivesh Mitra — an online facility for entrepreneurs to set up their projects — is not user-friendly and it’s not implemented in all the districts.” Satpal Pugla, managing director of Moradabad-based Globe Metal and Glass Exports, says that exporters like him have to deal with 16-18 departments for clearances.

Industrious development

Investments have tripled in

the past five years, but no

blockbuster deals 

On his shop floor, most work has already been done by artisans from their homes and the brassware is here for the finishing touches. But the dusky gold brass is conspicuous by its absence. Brass was ₹18 a kg 15 years ago; today it is ₹300 a kg, so aluminium has replaced it. Exports of brassware from Moradabad dipped from ₹4,500 crore in 2002-03 to ₹3,200 crore today. These nine years saw the Chinese takeover of world markets, the shutdown of casting units, and the flight of workers from Moradabad. Not surprisingly, Pugla’s company, which used to clock a shiny turnover of ₹54 crore in 2002, is now down to ₹20 crore. 

Some 400 km away in Lucknow, Kiron Chopra, managing director of the ₹20-crore Chopra Retec Rubber Products, is both proud and concerned. Of the Chinese, he says, “They give free power, loan, land and everything else. UP is the complete reverse of that.” But as luck would have it, of all the suppliers on the planet, the makers of Aston Martin — 007’s favoured set of wheels — zeroed in on Chopra as the supplier of a suspension component for a limited range of 77 cars in December. Chopra is now the exclusive supplier to Aston Martin, quite a feat for him and his city. But it hasn’t gained him an audience with the powers that be. Chopra complains, “With our chamber, we made almost 100 attempts to meet the CM in the last five years to present a vision for industry.” They never succeeded.  

Bittersweet sugar

UP’s sugar mills are industrial mammoths. They can be seen dotting the rural landscape down the link roads in western and central UP. Trucks and wagons loaded with sugarcane head to mills for crushing. However, the sugar industry is a dangerous cocktail of over-regulation and politics. The air of a sugar mill is heavy not only with particles of bagasse, but a lot of unease as well. 


Private sector power has

added capacity, but not

enough to meet demand

The KM Sugar Mills in Faizabad is a city in itself. It has 270 houses, a bagasse-based 28 MW co-generation plant (which supplies 20 MW to the state), a factory using 70 million cusec of water and crushing 8,000 tonnes of cane a day. Set up in 1947, the sugar mill’s monstrous but ageing rollers, crushers, cranes and boilers have a certain old-world industrial charm. The cane’s journey from the farmer’s truck towards juice extraction and then separation of sugar from molasses is almost a mile. Lord Vishwakarma’s pictures grace every level. Labourers touch the senior management’s feet — something that can be seen only in Uttar Pradesh. People outside the factory touch the feet of bureaucrats. The problems here might well require divine intervention. 

Cane (input) prices are decided by the state government and often raised as growers are voters, too. The price of sugar (output) is dictated by the central government because it’s an essential commodity. The quantity of output to be sold by a mill is also decided by the Food Corporation of India. 

KM Sugar Mills reports the selling price of its sugar as ₹2,750 a bag a quintal, against a cost of ₹3,085, rendering a loss of ₹3.5 a bag. The last time the mill clocked a (minimal) profit of ₹32 lakh was in 2008-09 — and only because it crushed considerably below its capacity in that year. If 2009-10 saw a loss of ₹24 crore, 2010-11 notched a loss of ₹10 crore on a turnover of ₹313 crore. This is the story of most sugar mills in UP. 

Four out of 10 mills are government-run and they are even worse off. “Cane price is the highest in UP,” says KM Jhunjhunwala, sugar industry veteran and chairman, KM Sugar Mills. “The crushing period is six months shorter than in Maharashtra. Recovery is 9.5 kg sugar per quintal of cane as compared to 11.5 kg sugar per quintal in Maharashtra.” 

KM Jhunjhunwala, KM Sugar MillsVinod, a small farmer from Irawara village near Ayodhya, says the nearby sugar mill hasn’t paid him his dues for the past three or four months. Jhunjhunwala explains, “By law, 80% of credit extended to us is transferred in the cane price account. But, seeing our losses, banks are not extending credit to us anymore. How do we pay others?” Lowering taxes could be one way out, he feels. “Otherwise, most mills will shut down in a span of two to three years.”

Power struggles

KM Sugar Mills generates its own power but others are not as lucky. The government’s promise of 24-hour power under industrial feeders is rarely kept. At Unnao, Kanpur, Perwez Abedin, general manager, Mirza International, makers of the Red Tape brand of leather shoes, shows us his state-of-the-art Italian machinery. “It’s a slicer in which you can set a particular thickness and get the thinnest layer of leather,” he explains. “But what’s the use? Once the power goes we can’t put this expensive machinery to any use.” 

SK Aggarwal, UPPCLUttar Pradesh Power Corp (UPPCL) is estimated to be incurring ₹5,000 crore of losses every year. SK Aggarwal, director, UPPCL, accepts that the power deficit has restricted industrial and economic growth in the state. For the time being at least, uninterrupted power seems like a distant dream in Uttar Pradesh. “Currently, big industries get power for 20 hours a day, urban areas 16 hours a day, and rural areas eight hours a day,” he says. He reasons that, “not even a single mega-watt of capacity was added in the 10 years before 2006. As a matter of fact, we lost 1,000 MW after Uttarakhand was created in 2000.” Post 2006, with the help of private players and public-private partnerships, Uttar Pradesh has managed to add 3,450 MW to the existing 4,500 MW. Even then, there is a yawning gap of 15-20% between demand and supply. 

Miles to go

The state highways have received the government’s attention, but link roads are potholed. Mayawati’s ambitious 168-km long Yamuna Expressway, costing ₹10,000 crore, is nearing completion. While farmers are still fighting for compensation over the land acquisition related to the project, the expressway is expected to bring more tourists to Agra and trigger industrialisation along the way. Mayawati’s other dream project, the Ganga Expressway (a 1,080-km link connecting Noida with Balia at a cost of ₹30,000 crore), remains on paper and will be subject to the mercy of the new government.      

Still, Professor Mohan sounds exceptionally bullish. “UP has doubled generation capacity in five years, connected 100,000 villages with metal roads, grown at over 7% in five years, and capex has risen from 1.3% 10 years ago to 9% today — so we are development ready.” 

Arvind Mohan, Lucknow University“Lucknow boy” Jayant Krishna wonders why other companies haven’t found their way to the state. The head of TCS, Lucknow, points out UP’s advantages.  “With IIT Kanpur, BHU and IIIT Allahabad around, there is good availability of talent,” he says. “Also, there are substantial cost savings here; lease rentals are half that in Noida.” His suggestion: the state needs to run a very strong ‘Brand UP’ campaign.

The answer to UP’s problems may not lie in big-ticket investments that create a hundred ancillaries. There are 600,000 micro, small and medium enterprises with 8.9 million families dependent on them, contributing to 24% of UP’s industrial production and 60% of the exports. “These will be key for our future,” says IIA’s Verma. “80% of the state’s industrial policy of 2004 pertains to large businesses. This needs to be changed.”

Jayant Krishna, TCSOthers also point to the need to look after those lower down the line. Mirza International’s chairman Irshad Mirza says, “We must also take care of our labourers. Ensuring their social security will go a long way in creating sustainable enterprises in the state.” 

There’s a flyover near the BD Mahajan cricket bat factory in Meerut that took 13 years to complete. Another one nearby has been under construction for three years. Lalit, a 30-year-old artisan at the bat factory, remembers the day Virendra Sehwag visited. “He can change the game by scoring 100 runs in an hour,” says Lalit proudly. Truth is, all of UP needs such a game changer.