State Of The Economy 2017

Here For Good

Despite the excise tax exemptions ending in a couple of years, Baddi is still seen as a hospitable cluster

Vishal Koul


As the large room-size printers in Sanjay Bhasin’s factory in Baddi keep churning out medicine labels like clockwork, he explains how different coloured inks are mixed to produce the final text and bar codes. His company Parkash Hitack Industries employs 10-15 workers to make labels for its 50-odd customers. Bhasin vividly remembers the day prime minister Narendra Modi announced the ban on the old Rs.500 and Rs.1,000 notes. “I had paid salaries on 8th of November, and the next morning workers said we can’t accept old notes,” he recalls. He admits that he found it difficult to muster enough cash to pay his workers. But he ensured that he helped them in other possible ways. “I asked the local grocer to give them rice and essentials. I even spoke to their landlords and convinced them that I will pay him later,” he says relievedly. As for his business, demonetisation has resulted in longer debtor days. “Our payments are getting delayed. We used to get them in 50 days, now it takes 90 days,” shares Bhasin. 

Baddi-Barotiwala-Nalagarh is the largest industrial area in Himachal Pradesh, which is spread across the foothills of the Himalayas. While some industrial units started in Baddi between 80s and 90s due to uninterrupted power, discounted land rates, and the tranquil atmosphere, the actual industrial explosion took place in 2003. It was only then that the former prime minister Atal Bihari Vajpayee had granted exemption to SMEs from paying excise duty for ten years from the date of the commencement of their business and an exemption on paying income tax for five years. This led to the formation of three industrial areas in Solan district of Himachal Pradesh. A total investment of Rs.10,680 crore has been made in Solan between July 2003 and December 2014. 

Exit Mode?
The exemption is quickly becoming a thing of the past for industrial clusters like Baddi. Having made the most of the concessions, some pharma and FMCG companies have already established their plants in newer tax-holiday destinations like Sikkim and Assam. Larger pharma companies like Cipla, Wockhardt, Zydus Cadila and Dr. Reddy’s have started their new manufacturing bases either in Sikkim or Assam. However, Shailesh Agarwal, president of the local industry association, Baddi-Barotiwala-Nalagarh Industries Association (BBNIA) is not too perturbed. “The 10-year package will finally end in 2020 (for the last entrant in 2010). For some, it has already ended and for others it will end in two or three years. But these players have invested money here and I expect them to manufacture from here even after the exemption comes to an end,” opines Agarwal. The industrial association has around 2,000 units and most of them are medium to small-scale units. About 50% of those units are pharma and its ancillary units, employing over 300,000 people.

Agarwal feels that big firms in pharma and FMCG are always on the lookout for newer locations, where they get incentives and thus, their manufacturing facilities are spread across the country. He believes that Sikkim or Assam may be one of the last few options for manufacturers. However, according to him, Baddi offers the most conducive atmosphere for businesses, making it thrive longer. As for smaller players, units that came exclusively for incentives will move out, but the number will still be negligible. He estimates that around 15-20 firms have either gone back to Gujarat or Maharashtra. The rest have changed their nomenclature from catering to the domestic market to exports, or at best scaled down operations till they figure out other options to scale up their revenues. 

Rajesh Bansal, chairman, BRD Medilabs agrees with Agarwal. He came to Baddi and set up the pharma company along with his father, BD Bansal in 1993 — a decade before the exemption. 70% of tablets and capsules that are made in this plant are for other companies under contract manufacturing. “Some of these big pharma players are now using their Baddi base to fulfill export requirements. The excise duty you pay get reimbursed when you export,” points out Bansal. The contract manufacturers had to do their bit to realign to the changing environment. “The compliance for exports are slightly stringent, so we have made those changes in our processes accordingly,” he says. Having been here for more than two decades, Bansal has handled many a crisis during his stint in Baddi. Thanks to the incentive announced, firms rushed to Baddi to set up manufacturing facilities and by 2010, there was a fair bit of capacity that was created in this sector. In 2012-13, the pharma industry was tackling a glut of oversupply causing huge problems for manufacturers like Bansal. But, how did he overcome that challenge? Bansal who employs 300 people, chose to focus on quality, which helped him to win marquee clients such as Cipla and Wockhardt. A steady order flow from these large clients has ensured that the plant has a capacity utilisation of 80%. He isn’t too worried about the future of this artificially created cluster. “No big units have shut down so far. I think their focus on markets or products will change. As far as individuals are concerned, they have invested a fair bit of their own capital. So, they are likely to continue,” he says. Some of the manufacturers have resorted to building their own brands. Typically 80% of the revenue come from contract manufacturing and the remaining comes from their own brands. Now manufacturers are working on increasing the contribution of own brands.  

Sanjay Bhasin, Director, Parkash Hitack IndustriesClose to Bansal’s facility is the factory of Riddhi Packages. Riddhi’s director Dinesh Jain counts companies such as P&G, Wrigleys, ITC, and Dr. Reddy’s as his top clients. His company did business worth Rs.70 crore last year. “There was a 25-30% drop in demand during December,” he says when asked about the impact of demonetisation. However, he is not too hassled by it. “FMCG never stops. It is a temporary dip,” he says. Apart from the packaging business, he leases out his warehouses to the likes of P&G and L’Oréal. The bigger challenge for him arrives when his customers shift shops at times. For instance, P&G shifted its Vicks plant to Gujarat in March 2016, since it entered into a global contract manufacturing agreement with an international player. Jain admits that the loss of business hurt his revenue by 5-10%, but he hopes to make up for it with his newly added clients. 

Rajesh Bansal, Founder, BRD MedilabsNot very far from Jain’s packaging plant is Manoj Agarwal of Innova Captab, who has set his hopes on future reforms. Agarwal is a first-generation entrepreneur who has set up three pharma units in last 10 years, mainly to take advantage of the tax incentives offered. Two of his units still enjoy tax holiday. He believes that the introduction of GST will bring about a level-playing field for all companies in this space. “MRP-based excise duty has an adverse impact on our business since our products are rarely sold on MRP,” he says. The company does contract manufacturing for Lupin, Wockhardt, Abbott Laboratories and RPG Life Sciences. 

Companies are also waiting for GST to come through, before they commit more money to capital expenditure. Riddhi Packages wants to invest about Rs.10-15 crore on expanding a facility next year but is waiting for clarity on the GST bill and see if they are offered any incentive under the new bill.  

Manoj Agarwal, Director, Innova CaptabTransportation trouble
After demonetisation and fading incentives, the next irritant for most in Baddi is costly transportation. Shailesh Agarwal, who runs an insulated wire and strips business says, “We are not against unions but cartelisation of truckers in this area makes us less competitive. Sending a truck from Baddi to Mumbai costs Rs.60,000 whereas a return journey costs only Rs.40,000.” Baddi still doesn’t find itself on the country’s rail network. The possibility remains a distant dream with both the state and central government blaming each other for the lack of a rail network. In November, the project has been sanctioned money again. “There will be notification, land acquisition, and tendering. It’s a long process. Even if it remains on track, it is a two-three year wait,” says a wistful Agarwal. Till then the road that connects Baddi with the national highway is likely to remain choked with around 10,000 trucks passing through at once.  

Jain points out that the freight rates in Baddi are 30-35% higher than the rest of the country, thanks to the strong truckers’ union. He feels if this is brought down, it would help in increasing Baddi’s attractiveness as an industrial cluster.

Dinesh Jain, Director, Riddhi PackagesHassle-free and conducive 
Thankfully, there is one thing the industries don’t have to worry about: electricity and the lack of interference from the local government. There are hardly any complaints about shortage of power supply. The lack of interference from the local government in businesses, improves the ease to carry out work considerably. Jain, who has packaging units in the nearby states of Haryana and Punjab says, “There is zero political interference here. I have dealt with bureaucracy in all three states. The administration here is way more pro-industry.”

Despite the fact that 70% of the blue-collar jobs are reserved for locals, the clause doesn’t impede the quality or the availability of labour. If they are unable to meet the requirement due to unavailability of labour with the required skill set, all they have to do is obtain a NOC certificate from the government. Given the defensive nature of FMCG and pharma businesses, the impact of demonetisation is expected to be temporary and the businesses expect the demand to bounce back in the coming months.

Shailesh Agarwal, President, BBNIABaddi has become a growing industrial hub, thanks to tax incentives. But given the fact that it offers uninterrupted power, a fairly disciplined labour force and zero political interference, it certainly seems to be one of the better places in India to do business. While tax incentives often act as bait for business to set up facilities in a place, it is the ease of business that determines its viability as an industrial cluster. “While there is no precise statistics to support it, taxes paid by industry from Himachal Pradesh have not come down. It can be an indicator that the cluster is not seeing a flight of companies,” says Bansal of BRD Medilabs. Adapting to changes in policy and regulations made the company fare better and such companies are effectively climbing the ladder of success in Baddi.