Growing pains | Outlook Business
Home  /  Specials  /  State Of The Economy 2012  / Growing pains | MAR 31 , 2012

Photographs by RA Chandroo

State Of The Economy 2012

Growing pains
The shortage of power and labour is pinching large enterprises and killing small players in Tamil Nadu

Kripa Mahalingam

Labour pangs: Freebies doled out by the government is impacting the labour market in Tamil Nadu in a perverse way

Hosur is a five-hour drive from Chennai with fantastic roads for most part of the distance. As you enter the town, you spy a south Indian restaurant comfortably nestled between a McDonald’s and a Café Coffee Day, a definite sign of the times to come. Looking at it now, it’s difficult to believe that back in the 1970s, the central government had  declared the town a backward area. Among the large business houses that accepted sops to set up shop here were Ashok Leyland, TVS Motors, Titan and Carborundum Universal.

Small and medium businesses sprang up close by to support them. “In the late 1970s, we came to Hosur with a lot of dreams and hopes with the money given to us by our parents,” recalls LKM Adhi, managing director of Elkayem Auto Ancillaries, which employs 500 people and reports a turnover of ₹50 crore. Adhi credits Hosur’s growth to co-operation from the government. However, today things are different. “We don’t know who will help us with our problems,” he says. “The government is too busy wooing multinational companies and has no time to spare for us.” 

The source of his unhappiness? Labour and power shortages in Hosur are forcing him to give up business that is coming his way. “The labour shortage happened because of several years of non-governance,” he says. “People have been given so many things free of cost. Add to that NREGA [National Rural Employment Guarantee Act] and people are no longer willing to work. We have lost out on almost 30-35% of revenues this year.” Elkayem’s power and labour costs have doubled to 3-4% and 15% of revenues, respectively, in the past one year. “Where do we make our profits?” asks an irate Adhi. 

Industrial units in Hosur face a daily power cut of nearly 8-10 hours, leading to huge business losses. “Lack of power supply has not merely impacted our business — it has ruined our business,” says PV Venkateswaran, director, Medibest Pharma, a small scale generic pharma manufacturer with revenues of around ₹5 crore. “We can’t plan our production schedule because the power cuts are not scheduled.” Venkateswaran says night shifts are costing him more in wages. Overall, labour and power costs have increased by 30-35%.  The rise in labour and power costs will also halve margins to 3-4%. Venkateswaran concludes, “They are penalising us to keep the larger companies in Chennai happy.” 

Tamil Nadu has been one of the fastest growing states in the country, attracting the third-highest foreign investment among Indian states, but this development has been lopsided. Multinationals have leap-frogged over small businesses, which earlier dominated the state’s industrial belt but are now withering away. And it’s not just smaller companies, a few industries have also borne the brunt of ill-advised government decisions. 

LKM Adhi, Elkayem Auto AncillariesConsider textiles. Once the pride of the state, “Textile mills lost almost ₹11,000 crore between April and September 2011 on account of inventory losses,” says Dr K Selvaraj, secretary general, South Indian Mills Association. The government banned the export of cotton yarn from early December 2010 to end March 2011 in a bid to help meet domestic demand, which led to a glut in the domestic market, driving down realisations for yarn at a time when global demand was on the rise. By the time exports were allowed in April 2011, the demand landscape had completely changed. Things had worsened in Europe and demand evaporated. Both cotton and yarn prices crashed. And there is no saying what the impact of the next policy decision will be. “It is like driving a car without a steering wheel,” says R Elango, MD of the Coimbatore-based Sangeeth Mills.

The same tale of woe echoes in neighbouring Tirupur. Last year, some 250 units stopped production here. Tirupur accounts for 80% of the knitwear exported from India. The city employs over 500,000 people and generates ₹12,500 crore in revenues from garment exports to fashion labels like Tommy Hilfiger and Levi’s. “I have been in business since 1973. The current slowdown is the worst I have ever seen,” declares A Sakthivel, president of the Tirupur Exporters Association. Unfortunately, even the government may not be able to help, here. 

Advantage MNC

Multinationals, on the other hand, have had ample reason to celebrate Tamil Nadu’s policies. When Hyundai decided to set up its first integrated plant in India in 1996, the Korean auto major zeroed in on the southern state for three reasons. “First, the auto components industry in Tamil Nadu was producing quality inputs; second, skilled labour was available; third, there was a port nearby,” says R Sethuraman, senior vice president, finance, Hyundai Motor India. 

R Sethuraman, Hyundai Motor IndiaIn 1996, Hyundai invested around $600 million to build an integrated manufacturing plant over 550 acres at Sriperumbudur with an annual capacity of 1 lakh cars. It was the second big-ticket investment in the state after Ford Motors, which came to Tamil Nadu in 1995 and went on to invest more than $1 billion in a car plant with a 2 lakh production capacity at Maraimalai Nagar in the outskirts of Chennai. 

Till date, Hyundai has invested more than $2 billion, increasing its capacity over sixfold to 630,000 cars. Nearly 2,200 cars are manufactured at both its integrated plants every day. It certainly isn’t the only one to do so. Six of the top 10 global car manufacturers, the others being Ford, BMW, Renault, Nissan and Mitsubishi have set up shop in Tamil Nadu, making the state one of the leading global automobile manufacturing hubs. 

Tamil Nadu has traditionally been a thriving hub for the electronics, textiles, leather, IT and ITES sectors. Not all are thriving now. IT exports from the state were around ₹40,000 crore in 2010-11, with companies like Cognizant, Verizon Data Services, TCS, Infosys, Wipro and IBM having a strong presence here. Even then, the manufacturing sector has been the largest contributor to the state’s GDP — it has helped the economy grow by an average 16% over the past five years.

Coming soon

The state has many projects out of which the most important is the Metro

But the rapid industrialisation in the state has led to an acute shortage of skilled labour. Apart from the majors, global electronic equipment manufacturers like Nokia, Samsung, Dell and Flextronics have established their manufacturing plants in the outskirts of Chennai, absorbing a large chunk of the labour force in the city. “We aren’t a low cost labour state anymore,” says Gayathri Sriram, managing director, Ucal Products, a Chennai-based auto component manufacturer with 250 employees and revenues of around ₹50 crore. “Labour costs have been practically doubling every two years. Newer entrants are offering more incentives far beyond traditional players. So, for the same skill, a lot more money is being exchanged.” That may be good for people, but small and medium sized enterprises are suffering on account of this. 

Skewed and strangled 

While Tamil Nadu is seen as one of the better developed states in the country, this development has been skewed in and around the capital — the rest of the state is lagging behind by quite a distance. “While Chennai has good international connectivity, the problem is that the rest of the state still does not have enough access to the global network,” says R Dinesh, managing director, TVS Logistics, and chairman, CII-Tamil Nadu State Council. “So, the rest of the state has been unable to keep pace and attract talent and investments.”

 R Dinesh, TVS Logistics The gaps are especially pronounced in two areas — power and port infrastructure. While the demand for power in the state is around 11,500 to 12,500 MW, availability is around 8,500 MW, resulting in a shortfall of 3,000 to 4,000 MW. The state government recently announced a 40% power cut for all industrial and commercial users. “You don’t want to cripple an industry, which is what will happen if the power crisis is not resolved,” says Ucal’s Sriram. She adds, “Companies in tier 2 and tier 3 towns will shut down if the situation continues.” 

L Ganesh, Rane GroupPorts are feeling the pressure, too, and capacity expansion is lagging behind. Tamil Nadu has three major ports and 15 minor ports. Though port infrastructure is being upgraded with investments of nearly ₹14,000 crore, congestion in the interim is posing a problem for companies. “Containers are getting stuck both inwards and outwards,” says L Ganesh, chairman of the Chennai-based Rane Group, an automotive component manufacturer with a turnover of ₹2,242 crore. “Evacuation is a problem. The highway proposed to connect the Chennai port to the ring road has not happened. They have been talking about it for 10 years.” Delays caused by the congestion lead to even higher costs. Ganesh adds, “If we miss a shipment, it takes 10-12 days for the next shipment to leave the port and that kind of delay is not acceptable in the auto industry.”  

It’s a free world

In Tamil Nadu, politics and freebies have gone hand in hand for some time. Ever since the previous DMK government came to power in 2006 on the back of the promised freebies, it has been seen as a winning strategy in state politics.  Under the previous regime, people with ration cards would get rice at ₹1 per kg, food items like pulses and cooking oil at subsidised rates, and gas stoves with LPG connections. 

Not to be outdone, the current government, too, came to power with a longer list of promises, which included goats and cows for people in rural areas, free homes across the state in four years, free laptops to college students and free mixies, grinders and fans to households. If that were not enough, there is money being handed out under the NREGA, irrespective of productivity levels. The much talked about development is yet to reach the interior regions of the state. For instance, Namaleri village, about 42 km from Hosur, is home to nearly 5,000 people but has no drainage facilities; it has one primary school, one doctor and one Force Motors SUV Trax Cruiser that doubles up as an ambulance for the entire village. Power and water is in short supply and the first bus service got here in 2010. 

Who contributes how much

Manufacturing contributes the most to the state's GDP

“We don’t want subsidies or freebies from the government,” says K Perumal, head of the Namaleri Panchayat. “If we get a constant supply of water and power, it would be enough.” 

“Under the government scheme, people get ₹100 per day for 100 days and once the 100 days are over, they can enrol again,” says Srinivasa Reddy, a 48-year old farmer in the village of Bagalur, 12.6 km from Hosur. “So, no one wants to work in the fields any more. Agriculture is dying a slow death here,”  he adds.   

It’s all relative

The current government’s determination to dole out freebies to its voters has left a gaping hole in its finances with the overall government debt expected to be around ₹118,610 crore at the end of 2011-12. So, despite good intentions to improve infrastructure, financing will remain a problem for the state. 

Despite the challenges, companies that do business in Tamil Nadu rate it better than its other southern counterparts. “We have four plants in Andhra Pradesh, which are going through a horrendous period,” says Rane’s Ganesh. “ The power situation is worse and through the whole of the last year, we lost out on production due to the Telengana issue. I would still rate Tamil Nadu as one of the better states in the country.”

Here's your chance to read the latest issue of Outlook Business for free! Download the Outlook ​Magazines app now. Available on Play Store and App Store
On Stands Now