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Photographs by Nilotpal Baruah

State Of The Economy 2012

State of inaction
Telangana troubles and a power crisis have taken the sheen off what was once known as India’s new IT capital

Krishna Gopalan

Visiting Hyderabad in the past year has been almost like taking a trip to a ghost town. Frequent bandhs meant educational institutions were closed, malls and shops downed shutters and most vehicles stayed off the roads. It’s been three years since the Union government agreed to carve out Telangana State out of Andhra Pradesh, and with no conclusive steps taken since then, the agitation has only escalated, often turning violent. Meanwhile, the impact on business has been palpable. Fewer new projects are making their way to the state, planned projects are being scrapped, postponed or moved out of the state and youngsters — who will comprise the workforce that will drive future economic growth — -are moving out. 

Srinivas Kesineni is the chairman and managing director of the Kesineni Group, which operates a pan-India transport and cargo services business. A two-day bandh a few months ago forced him to cancel nearly 100 buses and over 40 cargo vehicles, leading to a loss of around ₹30 lakh a day. “There is no point in doing business here if this atmosphere continues,” he said to Outlook Business at the time. Indeed, Kesineni, who started his business in 1992, began looking at newer markets only after the Telangana troubles picked up steam in 2010. In the past couple of years, the group has invested over ₹60 crore in expansion, but not in Hyderabad or in the Telangana region at all. “Hyderabad is an important market and we want a presence here,” says Kesineni. “But it depends on a conducive business environment.”

As things stand, that quality seems to be missing in Andhra Pradesh. And it’s not just about T-troubles, which right now, at least, seems to have settled down to a simmer. A crippling power shortage, strangulating bureaucratic red tape and what is seen as an increasingly indifferent administration are taking a severe toll on a state that at one time seemed set to become a role model for modern, industrial India. And it doesn’t seem likely that the situation will improve any time soon. 

Death of a dream

The transformation of a predominantly agricultural state known more for its history of opulent Nizams and annual cyclone threats, into a global investment destination made for B-school case studies. There was Cyberabad, which would give Bengaluru a run for its money, a carefully nurtured pharma hub and some of the country’s best educational institutions. At Hyderabad, Hitec City soared over the city’s skyline and the who’s-who of IT,  including Microsoft, Google, Facebook, TCS and Infosys, made a beeline for India’s new IT capital. 

Beside the efforts to develop the state, Andhra also had huge locational and natural advantages. Over 40% of India’s total limestone reserves are housed in the state, translating into a manufacturing capacity of 40 million tonnes of cement every year. AP also has the largest granite reserves and is the biggest producer of building materials like marble. “Large deposits of bauxite and uranium are also available here,” points out R Karikal Valaven, commissioner of industries, commerce and export promotion, government of Andhra Pradesh. It also has the country’s second-largest coastline, making it the India’s largest exporter of marine products, accounting for 40% of total national exports. 

R Karikal Valaven, Commissioner of industries, commerce and export promotionNatural resources aside, the state also has the capacity to make 550,000 tonnes of paper every year. “Another 500,000 tonnes will be added in the next two years, with an investment of ₹5,000 crore,” Valaven adds. 

There’s a flip side to this. Andhra Pradesh has failed to take advantage of its long coastline: there’s only one major port, Visakhapatnam, and its modernisation has been a painfully slow process. In 1933, the port had a draft of 8 metres; in the nearly eight decades since then, the draft has been deepened just 3 more metres, which limits the type of vessels that can berth at the port. Ajeya Kallam, chairman, Visakhapatnam Port Trust, says that ₹2,600 crore has been earmarked for modernising the port. “That should have a positive impact over time.” Lack of a stockyard in Visakhapatnam is an issue. “There is limited back-up space and large cargo quantities have to be moved out of the port,” says Malaratua Bhupesh, MD, Navship Marine Services.

Turtle pace

Only four PPP projects have reached construction stage

Meanwhile, industrialists don’t seem convinced that Andhra means business anymore. Over the past few years, businesses are consciously staying away from the state, moving their operations to other parts of the state or to places like Gurgaon and Bengaluru. A few years after Volkswagen moved over to Chakan in Maharashtra, Peugeot Citroen decided to invest ₹4,000 crore in Gujarat, even though it was offered land at an unbelievable ₹1 an acre in Andhra. Against its original plan of creating 20,000 jobs in the state, ICICI Bank will now add only 5,000, while Bank of America has scaled back its initial plans of adding 9,000 jobs in the state to just 3,000. Homegrown infra giant Lanco Infratech, too, has moved its headquarters from Hyderbad to Gurgaon.

Not surprisingly, the business community back in Andhra Pradesh is upset about the lost opportunity and the sense of limbo. “The uncertainty [over Telangana] is unsettling. We want a decision one way or the other,” says Satish Reddy, managing director & COO of the ₹7,470-crore Dr Reddy’s Laboratories. 

To be fair, the uncertainty isn’t only over Telengana. Unclear regulations and multiple levels of clearances are also stifling business in the state, crib industrialists. “Regulatory issues for our industry are at the Centre and state level. A lot of processes are still done manually, which is hard to understand,” Reddy says. He says the pharmaceuticals industry feels let down by the state — the biggest grouses are that areas earmarked for industries have been turned over to residential developers and the industry’s demand for a common effluent treatment plant has not yet been met. “This is a far cry from the past when the pharma industry held a place of pride. Today, we need to ask the government for help,” he exclaims.

Satish Reddy, Dr Reddy’s LaboratoriesIndeed, government apathy and slowdown in decision-making is a common thread among the states’s businessmen. “The lack of planning and coordination between departments is problem. Often, work that is completed is undone because another department raises an issue. We cannot afford such problems,” declares S Vijaya Kumar, CMD, Vijay Nirman, a ₹1,000-crore engineering and construction group based in Visakhapatnam.

It’s worse in the power sector. A Issac George, director of finance and CFO of GVK Power & Infrastructure, is brutally honest. “One can not wish away the fact that power is a state subject. In the case of Andhra Pradesh, the regulator has neither demonstrated a sense of accountability nor are decisions being taken in time,” he points out. The state’s power deficit is worsening, he points out, but no concrete decisions have yet been taken on coal and gas allocations; meanwhile, power companies’ costs are increasing rapidly (See story: Dark days ahead ).

A Issac George, GVK Power & InfrastructureTill date, GVK has invested ₹3,500 crore in the power sector in Andhra Pradesh but it’s also pulled back close to ₹7,000 crore across two projects of 800 MW each. “There is no gas available right now,” Issac explains. “The way things are moving here, we might just have to look at Tamil Nadu, which we think is more investor-friendly.”

There are exceptions to that view, but they are few and far between. Rashtriya Ispat Nigam (Visakhapatnam Steel Plant) is in the middle of expanding capacity from 3.6 million tonnes to 6.3 million tonnes. According to company CMD, AP Choudhary, over the next four to five years, capacity will be increased to 11.5 million tonnes with an investment of around ₹25,000 crore. “Visakhapatnam remains a favourable industrial destination since we get a skilled workforce and adequate support from the government,” says Choudhary.

Powerless

Amar Rao seems visibly upset. It’s a hot day in Visakhapatnam and there is no electricity. But it’s not the physical discomfort that’s troubling Rao, nor is it the delayed payments from clients in the public sector — although both are reason enough. His mechanical construction company, Indo Engineering Works, had to stop work three days of the week due to lack of power — this is in addition to the scheduled four hours of power cuts every day. Rao’s finally given in and installed a back-up, but that has doubled costs for the ₹5-crore enterprise. “We were in a bizarre situation where we had more orders but were finding them difficult to execute because we couldn’t run our machines,” he says, shaking his head. 

Big spenders

Most of the new mega projects over the past five years have been in power and cement

It’s not just Visakhapatnam. From early March, the daily one-hour power cut has been increased to two. Villages that already had load shedding for eight hours a day will now have to go without for another four hours. In 2010, the government had given an assurance that industries in the state would get uninterrupted power supply. That’s clearly not happening and small and medium industries are threatening lock-outs, stating they will go out of business if they have to stop work three days a week for lack of electricity. 

Cropping problems

It isn’t only industry that’s bearing the brunt of the power crisis. A long dry spell in the state has meant that agriculture’s demand for electricity — for running pumpsets to water the fields — has, not surprisingly, soared. But it is not being met, and crops are already withering. That is not good news for either the state or the nation. About one in five people in Andhra Pradesh is a farmer and the state accounts for 14% of total agricultural output in India. Falling productivity, then, is a big worry. V Nagi Reddy, principal secretary in the state agricultural department, concedes that there is a long to-do list. “What we need to do is address issues like the old rice mills, which are in urgent need of modernisation,” he says. “The way forward lies in the establishment of rice export processing zones and increased thrust on crops like oil palm.”

V Nagi Reddy, Agricultural departmentIn many cases, farmers have given up on the land, moving to other areas like fisheries. But in many villages, bad harvests have reduced landowners to tenants or even daily labourers. In Turkapally village in Ranga Reddy district, about 45 km off Hyderabad, 65-year-old Laxmiah sits under a tamarind tree with his 18-year-old nephew, Swamy. Until two years ago, they grew rice on their one-acre plot in the village. But, “One bad monsoon finished us and now we work as daily labourers,” says Laxmiah.

Now, for the four months of the tamarind season, the uncle and nephew gather the fruit for the local landlord, who pays them ₹300 a day for a tree. “Most people in the village have got only one tree. We were very lucky and got three,” says Swamy. Interestingly, even as reports from other states suggest that increasingly, unemployed villagers are turning to the National Rural Employment Guarantee Act, it’s still not an option in Turkapally. “We’ve heard of such a programme,” says Swamy. “But it has not reached our district yet.”

At the same village, 44-year-old Sujata, too, lost her one-acre farm after crops failed two years in a row. Now, she’s joined hands with a friend and taken a two-and-a-half acre field on lease, where she grows wheat. “Half the produce goes to the landlord and we get the rest. We make a reasonable amount of money,” she says. But she’s far from satisfied. “Farmers from our village have tired of speaking with officials for more street lights and pucca roads. We don’t have a school, either. They make promises but nothing comes of it. I wish someone would actually pay attention to our problems.”

That’s more or less what everyone in Andhra seems to want. As we head back to Hyderabad, our driver Feroz points out that political uncertainty in the state hasn’t spared anyone. He has to keep his taxi off the roads whenever there is any threat of violence or strikes — which means zero income for that day. “The people I drive to Hitec City also point out how their businesses are down because of all the strikes in the past few years. Now, we just want things to go back to normal.”

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