State Of The Economy 2014

Shaping up slowly

Its relative inexperience and lack of enough real estate to spread out is costing Mancheswar dear

Vishal Koul

Making fibreglass boats wasn’t part of JK Rath’s original plan. Coming from a family of doctors and engineers, Rath did his ME in industrial chemicals, and was to take up a government job. After all, that’s how most Odias worked their way up a career in the 1970s. But he chose differently. “Many of my friends in college were from business families and I saw their living standards.” In 1979, Rath took the plunge and started making industrial perfumery chemicals used in soaps and oils. Soon he was into the manufacture of drug intermediates for pharma companies when a chance exposure to fibreglass products changed things. 

Today, his two firms, Mechem and Refcast, located in Bhubaneswar’s industrial area of Mancheswar, clock ₹8 crore in annual turnover making boats and a variety of fibreglass products such as overhead water tanks and stadium seats, steel door hinges and anodised aluminium products used in building construction. “If I was in Mumbai, for instance, one line would have been enough. In Odisha you need to get into many opportunities,” he says. Rath’s statement is a telling one — about Odisha’s industrial development approach, and the current state of its small businesses.

If large clusters have defined and helped grow the economy of entire cities in most other Indian states, here entrepreneurs have been largely left to fend for themselves. It’s not as if Odisha doesn’t have clusters, but these have received little government support and haven’t managed to achieve the status or scale they have elsewhere. At Mancheswar in the capital city of Bhubaneswar, the lack of formalised clusters is evident, even as business sentiment remains largely positive. 

Starting small

Mancheswar, along with three other industrial areas in Bhubaneswar — Rasulgarh, Chandaka and Bhagabanpur — came up around 1983 on the outskirts of the state capital. Today, while it’s counted among the prime business locations and is now in the heart of the city, it is also emblematic of the frustration small business owners face in Odisha. Allotted primarily for manufacturing, now less than half of its units remain dedicated to that purpose, observes Rath, who is also the president of the Association of Industrial Entrepreneurs of Bhubaneswar. “In 2004 we did a survey and found that many units that were not related to manufacturing had come up here. There were warehouses, colleges, service workshops for automobiles and showrooms,” he says. “If the government has given land at a certain price, why should it be used for any purpose other than manufacturing?”

Niranjan Mohanty, founder of the ₹2-crore Magnum Apparel, which makes readymade garments in Mancheswar, explains that problems in the area started when the Orissa State Financial Corporation (OSFC) and banks seized plots from defaulters, and auctioned them to anyone who would pay. “People were allowed to open car showrooms and warehouses, and land prices have gone up considerably,” he says. “If I can sell and get ₹3 crore, why should I run the unit? Earlier, sick units would sell out. Now they sell because land prices have gone up.” He also blames the Odisha Industrial Infrastructure Development Corporation’s (Idco) more recent ‘social infrastructure’ clause, which allows warehouses, colleges etc., to come up in the area. “Any sale by the OSFC was approved by Idco, irrespective of the purpose it was bought for.”

Vishal Dev, principal secretary in the state industries department, and chairman and managing director of Idco, agrees. “Mancheswar is a case of gross misutilisation of land. It is used as a godown industrial estate because it is easier to rent out,” he says. “We’re trying to take corrective action.” Among Idco’s key mandates is to acquire land for industrial projects across the state. Mancheswar is among the 106 industrial estates and clusters under Idco’s management. Dev adds that many of its industrial unit owners who were served notices for cancellation of lease due to non-conformity with land use norms, have now taken the legal route against IDCO, compounding the issue.

No room to grow

Meanwhile, there’s an acute shortage of industrial land in the area. “The existing industrial estates of Mancheswar, Rasulgarh, Chandaka and Khurda are full and there is no land available for new industrial units,” confirms Ramesh Mahapatra, president of the Utkal Chamber of Commerce & Industry (UCCI). Like Rath, Mahapatra, too, has interests across several different lines of business, though on a much larger scale: his group has a turnover of ₹320 crore. He owns companies that are into fish net twines, fishing and mooring ropes and HDPE pipes and telecom ducts,  aquaculture and prawn culture, contract farming of prawns, merchant exports and medical transcription services. His is the second-largest fisheries business in the state at ₹285 crore. 

Still, he finds time to raise problems with the government. “VAT rates are higher than in West Bengal and need to be rationalised. Infrastructure is a big problem. The Cuttack-Bhubaneswar road is being widened from four- to six-lane, but this should have been done much earlier,” Mahapatra says, listing the top priorities for the chamber currently.

Labour problems are also a big issue, with agriculture and small industry finding it difficult to get workers. “They have options to earn money without working, thanks to election sops and the MGNREGA,” points out Magnum Apparels’ Mohanty, who is down to 40 workers from a peak of 90-95. “Labour costs are low here but labour productivity is worse. So, we still pay more per shirt — if elsewhere they make 10 shirts an hour, here they make only four,” he adds. With productivity issues, expanding capacity is a challenge for most units and that, says Mohanty, deters buyers.

That shouldn’t be a problem in white-collar jobs, believes Mahapatra, who is optimistic about the IT sector adding to Odisha’s growth story. At nearly ₹2,000 crore, IT exports were double that of fisheries exports last fiscal. “Once international flights come to Bhubaneswar, which should happen in the next three months or so, the IT sector will grow faster,” he says. 

Meanwhile, fisheries is also doing well, say businessmen from the region. “Seafoods is one of the sectors that has grown despite the economic slowdown,” says Rajen Padhi, chairman of UCCI’s expert committee on international trade. Padhi, who has been associated with the seafoods business for nearly three decades, is also a consultant to small businesses in seafood processing and exports. “Odisha government is very proactive now. It’s setting up a seafood park in Bhubaneswar — the first of its kind in the state,” he says. This is the kind of change that was missing so far in the state’s industrial development efforts. “We’ve been traditionally promoting exports of raw materials. There is now a realisation that adding value is important,” says Padhi.

New horizons

Much of the attention so far has been on further development of Odisha’s mineral resources and traditional industries. But that doesn’t mean there aren’t other clusters. Dev lists some of the operational clusters such as the steel cluster in Kalinga Nagar, the plastic, polymer and allied cluster at Balasore, and some upcoming ones such as the plastic and polymer cluster at Paradeep, the aluminium clusters at Angul and Jharsuguda, a mega food park at Rayagada and an electronic and hardware manufacturing cluster at Bhubaneswar. “Overall development happens when you have downstream industries,” he says.

Entrepreneurs lament that Idco could have done more to grow smaller businesses. “Odisha needs to concentrate on the MSME sector. That’s where the growth will come from,” says Mahapatra. “Big ticket investment will want to come because of minerals. But it will become increasingly difficult for large units to come because of the new land acquisition policy and environmental clearances.” 

For its part, the government points to various steps it has taken to help small businesses. The MSME Act came in force in Odisha in 2006, and that has helped fine tune its small business approach to become more friendly and effective, says Panchanan Dash, secretary in the state MSME department. Registration with the department has gone online and the practice of inspection after filing has also stopped. “This is the only state in the country to have done so,” he says. Dash plans to ensure that soon no entrepreneur will have to visit the department offices for approvals or clearances. “We’re developing a system where people use more of ICT to get their work done.” And while he agrees that the state has “not come up to the stage we should have” in clusters, the MSME department is working on improving the competitiveness of some industries, either by developing or creating clusters. These include a cashew cluster in Ganjam district, a rice mill cluster at Bargarh, pharma and engineering clusters at Bhubaneswar and a dry fish cluster at Paradeep. 

On their own

Some businesses in the region aren’t waiting for government action to spur business and drive change. In 2006, Rath and four other businessmen came together and started a common, cluster-like mechanism to leverage economies. They formed an SPV called the Bhubaneswar General Engineering Syndicate to start the JBS Consortium that has 14 manufacturers in Bhubaneswar. Separately, there’s also a service and spares consortium with eight members under this SPV. Starting with three autorickshaws, it now has eight trucks that are run by one of the members, who is the marketing and distribution partner for the entire consortium. This group supplies steel products such as GI wires, steel nets, nails, screws, latches, door clamps and other materials used in building and construction from members. 

The consortium uses common transport for raw material and finished goods. “The trucks that go to Rourkela or Visakhapatnam with our products come back with steel rods, sheets, wires etc., the ones that go to Kalahandi return with raw material from Bhilai,” says Rath. The consortium has hired a common consultant to advise on lean manufacturing practices, which would not have been affordable individually by each member. “My logistics has become very efficient, frequency of sending goods to the dealer has reduced, and that way my economy has improved,” he adds. “There’s been a 10-fold increase in the combined turnover of the consortium, which now is ₹36 crore. Initially, we were using 80 tonne of steel, but it has now gone up to 800 tonne a month.” Rath’s own business of hinges has jumped from 2 tonne a month in 2006 to 25 tonne a month now.

Others have taken a similar route. From exporting 200,000 garments a year, Magnum Apparel switched to the domestic market after the 2008 slowdown. It is now a supplier of fire-retardant jackets and trousers to Tata Steel. The company’s shopfloor has clearly seen better days. Ageing sewing machines from Japan line the empty tables — there are no workers as the day’s shift has ended. Even in the evening, the lack of air-conditioning is evident, which means summers must be sweltering. Clearly, not much has gone into upgrading facilities since the company was first set up. 

Things could be better, Mohanty admits, but says he’s happier now than as an exporter. Margins in the domestic market are better, even though volumes are lower. “Outside, I have to buy material from China and compete with it too.” Besides, he says, he’s still better off than many others in the area, who have simply quit and declared their units sick. 

“The major problem for industries in Odisha is that we have standalone units, not clusters,” says Mohanty. So in 2006 he, along with 21 other entrepreneurs, formed a holding company for small garment manufacturing units called Orissa Knit Complex and has been pursuing it since under the Scheme for Integrated Textile Parks (SITP). “We were almost sure we’d get approvals but the new minister who came in told us to come back with a bigger proposal,” says Mohanty. The group has been struggling since, and land allocation has been an issue: the first one was on forest land while the second one allotted by Idco on the outskirts of Bhubaneswar was being dug up by illegal miners. Finally, a year and half back, the complex was allotted an adjacent plot, though work has yet to start. “We are not depending on the government for anything other than land,” says Mohanty. “It’s a private initiative that can bring high employment with low investment.” 

This can-do attitude is reflected in the overall business sentiment at Mancheswar, where despite their cribs about the lack of cluster-driven growth, businessmen are overwhelmingly positive about their prospects. Sure, they have concerns about power, raw material and labour costs, just like everyone else across the country, but they also want to increase capacity. They are sure that FY15 will be much better than the year that has just gone by and that they will be able to maintain profitability. Hope floats.

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