State Of The Economy 2015

Shrouded in mist

As their tax holiday draws to a close, many pharmaceutical units are unsure about their future in the hilly Baddi

Photographs by Soumik Kar

Harish Goyal is clearly anxious about his future. The owner of Samson Laboratories, now in his early 40s, had set up his pharmaceutical unit in Baddi, Himachal Pradesh, in 2005, and manufactures for many big names in the pharma world. “Do ministries in Delhi read your stories?” he asks with hope in his eyes. Soon, he opens up a letter on his computer, addressed to the Union finance minister and marked to the finance secretary. The letter requests the ministry to impose excise duty on transfer price and not on maximum retail price (MRP) — as is done in the case of pharma. Goyal explains, “MNCs and large companies can still bear the excise burden, as they sell medicines at MRP, but ours are seldom sold at MRP.” 

Small and medium enterprises (SMEs) like Goyal thrived in the tax holiday announced for Himachal Pradesh in 2003 by the Atal Bihari Vajpayee government. Under this scheme, SMEs were exempt from paying excise duty for 10 years from the date of commencement of business and income tax for five years. But he is now worried. “When my tax holiday concludes in April, my clients will start buying from my neighbour who still has the exemption,” he laments. 

SL Singla, director of MDC Pharmaceuticals and the representative for pharma units in the region, is anxious about the impending crisis. There are 450 registered pharma units in the Baddi-Barootiwala-Nalagarh area. “For 80% of the units, the incentive will no longer be available starting April 2015, and for the remaining 20%, it will cease in the next four to five years. The industry is facing a critical situation, without around 200 companies going through troubled times. Many have already given notice to workers,” says Singla. 

Labour is hassle-free but companies aren't confident enough about increasing headcount

Digging a bit deeper, one realises that a fair amount of damage has been caused by inconsistent policy. The tax incentive was first introduced for 10 years in 2003, which meant that anybody setting up their unit between 2003 and 2013 could avail excise and income tax exemptions for the next 10 years. However, soon the cut-off date was changed to 2007 (instead of 2013) and then again pushed forward to 2010. “Himachal Pradesh has been projected as the pharma hub of India, but it has not progressed much after 2006. Many entrepreneurs could not plan their manufacturing due to these changing cut-off dates,” says Singla. 

Most SME pharma units are third-party manufacturers and don’t have recognised brand names to shield them in case the buyer decides to pull out. “Eighty per cent of our manufacturing is for others and 20% is for our own brand,” reveals Goyal. 

Another issue plaguing the Baddi pharma industry is that of capacity utilisation. Some companies estimate that 50% of their capacity is already unutilised, but the worry is that as the bigger buyers move to the few who still provide low costs (on the back of excise exemptions), they will be overburdened. As for the others, Singla worries, “Inequality is going to persist. How will they pay taxes? Investments made by bankers will be at stake, and labour will be unemployed.” 

SL Singla, MDC Pharmaceuticals Harish Goyal, Samson LaboratoriesGoing downhill

While Baddi is primarily known for pharma manufacturing, which came up after the 2003 package, it’s not all about that. Baddi also has engineering, packaging, electricals, food processing and textile units and a total investment of ₹10,680 crore has been made in Solan district between July 2003 and December 2014. 

Deepak Bhandari of Bhandari Deepak Industries came to Baddi in 1994. “I had been working on setting up overhead transmission lines in Himachal Pradesh from 1973, and so I settled here,” he says about his reasons for setting up a business in the state even before the tax holiday was implemented. He manufactures semi kraft paper and corrugated boxes. The factory was a sick unit bought in an auction from Himachal Pradesh State Industrial Development Corporation (HPSIDC). Its capacity has been enhanced from 8 tonnes per day to its current level of 40 tonnes per day. His factory has massive rollers processing khaki-coloured paper under a huge shed, but it wears a worn-out look — the fact that it has changed hands is visible everywhere. Bhandari’s paper and boxes have more buyers outside the cluster, so he often needs transportation, and that’s a massive strain for him.

He picks up the telephone receiver to confirm the exact freight amount paid by them to a trucker on the previous day. “We sent a roll from Baddi to Amritsar for ₹11,000. The same truck has brought back products from Amritsar for ₹6,000 only,” he says. He laments that at times, they have to pay almost double freight when dispatching goods from Baddi. “Truckers, canters, taxis — everybody has formed a union here. Of the 10 unions here, the Nalagarh truck union, with 9,000 trucks, is perhaps the largest in Asia,” says Bhandari.

In addition, the Baddi-Barootiwala-Nalagarh area still craves for proper connectivity with Chandigarh, even though it is a land-locked region with no consumption and no raw material. One needs to pass through the chaotic town of Pinjore to get to a proper highway. Rajender Guleria, president, Baddi- Barootiwala-Nalagarh Industries Association (BBNIA) has already taken up the four-laning of Pinjore road with the ministry of surface transportation, and he sounds only hopeful — though ever so slightly — about a rail link as well. “These days, the rail ministry also looks at commercial viability before laying a link, and they want states to bear at least half the cost. An MoU has been signed with the railways, but let’s see what happens,” says Guleria.  

Some big businesses seem to have cut their production in the area as the exemptions come to a close. “HUL is only producing from here for the northern markets now,” says an industrialist. Bhandari, who has spent three decades here, says, “MNCs don’t have a heart. They just come to encash tax exemptions and then they leave.” However, Guleria doesn’t believe that there are too many deserters.

“Dabur and Vardhman Industries came here even before the 2003 package was offered. And even those who came afterwards created infrastructure to serve them for a long time. They cannot shift so easily,” he asserts. Guleria says that Vardhman and Pidilite are investing to further expand their operations here. However, he does concede that Asian Paints has officially closed its factory here. 

Deeak Bhandari, Bhandari Deepak IndustriesRajender Guleria, BBNAAdequate power supply and cordial labour relations are two advantages offered in this area. Guleria tries to present his case: “The average wage here is ₹5,250, which is half of what is paid in Gurgaon.” However, there is a catch. Seventy per cent of the jobs are reserved for Himachalis. Ameet Gupta, director of Havells, which has a plant in Baddi (set up in 2007), says, “Labour supply is not at all organised in Baddi. We had a factory in Delhi which was too small, and there was land available in Baddi at that time. If I were to start over, I wouldn’t go to Baddi, as we have long-term plans.” 

All entrepreneurs claim that they comply with the 70% Himachali labour clause. “Where we can’t, it’s not hard to obtain an NOC from the administration,” says Bhandari. Guleria believes that Himachalis like their job security, and the culture will only change slowly. “Himachal’s population is 62 lakh, and 3 lakh of these are government employees. We say that every family has someone working with the government,” he says. 

 Drawn to power

Despite its shortcomings, Bhandari is optimistic that more companies will come in because of the positive power supply situation as well as the accessible administration in Himachal Pradesh. “Working here is hassle-free. You can even meet the CM if you wait outside his office,” he says, adding that bribes and harassment are not rampant here. 

Thankfully, there is a Baddi beyond tax holidays. Vardhman is the poster boy of pre-package industrialisation in the area. It has nine units — four spinning, two processing, two weaving and one garmenting — spread over 330 acres. Of the total ₹6,000-crore revenue of the company, ₹2,000 crore is generated here. Moreover, the company is investing an additional ₹560 crore here and it hopes to create 1,200 more jobs. But why did Vardhman choose Baddi? “We came here in 1989 because we wanted to disburse from a then-politically volatile Punjab. Baddi was a very small town. Whatever industry did exist was sick at that time. But later, we realised that land was cheaper here,” recalls SP Oswal, chairman and MD, Vardhman Industries.

When asked why Vardhman is expanding within the cluster while some other big players are moving out, he says, “We have to look at synergies — the availability of critical resources such as land, water, power, etc. Taking all these into consideration, it is a good location. We can have common sharing overheads.” He agrees that moving to Madhya Pradesh would fetch them subsidies of up to 7%, but they decided to pick internal synergies instead. 

The veteran textile man says that in FY14, their performance was much better, but that was because of favourable market conditions like the availability of cheap cotton. “This overall year — not bad I would say.” Oswal believes in the intent of the new government and says they must implement goods and service tax and commit to labour reforms to enable big companies like Vardhman to compete with others, like those in China. He finishes on a positive note: “The wind is changing. Now it is tailwind, not headwind.” 

Back in the world of pharmaceuticals, while Goyal is anxious, there is Singla, who has found a way out of package expiry via some costly planning. Singla had started off with his first pharma unit in 2002, then added a second unit in 2005 to make the most of the package’s benefits. But with the 2010 cut-off date approaching, the window was fast closing. “In 2010, the government gave permission to buy a unit, change its name and avail excise exemptions.” So Singla bought another small unit in 2010. “It was a crisis decision. I paid ₹4 crore for the unit, which would otherwise be built for ₹1 crore,” he says.

Also, he ensured that he doesn’t remain a mere contract manufacturer. “Our medicine reads manufactured by MDC (his brand) and marketed by the buying company,” he adds. Singla is expecting ₹50-crore sales in FY15, which is higher than what he had last year. But he remains bearish about the overall industry and future of Baddi. “The tax package was mostly for the big players and MNCs. They were paying huge excise duties and were able to recover that in a year or two,” he says. 

Only time will tell how the SMEs in Baddi will cope with the fading tax holiday in the coming year. But the fact remains that the introduction of the industry in the foothills provided an economic backbone to the showpiece Tri-city of Chandigarh, Panchkula and Mohali. “There are five daily flights between Chandigarh and Mumbai today and real estate in the Tri-city has shot up in the last 10 years — all because of Baddi,” Guleria says with a proud smile. 


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