Does Himachal deserve extension of industrial package?


By: Pinki Ramaul

India has adopted a new development paradigm ever since the new economic policy was initiated in 1991. Instead of inward-looking government-led development, India is now pursuing an outward-oriented market-led development characterized by liberalization, privatisation and globalisation. Instead of remaining what Anne Krueger called a rent-seeking society, India adopted the Structural Adjustment Programme. The permit, license and quota raj in most of the sectors of the economy has been dismantled. Development policies including industrial policy in India in the post-reform period have been formulated according to the new paradigm.

This new development paradigm has spurred India towards becoming a developed nation. However, the Indian economy is marred by grave regional disparities. Because of this, the fruits of development are not reaching all people equitably. If these disparities are not remedied immediately, then they may result in undesirable social and economic consequences. The fact is that actual and perceived regional inequalities have aggravated the problems of Naxalism, Maoism, and terrorism in India. There are concerns that regional inequality in India may have increased after the economic reforms of 1991.

There are two arguments for public policy for regional equality. The equity argument which states that all citizens are entitled to equal treatment and equal opportunity regardless of where they live and the efficiency argument according to which below average productivity in certain regions represents an under utilisation of resources.

Serious regional imbalances resulted during the planned development despite balanced regional development being endorsed as one of the principal objectives of economic planning. In India, there is severe agglomeration of industries. Although, there have been several moves to achieve spatial dispersal of industries through policy interventions such as fiscal incentives, tax exemptions, subsidies, licenses etc, the results have not been desired. Growth biases continue to exist, despite these policy incentives to locate.

However, the role of the State as industrial owner and industrial location regulator has been substantially curtailed under the regime of liberalization and globalisation. Thus, the compatibility of fiscal incentives, like the Special Industrial Package, with the World Trade Organisation needs to be analysed.

The backward economic structure of Himachal Pradesh is indicated by the low share of industries in the SGDP that has increased from 1.1% in 1950-51 to 9.4% in 1990-91 and further to 10.0% in 2008-09. Moreover, out of total industrial investment proposals received in the country from August 1991 to April 2008, the share of Himachal Pradesh stood at 0.54 % only. Further, around 99 per cent of the investment is in small-scale units. This data reflects low level of industrialisation in Himachal Pradesh.

Industrialization in Himachal Pradesh is comparatively a recent phenomenon. The severe climatic conditions, topographical and geographical severities are the main hurdles in this process. In such a scenario, the monetary and fiscal benefits in the form of incentives and subsidies as well as the development of appropriate infrastructure are the main instruments to off-set the locational and geographical disadvantages and to woo industrial investment in the State.

Since the planning era, efforts have been made to influence firms’ location decisions by devising incentive policies. The main objective of these incentives, concessions and subsidies has been to encourage investment in the backward States, to make or to enable the units to become more competitive and to establish them at the initial infant stages. For a hilly state like Himachal Pradesh where the cost of production is higher due to difficult terrain and inadequate industrial infrastructure these subsidies are justified to offset the locational disadvantages and to make the prices and the products competitive with the goods produced by units set up in the neighbouring states.

Himachal Pradesh has demanded the extension of the Special Industrial Package to 2013, as was originally envisaged. However, it is unfortunate that the Punjab government moved the Supreme Court challenging the federal government’s fiscal sops for industrial development in the neighbouring states of Jammu & Kashmir, Himachal Pradesh and Uttarakhand. It contended that the discriminatory fiscal incentives had led to mass exodus of industries from Punjab. On the same logic Haryana and Uttar Pradesh are also opposing these fiscal incentives. These states being politically more strong and influential have lobbied successfully to prevent extension of the package till date. Perhaps, narrow politics has once again won over the economic and constitutional principle of regional equality.

However, there seems to be no appreciable flight of industries from any of the neighbouring states. Several leading industrial houses, from all over India, have set up new units in Himachal Pradesh to derive benefits from the tax holiday. The Special Industrial Package to Himachal Pradesh has been highly successful as it has increased the industrial investment, output and employment in the State. Moreover, a large number of new enterprises have also been established by the people of the State. It must also be pointed out that the Centre has already extended the package for Jammu & Kashmir and the North Eastern States.

It must be realised that under Green Revolution the scarce resources were channelized by the government of India in selected areas, predominantly Punjab and Haryana. Even today the benefits of massive public funds spent on agricultural and food subsidies are mostly cornered by the farmers in Punjab and Haryana. Moreover, Punjab and Haryana have always received the highest per capita plan outlays. Has any state objected to this anomaly?

Further, Punjab and Haryana have been continuously receiving the brain and resource drain from Himachal Pradesh. They act as suction pumps, pulling out the dynamic elements from the more static Himachal Pradesh. Punjab and Haryana are also the major beneficiaries of expenditures incurred by the government of Himachal Pradesh for maintaining ecological balance and environmental sustenance. Is Himachal complaining?

After the notification of special package of incentives to industries in Himachal Pradesh, the state department of industries approved 958 new investment proposals (79 expansion proposals) in medium and large scale industrial sector and 10,446 new investment proposals (242 expansion proposals) in small scale industrial sector with combined envisaged investment of Rs 35,667.43 crores and employment potential to 4.08 lakh persons up to 30/11/2008.

During the same period, 195 new industrial units (73 expansion) in medium & large scale sector and 4201 new industrial units (205 expansion ) in small scale sector have been set up in the state with a total actual investment of Rs 4649.70 crore and generating employment to 62,779 persons up to 30/11/2008. By November 2008, the state had 34,897 small scale and 397 medium & large scale industrial units with an investment of Rs 7483.03 crore and employment generation of 2.22 lakh persons.

Thus, the special industrial package has made a positive impact on the industrial growth of the state and withdrawal of these benefits may adversely impact the process of economic development. But if we analyse the data received from government by various NGOs through RTI Act, it would be revealed that only a small percentage of these jobs have gone to the bonafide Himachalis which is a gross contravention of the Himachal Pradesh Industrial Policy which mandates that 70 percentage of industrial employment must go to the bonafide Himachalis.

In Himachal Pradesh there are very few spontaneous growth centres (i.e. places where industry developed without the benefit of subsidies and incentives). However, since the grant of special industrial package certain induced growth centres in the industrially backward state of Himachal Pradesh have come up. However, the dispersal of industrial units in Himachal Pradesh is highly uneven. This unbalanced growth of industries is reflected in the number of industrial workers (in terms of percentage to total industrial workers) which is available in the Directorate of Economics and Statistics (2006) District Level Economic Indicators. Solan with 66.17% of the total industrial workers in the State is ranked first and Sirmour with 12.98% workers is ranked second. Hamirpur has only 0.55% of the industrial workers while Lahaul-Spiti has no industrial worker at all. Thus the major portion of the new industrial investment in Himachal Pradesh has gone to the areas that are bordering the neighbouring states and are plains or valley areas. Only such areas like Parwanoo, Baddi, and Nalagarh in Solan and Kala Amb and Paonta Sahib in Sirmour districts have developed as the induced industrial centres in Himachal Pradesh.

Over a period of time, it has been realized that fiscal incentives have invariably led to the creation of inefficient and uncompetitive industry, which may not sustain in the long run. Most of the industrial units set up in the State are merely screw-driver or packaging industries which are indulging in assembly and packaging of products actually manufactured in other States. Their only motive is to avail the fiscal incentives. If the industrial package is not extended, these industrial units would be the first to fly out of the State. Thus if the fiscal incentives are continued then some minimum value addition criteria for availing fiscal incentives must be enforced to ensure sustainable industrialisation of the state.

Another distressing fact is that most of the units established in Himachal Pradesh are running in leased and rented complexes because they seem to have no intention of permanently working in the State. When a school or college is required to have the ownership of land and building for seeking affiliation, then why a similar condition cannot be imposed on these industrial units for availing the benefits of fiscal incentives?

Further, with changes and modifications being introduced in the taxation policy and reforms initiatives like introduction of VAT and GST, incentives to industry need to be looked at afresh. Thus it is imperative that we move towards a policy of gradual phasing out of subsidies. Such initiatives coupled with an increased stress on the provision of quality infrastructure will help create conducive environment for industrial growth and attract both foreign and domestic investments.

Several studies have pointed out that the factors that are not adequately available tend to be more important, such as high importance of transport, electricity. Thus infrastructure improvement can play a key role in efforts to encourage investment in Himachal Pradesh. Reduction in trade and transport cost, by affecting the balance between dispersion and agglomeration forces can decisively affect the spatial location of economic activities. The government of India must ensure that more roads in Himachal Pradesh are brought under national highway and railway network is extended in the State on a high priority. Every Himachali laments the fact that while British Raj had brought railways to Shimla long ago but our own Indian government has failed miserably and Himachal Pradesh hardly finds reference in the railway budget. The government of India as well as the state government must realise that transport infrastructure may increasingly be used as a regional policy instrument. We must learn from the experiences of Japan and Switzerland which have overcome the physical geographical constraints and handicaps of mountainous terrain to become developed nations.

Location theory gives a theoretical framework for studying the location decisions made by firms. Much of the research on location has developed from Alfred Weber’s analysis of the least cost location. Progress in technology and moves towards a liberal economic policy create new challenges for theorists, policymakers and business executives. As a number of economic activities became ‘footloose’ and highly mobile, one of the most demanding and intricate questions in such a situation is where firms would locate, re-locate or stay. There is a need to look at taxes and subsidies in the context of new economic geography models which also consider the impact of other aspects of economic environment (such as mobility and wage rigidities) and non-economic factors.

There is a need to analyse the effectiveness of regional policies and interventions; and the impact of incentives on investment decisions. There are efficiency gains from the clustering of activity and new investment has a tendency to concentrate in an already well developed area, thus reaping the benefits of external economies. This creates a cumulative causation process that tends to increase regional differences. Thus there is a need to continue the fiscal incentives till we reach the minimum threshold.

Direct government intervention is a necessary condition for diverting industry from industrially developed areas to industrially backward regions, but it is unlikely to be a sufficient one. Some location factors are likely to be equally, or more, important in industrial location decisions. The formulation of an effective industrial location policy requires identification of these factors. The location factors are not static; rather they are dynamic and tend to vary in terms of socio-economic variables. This dynamism in industrial location means there is shift in the relative importance of location factors according to changes in the level of economic development. With economic development, non-economic location factors gain in importance. Government assistance is likely to be successful in inducing industrial development only in areas where incentives are available in conjunction with other factors. Government fiscal incentives only catalyse the process of industrial dispersal.

The state government, industrialists and the general public must realise and understand that Special Industrial Package and other incentives and subsidies cannot be continued forever. Therefore, all efforts must be made to reduce the dependence on such fiscal sops. Entrepreneurship from within the State needs to be encouraged as this is likely to be more long term and sustained. The Special Industrial Package, if extended, should not be considered an achievement but taken as an opportunity for concerted action and for taking certain politically and administratively hard decisions.

(The writer is principal, Trivenee School of Excellence, Paonta Sahib)

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