Friday, January 01, 2010

Bhupesh Bhandari : Bihar Reforms.

In mid-December, Business Standard Hindi had held a roundtable discussion on industrial development in Bihar. The idea was to bring together representatives of the state government, academia and industry to brainstorm the subject. The problem was to find speakers from industry. Most large companies and business houses, we realised quickly, did not have Bihar on their radar screen. Apart from Hindustan Lever, no other blue-chip company has of late put money in the state. Trucks come laden with stuff from neighbours like West Bengal, Uttar Pradesh and even Madhya Pradesh but go back empty. Essential commodities are all imported from other states and, therefore, sell at a premium. Cement, for instance, in Bihar is at least 5 per cent costlier than in neighbouring West Bengal.

In the past, industry’s bugbear was the poor law and order situation in the state. There was nobody to guarantee the safety of executives posted there. The Nitish Kumar administration has made Bihar a better place. “If you go to any park at Patna in the morning,” Chief Minister Kumar said at the event, “you will find big cars of every description.” The point is important. Earlier, such was the terror of kidnappers and extortionists that people had clamped down on any expenditure that could give away their wealth. Not any longer. But has the situation improved beyond Patna? SKS Microfinance pointed out at the meeting that 42 of its people were robbed of cash in 2009, up from 17 in 2008.

When Kumar took over the affairs of the state four years ago, there was hope that the state’s defunct sugar industry will revive. Bihar contributed a fourth of the sugar produced in the country before Independence. It now accounts for less than 3 per cent. Unfortunately, companies that were brought in by Kumar to invest in the sector have developed cold feet. One has even forfeited the earnest money of Rs 5 crore. There just isn’t enough sugarcane to feed the mills, investors say. Set up the mills and sugarcane will follow you, Kumar counters. It’s a chicken-and-egg situation. Of course, state-owned HPCL is putting up an ethanol unit in Bihar, but experts doubt its commercial viability, given the current high price of sugarcane. And with one year to go for elections to the state assembly, Kumar knows nobody will be in a hurry to put his money in Bihar.

Such, unfortunately, is the nature of politics in the state. Not everybody is sure that there is widespread political buy-in on economic reforms. Caste-based politics still holds strong in the state. What if Kumar does not come back to power? Will his successor have the same enthusiasm for maintenance of law and order or development of infrastructure? These are questions that bother corporations.

Kumar puts the blame at the doorsteps of the Centre. Bihar, he says, has not been compensated for the loss of natural resources and industry to Jharkhand, coal linkages for proposed thermal power stations in the state have not been cleared, and there is no clarity on ethanol. The solution, he says, is to grant the status of “special category state” to Bihar. The kind of tax breaks offered to Uttarakhand and Himachal Pradesh alone will draw industry to the state. Kumar does have a strong case here. But there is a build-up of opinion against such incentives. They distort market forces and lead to inefficient allocation of resources. Moreover, they attract screwdriver investments — companies wind up and move to another state once the incentives run out.

The bottom line for Bihar is that it will have to depend on its own entrepreneurs for investments — once locals build a strong foundation, outsiders are bound to follow. Bihar is rich in human capital. It turns out unskilled and semi-skilled workers with the same rapidity as IIT engineers and civil servants. Industry estimates suggest that local entrepreneurs have invested close to Rs 1,500 crore in the recent past. Though not large by any yardstick, it does show that there is latent entrepreneurship in the state. But they don’t know what to do.

When Kumar came to power, he brought several top industry leaders to the state. Road shows were held across the country. The idea was noble. One or two big names could have got others also to invest in the state. But that didn’t happen. Instead, it scared local businessmen. Will we be able to stand competition from large players? Most of them thought. Most local businessmen complain that the bureaucracy takes a lot of time to put into action announcements made by Kumar and his colleagues in the ministry. Orders have taken up to two years to get notified. Subsidies and concessions on offer often prove hard to get.

The biggest problem they face is finance. The state is hugely under-banked. And since banks, state-owned as well as private, now follow what the market dictates, there is little the state can do. Businessmen are at times asked to fork out twice or even thrice the loan amount as collateral security. This perhaps is the reason why microfinance outfits like SKS Microfinance have done so well in Bihar. Their customers are large in numbers and non-performing assets are low. Clearly, banks can take a lesson or two from them.