 "Punjab steel mills fall silent amid global slump")
Until a couple of years ago, the narrow lanes of Mandi Gobindgarh, around 60 km from Ludhiana, would be crammed with trucks and its air would smell of metal. Migrant workers, mostly from Bihar and Uttar Pradesh, would sip their tea with dark faces, blackened due to repeated shifts near the furnace. Then the town, also known as loha mandi, was the hub of secondary steel industry in India.
Much of that has changed now. The town wears a deserted look. The lanes are empty and the factories are closed. The air smells cleaner. There are few workers on the streets; most have left Mandi Gobindgarh in search of jobs.
The situation is not much different across Punjab. Industry seems to have run out of steam. Fresh investments have turned into a trickle. Joblessness amongst skilled workers is on the rise. (STATE OF THE INDUSTRY)
With stagnation in agriculture, this has caused Punjab to lag behind others in the march to development. Once the state with one of the highest per-capita incomes, it now stands tenth on the list. Its neighbour, Haryana, has a per-capita income 45 per cent more than Punjab's.
It's no surprise that resentment against the Shiromani Akali Dal-led government is running high across Punjab. Even its most optimist supporters give the party an outside chance of winning the election to the state legislative assembly next year.
The quiet factories of Mandi Gobindgarh reflect the somber mood across Punjab. "In the last two years, about a third of the 400 or so industrial units have shut down. At present, there are around 250 industrial units which are working," says Vinod Vashisht, president of the All India Steel Rerollers Association.
Starting from the 1940s, the industrial units here had earned a name for themselves as a reliable source of secondary steel. Majority of the units here are electric furnaces which produce ingot from metal-scrap (mostly imported) which in turn is used by the steel rolling mills.
A perfect storm
According to the local industrialists, a combination of global and domestic factors has led to the reversal in their fortunes. First among them is the global slump in steel demand. Added to it is the effect of policies followed by the state government.
For instance, industrialists here complain that the high electricity price in Punjab has reduced the competitiveness of the steel industry here. Neighbouring Haryana and Himachal Pradesh have lower electricity prices, where some of the industrial units have migrated.
Another factor which impacted the fortunes of Mandi Gobindgarh was the e-TRIP (Electronically Transporting Information within Punjab) system, which was introduced to record intra-state transactions and curb tax evasion.
As this system enforced stricter tax compliance, a section of the industry in Mandi Gobindgarh found that it pushed the price of their product and made it less competitive vis-a-vis produce from other states. After they protested, the Punjab government rolled back this initiative.
The condition of the textile industry in Punjab is no different, a majority of which is based in Ludhiana.
Like in the case of the steel industry, the textile industry owners say the cost of electricity in Punjab is the single most important reason which has forced them to look outside the state for expansion.
"The price of electricity in Himachal Pradesh and Madhya Pradesh is 25 per cent cheaper than in Punjab," says SP Oswal, chairman and managing director of Vardhman Group. His company, which started from Punjab, has industrial units in both Himachal Pradesh and Madhya Pradesh. Similarly, Oswal Group and Nahar have expanded outside of Punjab.
Oswal says Punjab has the advantage of good industrial relations and an educated workforce, but where it loses out in industries like textile is its geographical disadvantage which pushes up the transport cost for exporters.
A landlocked state, Punjab lies at a considerable distance from the ports on the western as well as eastern coasts. Also, it lies away from the mineral-rich regions of the country. Industrialists in Punjab are now banking on the Eastern Dedicated Freight Corridor which will connect Dankuni in West Bengal to Ludhiana.
Over the years, as diesel prices have increased, industries in Punjab have looked outside of the state to reduce their transportation costs.
They have long hoped for trade with Pakistan as a solution to overcome their locational disadvantage as this would provide them with access to markets of Pakistan and Central Asia.
In 2012, Punjab's deputy chief minister, Sukhbir Badal, had said leather could become a huge item of trade for the state. Entrepreneurs, he had said, would import inexpensive raw leather from Pakistan, stitch it into shoes or garments, and export it back across the border. No such thing has happened. After the Pathankot incident, the possibility of liberal trade with Pakistan looks like a remote possibility.
Another reason which has discouraged the textile industry in Punjab is the imposition of VAT on yarn, while other states such as Rajasthan and Gujarat charge no VAT.
A slow decline
Industry in Punjab was hit first in the 1980s with the rise in militancy. In the 1990s, once the militants were subdued, industry revived. Then the Centre came up with tax sops for the northern hill states of Jammu & Kashmir, Himachal Pradesh and Uttarakhand. This not only made Punjab unattractive but also caused many companies to relocate from the state to the tax-free hotspots.
Satish Dhanda, vice-chairman of the Medium Industry Development Board of Punjab, says industry in Punjab has suffered because of the Free Trade Agreements which India has signed with neighbouring countries which has resulted in customs duty being reduced to negligible. "At the same time, Punjab has not been substantially compensated for its limitations because of it being a border state and losing long years to terrorism," he says.
Some three years ago, Badal had created an informal group of 17 businessmen (Sunil Kant Munjal, Rakesh Bharti Mittal, Onkar Kanwar, Malvinder Singh, Atul Punj, Manoj Gaur, Pramod Bhasin, Gautam Thapar and Analjit Singh were amongst them; 15 of the 17 were Punjabi) who he would call to Kapurthala House in New Delhi to devise ways to get investments into Punjab. That seems to have been an exercise in futility.
Now, the Punjab government has said that it will exempt the food processing sector from VAT, central sales tax and purchase tax. It has announced a fixed price of power: Rs 4.99 per unit for the first five years for a new plant. During the second Progressive Punjab Investor Summit, 376 MoUs worth Rs 112,000 crore were signed. This includes investments by DLF Universal, GVK Industries, Adani Group, Reliance Industries and ITC.
How much of this money will actually get invested? It is an open secret that states attract industry by offering them tax concessions. In Punjab, the elbow room for such incentives is simply not there. The subsidies to the agricultural sector leave little scope for tax concessions to others.
The fiscal and revenue deficits of Punjab are higher than the national average. Similarly, while the national debt is 21.5 per cent of the gross domestic product, Punjab's debt is 32.2 per cent of its GDP.
"The way out for Punjab is to increase its sources of revenue by raising taxes and ensure that those already taxed pay their taxes. This revenue thus generated can be used to incentivise the growth of industry in the state," says Sucha Singh Gill, former professor and head of department of economics at Punjabi University, Patiala.
Industrial development in the state has also not taken advantage of its robust farm sector. Otherwise, Punjab would have had a large agro-processing industry. Experts say this is because the state government has not carried out the required reform in the farm sector. Specifically, the state government has dragged its feet on reforming the Agricultural Produce Market Committee Act - needed for the growth of agro-based industries - even as other states have gone ahead and done that.
Much of that has changed now. The town wears a deserted look. The lanes are empty and the factories are closed. The air smells cleaner. There are few workers on the streets; most have left Mandi Gobindgarh in search of jobs.
The situation is not much different across Punjab. Industry seems to have run out of steam. Fresh investments have turned into a trickle. Joblessness amongst skilled workers is on the rise. (STATE OF THE INDUSTRY)
More From This Section
A combination of factors has led to this state of affairs: the global commodity meltdown, industrial slowdown in the country, tax policies, and high cost of doing business. As the tables illustrate, the share of manufacturing has declined in Punjab, and since 2011-12, the rate of growth of this sector has reduced significantly.
With stagnation in agriculture, this has caused Punjab to lag behind others in the march to development. Once the state with one of the highest per-capita incomes, it now stands tenth on the list. Its neighbour, Haryana, has a per-capita income 45 per cent more than Punjab's.
It's no surprise that resentment against the Shiromani Akali Dal-led government is running high across Punjab. Even its most optimist supporters give the party an outside chance of winning the election to the state legislative assembly next year.
The quiet factories of Mandi Gobindgarh reflect the somber mood across Punjab. "In the last two years, about a third of the 400 or so industrial units have shut down. At present, there are around 250 industrial units which are working," says Vinod Vashisht, president of the All India Steel Rerollers Association.
Starting from the 1940s, the industrial units here had earned a name for themselves as a reliable source of secondary steel. Majority of the units here are electric furnaces which produce ingot from metal-scrap (mostly imported) which in turn is used by the steel rolling mills.
A perfect storm
According to the local industrialists, a combination of global and domestic factors has led to the reversal in their fortunes. First among them is the global slump in steel demand. Added to it is the effect of policies followed by the state government.
For instance, industrialists here complain that the high electricity price in Punjab has reduced the competitiveness of the steel industry here. Neighbouring Haryana and Himachal Pradesh have lower electricity prices, where some of the industrial units have migrated.
Another factor which impacted the fortunes of Mandi Gobindgarh was the e-TRIP (Electronically Transporting Information within Punjab) system, which was introduced to record intra-state transactions and curb tax evasion.
As this system enforced stricter tax compliance, a section of the industry in Mandi Gobindgarh found that it pushed the price of their product and made it less competitive vis-a-vis produce from other states. After they protested, the Punjab government rolled back this initiative.
The condition of the textile industry in Punjab is no different, a majority of which is based in Ludhiana.
Like in the case of the steel industry, the textile industry owners say the cost of electricity in Punjab is the single most important reason which has forced them to look outside the state for expansion.
"The price of electricity in Himachal Pradesh and Madhya Pradesh is 25 per cent cheaper than in Punjab," says SP Oswal, chairman and managing director of Vardhman Group. His company, which started from Punjab, has industrial units in both Himachal Pradesh and Madhya Pradesh. Similarly, Oswal Group and Nahar have expanded outside of Punjab.
Oswal says Punjab has the advantage of good industrial relations and an educated workforce, but where it loses out in industries like textile is its geographical disadvantage which pushes up the transport cost for exporters.
A landlocked state, Punjab lies at a considerable distance from the ports on the western as well as eastern coasts. Also, it lies away from the mineral-rich regions of the country. Industrialists in Punjab are now banking on the Eastern Dedicated Freight Corridor which will connect Dankuni in West Bengal to Ludhiana.
Over the years, as diesel prices have increased, industries in Punjab have looked outside of the state to reduce their transportation costs.
They have long hoped for trade with Pakistan as a solution to overcome their locational disadvantage as this would provide them with access to markets of Pakistan and Central Asia.
In 2012, Punjab's deputy chief minister, Sukhbir Badal, had said leather could become a huge item of trade for the state. Entrepreneurs, he had said, would import inexpensive raw leather from Pakistan, stitch it into shoes or garments, and export it back across the border. No such thing has happened. After the Pathankot incident, the possibility of liberal trade with Pakistan looks like a remote possibility.
Another reason which has discouraged the textile industry in Punjab is the imposition of VAT on yarn, while other states such as Rajasthan and Gujarat charge no VAT.
A slow decline
Industry in Punjab was hit first in the 1980s with the rise in militancy. In the 1990s, once the militants were subdued, industry revived. Then the Centre came up with tax sops for the northern hill states of Jammu & Kashmir, Himachal Pradesh and Uttarakhand. This not only made Punjab unattractive but also caused many companies to relocate from the state to the tax-free hotspots.
Satish Dhanda, vice-chairman of the Medium Industry Development Board of Punjab, says industry in Punjab has suffered because of the Free Trade Agreements which India has signed with neighbouring countries which has resulted in customs duty being reduced to negligible. "At the same time, Punjab has not been substantially compensated for its limitations because of it being a border state and losing long years to terrorism," he says.
Some three years ago, Badal had created an informal group of 17 businessmen (Sunil Kant Munjal, Rakesh Bharti Mittal, Onkar Kanwar, Malvinder Singh, Atul Punj, Manoj Gaur, Pramod Bhasin, Gautam Thapar and Analjit Singh were amongst them; 15 of the 17 were Punjabi) who he would call to Kapurthala House in New Delhi to devise ways to get investments into Punjab. That seems to have been an exercise in futility.
Now, the Punjab government has said that it will exempt the food processing sector from VAT, central sales tax and purchase tax. It has announced a fixed price of power: Rs 4.99 per unit for the first five years for a new plant. During the second Progressive Punjab Investor Summit, 376 MoUs worth Rs 112,000 crore were signed. This includes investments by DLF Universal, GVK Industries, Adani Group, Reliance Industries and ITC.
How much of this money will actually get invested? It is an open secret that states attract industry by offering them tax concessions. In Punjab, the elbow room for such incentives is simply not there. The subsidies to the agricultural sector leave little scope for tax concessions to others.
The fiscal and revenue deficits of Punjab are higher than the national average. Similarly, while the national debt is 21.5 per cent of the gross domestic product, Punjab's debt is 32.2 per cent of its GDP.
"The way out for Punjab is to increase its sources of revenue by raising taxes and ensure that those already taxed pay their taxes. This revenue thus generated can be used to incentivise the growth of industry in the state," says Sucha Singh Gill, former professor and head of department of economics at Punjabi University, Patiala.
Industrial development in the state has also not taken advantage of its robust farm sector. Otherwise, Punjab would have had a large agro-processing industry. Experts say this is because the state government has not carried out the required reform in the farm sector. Specifically, the state government has dragged its feet on reforming the Agricultural Produce Market Committee Act - needed for the growth of agro-based industries - even as other states have gone ahead and done that.