Industry-friendly moves keep Gujarat ahead in investor perceptions

The news that Vedanta controversially chose Gujarat over Maharashtra to set up its $20-billion semiconductor manufacturing unit along with Taiwan’s Foxconn has drawn fresh attention to why the state remains popular with investors, beyond the obvious political connections.

Everything the Gujarat administration offers is also available with its neighbour Maharashtra, Tamil Nadu, Haryana, and now Uttar Pradesh. But Gujarat gains because it was the first to check all the boxes as far as investor-friendly policies are concerned.

The most striking of these has been its success in unbundling its power sector. This is an often forgotten story. The state’s Jyoti Gram Yojana of 2003 freed industrial electricity consumers from having to subsidise rural consumption. There was no blowback as the latter consumption, in turn, was split into domestic and agricultural feeder lines. It was made possible by setting up a parallel rural distribution network of 78,454 km of new lines. That reform freed the state-owned power distribution companies from opaque accounting and gave the administration room to offer industries more incentives, such as the most recent upfront capital subsidy linked to fixed capital investment.

Shyamal Mukherjee, former India chief of PwC, said, “Efficient bureaucracy and the political will towards the business environment make the critical difference.” Certainly, the separation of the power distribution business was backed by political will. No other state has been able to follow Gujarat’s model.

At the same time, the state is also careful to publicise — and occasionally overstate — accolades that come its way. In July this year, for instance, Gujarat jointly with Karnataka was ranked as the “best performer” states for start-ups in India. The “Ranking of States on Support to Startup Ecosystems” was released by the department of internal trade and industry in the commerce ministry. Unlike Karnataka, the Gujarat government went overboard in advertising this ranking. This, even though in terms of aggregate employment reported by the start-ups till June 2022, Maharashtra leads the pack, whereas Gujarat is one-third of those numbers.

On cumulative foreign direct investment (FDI) into India for the past two decades, Maharashtra accounts for the largest at 30 per cent, Karnataka is at 9 per cent and Tamil Nadu at 7 per cent. Gujarat follows them at 5 per cent. But at a state Business Network International Symposium in Ahmedabad recently Chief Minister Bhupendra Patel said, “Since the past three years, Gujarat has been number one in FDI.” In fact, it has led in only one of those years.

But the diligent and sustained publicity across the decades has stood the state in good stead in terms of investor perception. Among the leader-board states of Maharashtra, Tamil Nadu, Gujarat, and Karnataka, the ranks for attracting investments — domestic and foreign — vary. But Gujarat always leads among them in the perception of industrial friendliness.

As its political zeal to implement the right policies show, Gujarat brings the energy of wanting to compete, which is where it scores. Both Maharashtra and Gujarat have competing manufacturing bases (Gujarat’s gross value addition in manufacturing is 15.9 per cent between FY12 and FY20. Maharashtra’s is 7.5 per cent per annum for the same period). The significant difference is that Gujarat does so with hardly any natural resources to support those.

For instance, few realise that Gujarat has the longest route to coal mines in India, which potentially makes any manufacturing process dependent on it the costliest.

Instead of letting the difficulty become debilitating, the state moved to adopt a gas economy, becoming the first state in India to adopt it aggressively. In 1994, the state set up the Gujarat State Petroleum Corporation Limited, beginning gas production from a small field in Hazira, in 1996. It is only now that most states are firming up policies to use gas. By 2004, India’s first R-LNG (regasified liquefied natural gas) terminal came to Dahej, while the state government made laws permitting the use of compressed natural gas in vehicles.

There was a clear pattern in the types of industries it consequently promoted. These were less water-dependent and were able to ride the gas economy, including chemicals and petrochemicals, besides pharmaceuticals and a host of ceramic goods. The latter build-up of automobiles rode on this advantage. Sanjay Aggarwal, former PHDCCI president, said, “Many states announce attractive schemes for investors, Gujarat scores in terms of prompt implementation of those promises.”

In ports, for instance, both Odisha and West Bengal have a deeper hinterland to exploit. That hinterland goes all the way back to Nepal while the ports have closer access to the richer nations of the Asean region. Yet the 48 ports of Gujarat account for 40 per cent of India’s cargo movement.

This is the reason that despite being an acknowledged industrial leader in the country — the state is home to 17 per cent of India’s industrial output — it also pushes for success in the sphere of start-ups.

Some risks are, however, building up. The state government employees are a powerful lobby, necessary to implement the government policies well on the ground. Among them the demand for reversion to the expensive old pension system jettisoning the National Pension Policy has gained ground. The Gujarat government is wary that in the impending elections this could be a hugely costly promise and to avert that it has announced immediate payment of the seventh pay commission arrears, besides raising the state government’s contribution to 14 per cent from the current 10 per cent. These are also going to impact the fiscal balance. In FY21, the state notched a revenue deficit (of Rs 21,952 crore) for the first time in a decade.

Second, the heavy dependence on gas could turn out to be a problem given that much of it is imported. Europe is now emerging as a major competing buyer of gas from West Asian sources as it seeks to reduce dependence on Russian supplies after that country’s invasion of Ukraine. That has already pushed up global gas prices to new highs and could skew costs for industrial users in the state. Also, Vedanta’s proposed semiconductor complex could prove to be a test case since fab plants typically require huge quantities of water, which is hard to come by in this water-scarce state. Against these challenges, the state administration’s default mode of going the extra mile could well face some headwinds going forward.