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End of an era for Himachal

The end to tax sops enjoyed by industry in Himachal Pradesh may well be described as end of an era of industrialization, an era that awakened Himachal from slumber, one that ensured a positive change in the living standard of people, and possibly also one that brought in strife, conflict, crime, discontentment and disparity within the social fabric of the mountain state. No wonder, as March 31 approaches, the clamor about net gain or loss from it gets louder and louder. While the political class is busy playing the blame game for losing the package, a strong civil society movement opposing extension of the package has also gained momentum.

Himachal Pradesh along with Uttarakhand was given a range of central incentives in 2003 to promote industrial activity, including excise duty exemption for 10 years, income tax exemption for five years and capital investment subsidy. Since then the state’s GDP has grown at the rate of about 12 per cent, with investment of around Rs 10,000 crore flowing in. Out of this, large and medium industries received around 80 per cent of the investments, accounting for about 45 per cent of industrial employment in the state. Investment in the manufacturing and construction sector has shot up by more than 90 per cent in the last decade, which, of course, has come at a cost as is evident from regular protests against large cement and hydel projects. Today the industrial sector is contributing nearly 10 percent to the state domestic product (SDP). The annual turnover of the industrial sector in Himachal right now is approximately Rs 4,000 crore. According to the PHD Chamber of Commerce and Industry, Himachal Pradesh saw an increase in industrialization by 200 per cent due to the incentives.

So, if Himachal is to lose, it would also mean end of an era for certain industries in the country that made the state their home, especially the FMCG and drug companies. Imagine excise duties at 16% and income tax levied at about 30% getting converted into plain profit. So the challenges posed by poor connectivity and infrastructure, lack of skilled workers and the difficulty of doing business in landlocked locations aff faded away as company after company flocked in. All this may now change, primarily because of opposition from neighboring states Punjab and Haryana.

The Punjab government had even moved the Supreme Court in December last year challenging the central government’s sops to the three neighboring hill states. It had contended that the “discriminatory fiscal incentives” in the form of excise duty waiver, income-tax holidays and investment subsidies had led to mass exodus of industries from Punjab. However, quoting Secretariat for Industrial Approvals (SIA) detailing year-wise investment intentions in states, Chief Minister Prem Kumar Dhumal had recently reasoned that in 2007-2008, while Haryana received investment proposals to the tune of Rs 6,350 crore and Punjab Rs 10,737, Himachal was at Rs 3,596 crore. He also argued that no established industrial group from the two states moved to Himachal and that most investment proposals received by the state were from industrial houses that had little presence in the north. Dhumal now himself has threatened to approach the court if the package is not extended. Whereas there may be some truth in Dhumal’s claims that there has been no flight of capital from neighboring states, there have been other areas of concern.

Skewed development in the state has been a primary concern among skeptics. According to government figures, more than 80 percent of the industry is mainly cluttered in the Baddi-Barotiwala-Nalagarh belt in Solan district alone and the rest clustered on the border of the state. So there is a reason to believe that overall the state did not see improvement of infrastructure, a primary offshoot of industrialization.

Some experts are altogether skeptical about overall investment that has poured in, stating that there has been not much impact. Official data shows that the state has got investment of only Rs 6,523 crore in the last seven years against proposals amounting Rs 41,205 crore. The latest figures of Secretariat for Industrial Assistance state that the state had been able to attract only 0.54 per cent of the total investment in industrial sector in the country since 1952. So, undoubtedly, Himachal is yet to emerge as an industrial economy.

Now there are fears that if subsidies are withdrawn, the cost to companies could increase by anywhere between 20 and 30 percent and they would go to other states. But the government is purring up a brave front, reasoning that even if the excise duty exemption is withdrawn, the income-tax holiday will continue. The industry too is reacting in a hush hush manner, not showing any signs of panic. But recently companies that were building their facilities were seen working round the clock to start production before the March 31 deadline so that they may qualify for the excise tax exemption. There are fears that removal of tax breaks will impact at least 30-40 projects that are in the pipeline.

Dhumal had recently underlined the need for initiation of suitable policy guidelines for the state on the same pattern as had been provided to the north eastern States under NEIIP, announced by the Government of India wherein policy initiatives had been provided in the long run and on a holistic perspective. On the other hand, Virbhadra Singh too has matched him in rhetoric on how important it is for the state to continue with the tax holiday, but none have so far spoken about at what cost the state has got industrialization. The political spectrum of course cannot be blamed for thinking the same way as industrialization beings them both money and promises that can be further sold to the voters.

It is futile to make politicians realize why companies find it hard to have skilled labour force within the state; why youths simply do not show interest in attending the job fares organised by the industry; why it finds hard to locate land for more industrial projects; why the state being a tourist destination has pathetic tourism infrastructure; why orchadists from the fruit bawl of the country are nearly made to beg commission agents in Delhi to buy their produce; why entrepreneurship is almost invisible among Himachalis.

History of any civilization teaches us that natural resources play the most important part in shaping up the economy of a place, unless it is the Silicon Valley in which case it was the human resource that made the difference. Anything imposed with external support has to crumble one day or the other because the local factors will hardly support the superstructure. Therefore, the government should realise that the fragile Himachal eco-system cannot survive heavy industrialization and should therefore concentrate on areas where it has an advantage and in turn promote small, marginal and agro-based industrial units that gel in its culture and do not strain its resources. It’s never too late to make a beginning, with or without a stimulus.
Good riddance!

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Author: ih

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