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Poverty Battle in Heart of India Begins With Factories

February 22, 2013

Battle Against Poverty in Heart of India Begins With Factories

A farmer unloads soybeans at a grain market in Burhanpur, Madhya Pradesh, India. Photographer: Sanjit Das/Bloomberg

Yards from the site of India’s worst industrial disaster, Majid Khan is welding a door grill in a shop on the narrow streets of Bhopal’s old city, where pigs forage for food amid the garbage.

For two decades after a 1984 chemical leak from Union Carbide Corp.’s plant killed more than 3,000 people, the capital of Madhya Pradesh struggled to throw off its image as a backwater in one of the nation’s poorest provinces. Now, the regional government has attracted industry and boosted agriculture with policies that have lifted the state’s economic growth to more than twice the national pace.

“Life has improved,” said Khan, 32, wearing overalls as sunglasses protected his eyes. “No government will feed us, but at least we’re able to earn our wages. Infrastructure in the city is better; power supply is much more dependable. We can feel the change.”

Progress includes a new highway to the commercial city of Indore, investment from companies such as Volvo AB (VOLVB) and a surge in agricultural production. The government of the state, which is larger than Italy and more populous than the U.K., forecasts expansion of 12 percent in the year ending in March, even as India’s pace slips to 5 percent, the slowest in a decade.

“Without investments and factories, we will neither be able to create jobs, revenues, nor will we be able to get the growth needed to remove poverty,” said Chief Minister Shivraj Singh Chauhan. “We have made industrial policy more investor friendly, and where processes need to be overhauled, we act.”

Seeking Factories

While the state of Karnataka attracted call centers and software services to propel development in the past decade, Madhya Pradesh, in the center of India, and states such as Gujarat and Uttarakhand are taking a different path: boosting farm output and targeting labor-intensive manufacturers.

“The combination of industry and agriculture bodes well for balanced growth,” said Laveesh Bhandari, a director of Indicus Analytics, an economics research company in New Delhi. The government “has been helped by a surge in agriculture, leading to a rise in rural demand” for goods.

Chauhan has trebled the state’s irrigated farmland to 2.2 million hectares (5.43 million acres) in the nine years through March 2012, boosting productivity by almost half and increasing crop output about 80 percent.

The rise in rural spending has hampered the central bank’s three-year battle to control prices. After the first interest- rate cut in nine months in January, Governor Duvvuri Subbarao said room for further reductions was limited because of the risk of inflation.

Curbing Bureaucracy

To build an industrial economy, Chauhan and some other state leaders are trying to speed approvals and reduce bureaucracy that can delay factory construction for years. The strategy has lured companies such as Volvo and truck maker Man SE in Madhya Pradesh, Ford Motor Co. (F:US) and Bombardier Inc. (BBD/B) in Gujarat and Hero Motocorp Ltd. (HMCL) in Uttarakhand.

“One sector that needs to be fixed is manufacturing,” Gita Gopinath, professor of economics at Harvard University, said at a November World Economic Forum meeting in Gurgaon, near New Delhi. “There is no way that India can transition from a low-income to middle-income country without having a healthy manufacturing sector, given the size of the labor force. You cannot skip from agriculture to services.”

Gated Condominiums

Signs of recent development are everywhere in Indore, Madhya Pradesh’s commercial capital of 2 million people, and include a gated condominium called New York City, complete with a miniature Statue of Liberty. On the outskirts, the 14-story Treasure Market City is under construction, which its builder says will be the largest mall in central India.

In the industrial suburb of Pithampur, truck engines are delivered by overhead chains in Volvo’s plant to be lowered into place as its joint venture with Eicher Motors Ltd. (EIM) produces 50,000 vehicles a year.

Service companies also are coming to Indore, with Tata Consultancy Services planning a $100 million outsourcing center and Infosys Ltd. (INFO) setting up a software-development facility.

The government has provided land to 161 large industries as part of its push for more investment in Madhya Pradesh, Chauhan said in the state’s assembly yesterday.

Madhya Pradesh is pursuing a similar path to Gujarat, where Narendra Modi has been re-elected chief minister three times in a row. Gujarat’s average growth was the third-fastest among India’s 28 states since Modi took over in 2001. Its $95 billion economy expanded 9.1 percent in the year ended March 2012, Gujarat’s government said in June last year.

Faster Approval

Government approval for an investment proposal takes an average of 60 days in Gujarat, compared with about six months nationally, the state’s Industry and Mines Secretary Maheshwar Sahu said.

“If they make a plan, they stick to it,” said R.C. Bhargava, chairman of Maruti Suzuki India Ltd. (MSIL), the nation’s largest automaker, which is building a $730 million plant in the state.

Half the $2 billion Dearborn, Michigan-based Ford is spending in India is going into its plant in Sanand, with production of SUVs and sedans due to start next year.

“Gujarat has become the poster child for economic development in India,” wrote Christopher Wood, a strategist in Hong Kong for CLSA Asia-Pacific Markets, in a June 2012 note.

The northwestern state, with 60 million people, accounts for 22 percent of Indian exports and 11.5 percent of manufacturing, according to the local government.

It took Montreal-based Bombardier less than two years to convert a dirt site into a 33 million-euro ($44 million) factory that turns out rail cars for New Delhi’s metro or for export. Workers spray finished carriages with high-pressure water jets to check for leaks, and in the offices, posters of the coaches proclaim “Made in Gujarat.”

Leadership, Vision

“When we asked the Gujarat government for various infrastructure facilities, they acted immediately,” said Harsh Mehta, public-affairs director for Bombardier Transportation India. “There is a leadership and vision.”

Modi has tried to curb India’s ubiquitous middle-level corruption, with initiatives such as making land records available online and building an Internet-based system for citizens to air grievances against the state government. Gujarat had the most transparent budget in a 2011 study of Indian states by the New Delhi-based Centre for Budget and Governance Accountability.

“There should be no scope for bias,” said Sahu, the top bureaucrat in the state’s industry ministry, in his office in Gandhinagar, Gujarat’s capital. “Corruption has gone down substantially.”

Surplus Power

As in Madhya Pradesh, Modi had to improve transportation and power networks, spending more than $3.7 billion. Now, about a third of Gujarat’s 74,000 kilometers of roads are highways, and it has 42 ports. It is the only state with surplus power.

“That’s paying us dividends now,” said Gujarat’s Energy and Industries Minister Saurabh Patel. “When an investor is looking for options, we have an advantage.”

When Tata Motors Ltd. (TTMT) abandoned its effort to build a car plant in West Bengal state in 2008 after protests by local farmers, Modi stepped in, offering Tata a site in his state and arranging all approvals within three days.

Now, thousands of red, yellow and green Nanos, the world’s cheapest car, fill the factory yard. By 2014, when the nearby Ford plant begins production, the industrial park in Sanand may produce about 600,000 autos a year.

Modi’s Record

Modi’s economic achievements have been tainted by opposition accusations that he failed to stop violence in Gujarat in 2002, when Hindu mobs attacked and burned Muslim neighborhoods. More than 1,000 people were killed and women were raped, India’s National Human Rights Commission found.

Modi’s office declined requests for an interview.

While Gujarat and Madhya Pradesh have a history of development, Uttarakhand, 200 kilometers north of New Delhi, has existed for only 12 years, carved out of neighboring Uttar Pradesh when the boundaries were redrawn in 2000.

The hill state built industrial compounds in Pantnagar, Haridwar and the capital Dehradun, and offered tax incentives to help lure Tata Motors, Bajaj Auto Ltd. (BJAUT) and Nestle India Ltd. (NEST), a unit of the world’s largest food company.

“The industrial estates are very well organized in terms of road infrastructure and availability of power,” said Vibha Malhotra, a director with the Confederation of Indian Industry in Dehradun. “The government’s approach is very proactive.”

Federal Contrast

About one-third of the state’s economy was driven by industry in the fiscal year ended March 2012, up from 23 percent in 2001-2002, according to the central bank.

Gujarat, Madhya Pradesh and Uttarakhand offer a contrast to Prime Minister Manmohan Singh’s federal government, which began pushing for more foreign investment in industries such as retail and aviation only about five months ago, after years of inertia from a bickering coalition and corruption scandals. A government panel Singh appointed has recommended doubling the share of manufacturing to as much as 35 percent of gross domestic product by 2020 from 16 percent.

Chauhan still faces hurdles in tackling Madhya Pradesh’s poverty. The state ranks 20th out of 23 in human-development indicators, according to the Planning Commission. Nearly 60 percent of children under 5 years old are malnourished, and infant mortality in 2011 was India’s highest.

Human Indicators

“The challenge for Madhya Pradesh is huge as it will have to keep the focus on development of human indicators as well, while pushing for more manufacturing,” said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.

The state government has improved hospitals in 50 districts with neo-natal care, opened centers to monitor infant nutrition and begun a campaign to immunize all children.

Madhya Pradesh and Uttarakhand saw poverty levels fall more than 11 percentage points in the five years ending March 2010, according to the Planning Commission. In neighboring Uttar Pradesh, the decline was about 3 percentage points. Gujarat’s level dropped 8.6 percentage points.

For Khan, the metalworker in the congested back streets of Bhopal, the progress is palpable.

“I don’t understand politics but I understand development,” he said. “I can experience it.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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