Gujarat and Punjab: Tales to Two States

Gujarat and Punjab are like cheese and chalk when it comes to creating a climate favourable to private investment. On Tuesday, Gujarat government signed a memorandum of understanding with a joint venture between Vedanta and Foxconn for establishing a semiconductor manufacturing plant in the state. Gujarat has pipped Maharashtra for the much sought Rs1.5 lakh crore project.

Just about the same time, Punjab government—through its Twitter handle—claimed “The efforts of CM @BhagwantMann to rope in major investments from Germany bore fruit as leading auto giant @BMW agreed to set up its auto part manufacturing unit in state. CM showcased Punjab govt’s exemplary work to promote industry after which BMW agreed to set up unit in state.”

The next day BMW denied the claim made by the Punjab government saying “BMW Group India has no plans for setting up additional manufacturing operations in Punjab.”

Even if one puts a charitable gloss on what transpired in Punjab, the fact remains that attracting investment is tough competition among Indian states. Companies make an investment decision based on a host of factors. In case of states like Gujarat and Maharashtra, it is the “agglomeration effect” where a company prefers to locate itself in an established manufacturing ecosystem where ancillaries, availability of skilled manpower and location advantages are major factors. In states with a virtually non-existent industrial base, it is availability of land, affordable and reliable electricity that are likely to weigh on the investment decision. Whether it likes it or not, Punjab falls in the latter category. Even there, it is failing.

It is well-known that among major states, Punjab stands out for being in the grip of populism. Farmers get free electricity that is heavily cross-subsidised by other consumers including industry. Power supply remains unreliable at best and during peak summer, there is regular “load shedding” for industrial consumers. Of late, its farmers have developed a markedly anti-industry attitude with regular agitation against what they describe by the epithet “corporates.” As to the state government’s record on attracting industry, the state government shelved a proposed Integrated Textile Region and Apparel Park Ludhiana district after an agitation that it would “destroy the region’s ecology.” The agitation was spearheaded by an NGO and had the active backing of farmers’ unions.

It is highly unlikely that major corporations will even consider investing in such an environment. The first step for Punjab ought to be to restore economic rationality to its policies. Until then, it will only see opportunities pass it by.

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