Bifurcation won’t hit growth

Hyderabad:As the year 2013 draws to close, Andhra Pradesh — the largest state in south India representing the second largest linguistic community in India after Hindi — will be entering one of the most tumultuous periods in the history of the Telugu land as the bifurcation process enters its final stages.

While the outcome of the bloodiest bifurcation of a state still remains uncertain, till the “last ball is bowled,” it has brought into focus several issues such as job opportunities and industrial prospects in areas other than Hyderabad, which have been ignored due to what analysts call “myopic vision of administrators”.

Hyderabad and its surrounding areas host a majority of business activity in the state, especially in sectors like IT, pharma, defence, engineering, banking, electronics, and heavy industry. The opposition for division is centred on the inclusion of Hyderabad in Telangana as people from Coastal Andhra and Rayalaseema fear that they will lose job opportunities in this metropolis.

Industry bodies and businessmen, however, have a different view. “The division will throw up fantastic opportunities in the Seemandhra region. The biggest advantage of this region is its coastline. It can attract heavy industries and also companies which require imported inputs or those focused on exports,” said Devendra Surana, the managing director of Bhagyanagar Industries and president of national executive council of Federation of Indian Chambers of Commerce and Industry.

The unique feature of Hyderabad’s industry is its small and medium scale companies, which are the backbone of the economy as they serve as ancillary units of mega factories and create jobs in great numbers. “SMEs, which are not present in Seemandhra, may establish their units in the region after division, once the government attracts large-scale units,” said V. Anil Reddy, vice-president of Federation of AP Chambers of Commerce and Industry.

Next: Seemandhra to attract factories, export firms

Seemandhra to attract factories, export firms

The state government has, of late, reoriented its industrial policy to attract manufacturing and export-oriented companies in the Seemandhra region.

The coastal region can boast of Petro-Chemical investment region, LNG terminal, Pharma city, agri-export zones, gems and jewellery park, marine biotech park in Visakhapatnam, Sri City SEZ — focused exclusively on manufacturing — in Chittoor, textile parks at Menakur Village near Nayudupet and Adidas shoe factory and an international leather park at Tada in Nellore.

Ananthapur and Chittoor will reap the benefits of the Bengaluru-Chennai Industrial Corridor, which passes through the two districts before entering Tamil Nadu. Seema-ndhra will also have two National Investment and Manufacturing Zones, one each in Ananthapur and Prakasam districts. As the Rayalaseema region is rich in iron ore, it can attract steel plants.

Ship-building industry could be developed in Seemandhra, which already has Hindustan Shipyard. According to a Ficci-KPMG report, the Indian ship-building industry has grown over 200 per cent in five years since 2002 as Western shipbuilders have become less cost-effective. This gives an opportunity to make India a hub of ship-building in Asia, alongside China and Vietnam.

The overall investment flowing into the upcoming private shipyards will exceed '20,000 crore in the next 5-7 years. With five ports and the longest coastline in the country, Seemandhra could try to attract a significant pie of this investment and hence jobs.

CII-AP former president B.V.R. Mohan Reddy, who is also the promoter of Infotech Enterprises, does not buy the argument of Seemandhra having advantage in the short-term, as he believes that the manufacturing sector in India is hindered by higher cost of manpower, poor record in the ease of doing business, higher input costs and lack of large-scale operations.

In the medium and long term, however, the prospects of Seemandhra look promising.

“Construction of a new capital city requires huge amounts of money. Construction is the only sector, which has the ripple effect on almost the entire economy. The immediate beneficiary would be cement and steel firms. This will boost employment opportunities, which will, in turn, expand cities and work as a springboard for further economic growth,” said Mr Anil Reddy of Fappci.

Ayodhya Rami Reddy, chairman of Ramky Infra, has a contrary view. “How much land does a capital city require? The new capital doesn’t need to be as big as Hyderabad. At the most, it would require an area of 25 square km. The construction of a few new government office buildings cannot offer any big business to construction companies.”

The million-dollar question, the Ramky chairman says, is this: What if the Central government was formed by a party, which wasn’t elected in the state? “In this scenario, will the fund flow, which was being proposed by the Centre, continue?”

Some of the small IT companies, especially BPOs, have started shifting their base to Vijayawada and Visakha-patnam IT parks. “Key impediment in setting up IT companies in tier-2 and tier-3 cities is the shortage of mid-level managers. They don’t want to shift to smaller cities because they lack social infrastructure such as good schools, best healthcare, malls and recreational facilities,” said Mr Mohan Reddy. Mr Reddy’s company is present in smaller cities like Kakinada and Vizag, employing 1,000 and 250 people respectively.

Ashok Reddy, the president of Confederation of Indian Industry, feels the root cause of the crisis is excessive focus on developing only Hyderabad. “The government should have focused on more cities. Now, however, the government is focusing on other regions and is also attracting manufacturing companies. Recently, Pepsi and Isuzu Motors have set up their plants in Coastal Andhra.”

Next: Telangana to remain service sector hub

Telangana to remain service sector hub

Contrary to the general perception, the majority view among businessmen and analysts is that Telangana may not gain significantly from the division in terms of attracting new industries as India shifts its focus to manufacturing; lack of ports will be a disadvantage for Telangana.

“Lack of ports may hamper the prospects of Telangana in attracting the heavy industry sector and export-oriented and import-dependent sectors. However, with its best air connectivity and excellent infrastructure in and around Hyderabad, Telangana may emerge as the hub of the service industry,” explains Mr Surana, who was also the past president of Fapcci.

The information technology industry, which has of late become the mainstay of Hyderabad’s economy, will not shift to any other city in the near-term, feels Mr Mohan Reddy.

“Hyderabad has been successful in attracting the IT sector because of three reasons: availability of talent, air connectivity, and good physical and social infrastructure. Even after the division, assuming it happens, all these will continue to exist. So the implication of the division on Hyder-abad, as an IT hub, is fairly minimal,” said Mr Mohan Reddy.

AP has registered around '53,000 crore worth of IT exports. Of this, almost 95 per cent comes from Hyderabad and its surrounding areas.

The IT sector in the southern metropolis is mostly dominated by global and national players, compared to regional ones. The foreign IT multinationals, which have presence in Hyderabad, include Google, Microsoft, Facebook, IBM, Oracle, Qualcomm, CA, CSC, Dell, Accenture, Yahoo, Amazon, Cognizant, Genpact, Pegasystems, etc. The happenings in Hyderabad gets highlighted in even the foreign media because of the interests of these companies.

The foreign IT multinationals, however, are unfazed about the bifurcation, says Mr E. Suman Reddy, the managing director of Pegasystems in India. “MNCs want a stable and peaceful atmosphere. It doesn’t matter which state Hyderabad belongs to. Hyderabad is the most favourable city in India for MNCs because of its talent, cost of talent and infrastructure. We hire people from across India and division doesn’t affect employment prospects of anyone,” explained Mr Suman Reddy.

While discussing the prospects of the IT sector moving out Telangana, he said “the $84-billion Indian IT industry is expected to double by 2020. In the process if some opportunities do go to smaller cities, it doesn’t mean that it would affect the prospects of Hyderabad.”

This brings cheers to the Hyderabad real estate sector, which is directly affected by the IT slowdown. “The real estate prices in Hyderabad will not go down significantly. The division will just slow down the pace of rise in real estate prices,” says P. Dasharath Reddy, president of AP Real Estate Developers’ Association.

While IT, pharma and biotechnology will continue to remain in Hyderabad, the sunrise sectors for Telangana could be defence, aviation, electronics, semiconductors, power, steel, cement, and agri-based industries.

The presence of defence labs and establishments gave an advantage to Hyderabad in attracting private defence and aviation companies, says a senior official from Tata Advanced Systems, which has set up its helicopter cabin-making unit at Adibatla in a joint venture with US-based Sikorsky.

“Hyderabad’s industry would typically revolve around activities that are related to engineering. This is because Hyderabad had a head start over other cities as the government had set up several public sector defence and aviation units here as the city was away from borders and hence was considered safe,” he explained.

Power sector, analysts say, could get a big fillip as the region is rich in coal mines. “Because of heavy demand from Hyderabad and power requirement of farmers, Telangana would be a power deficit state. Huge investments need to be made to meet Telangana’s power requirements. And this would force the government to encourage private companies to set up power units.

The presence of Singareni Collieries and the good solar insolation in the region will lead to setting up of thermal and solar power plants,” observed B. Indrasen Reddy, the managing director of solar equipment firm FourSolar Ltd.

According to him: “The exploitation of solar energy in rural areas to provide power to farmers could be a game changer in Telangana as it would be beneficial for the farmers and also the government. While farmers can produce three times a year, the use of solar power will allow Telan-gana to reduce its subsidy burden.”

Currently, AP has a total installed capacity of 16,350 MW. Of this, 10,500 MW is generated in Seemandhra and 5,850 MW in Telangana. Out of a total 16 lakh agricultural pump sets, which get free power, 10 lakh are in Telangana, putting tremendous strain on the financials of the new state, if and when it happens.

The total government commitment towards the power subsidy in the entire Andhra Pradesh is '6,045 crore. Of this, '1,200 crore is additional burden for farm subsidy.

Next: Resolution of issue is the only solution

Resolution of issue is the only solution

Assocham, one of India’s leading industry bodies, seems to have conducted a survey to identify growth areas for both states, in the event of Andhra Pradesh’s division, and also recommend some of the steps the governments need to take to spur growth in both the regions.

“The survey seems to have indicated that Telangana and Seemandhra will have different growth patterns. While Telangana would be dominated more by IT and hi-tech industries, Seemandhra would grow in labour-intensive manufacturing sector. Once tempers cool down, everything will be back to normal,” said an Assocham official on condition of anonymity.

Despite discounting the discussion on the bifurcation of the state, Mr Ashok Reddy of CII says, “People in both regions are hard working. The sooner this issue is settled, the better it is for everyone. Whether AP is one state or two states will not matter once things settle down. Nobody can ask anyone to leave Hyderabad or any place. But this issue has created fear among people, and it is just psychological. And time is the only solution, which can paper down fear and mistrust.”

The only wish of most peple is that the issue should not be allowed to linger any longer and that the government or governments should get down to its business.

Telengana: Defence sector

The presence of key defence establishments and its ancillary units in and around Hyderabad could serve as a springbroad for the city to attract private sector defence companies as the government opened the sector to foreign investment.

According to a study by McKinsey, India is expected to spend around $150 billion (' 9,30,000 crore) to procure weapons, tanks, aircrafts, destroyers, etc. by 2020. Of this, it expects that $60-billion ('3,72,000 crore) worth orders will come under the offset requirement, which has to be sourced locally by foreign importers.

According to scientific advisor to the Defence minister and DRDO director-general Avinash Chander, the Indian industry could exploit '2-lakh crore worth business opportunities over the next 10-15 years from the DRDO’s plans to develop products, including missiles. This market opportunity is in addition to what is available under the offset clause.

A significant portion of this could flow into Hyderabad, as it could attract private companies due to its already existing defence-related industry and engineering talent. 

Another very important reason is that Hyderabad is perceived to be the safest city in India in terms of natural disasters and enemy threat. This was considered to be the prime reason for the Centre setting up strategically important establishments in Hyderabad.

According to the Geological Survey of India, Hyderabad is one of only two big cities, which is in the seismological low risk zone (Zone-II) – the other city being Bengaluru.

Hyderabad is also the only metro far from a land border or sea coast. Being located in the centre of the peninsula, it is not exposed to natural disasters like floods, cyclones, and has a pleasant weather.

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