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Who Moved The Rotten Cheese?

An old economy favourite till yesterday, Gujarat has suddenly become an investor's nightmare

Who Moved The Rotten Cheese?
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Till two months ago, it was one of India’s fastest growing states with the distinction of attracting the largest and best investments from Indian and multinational firms, of having the finest business environment. Not any more, not since February 27.

Today, business is far from usual, production at an unbelievable low, employee turnout at factories thin and business sentiments extremely negative. The February 27 Godhra atrocity and the consequent rioting have dealt a body blow that trade and industry in the state may take years to recover from.

Going by even conservative estimates, Gujarat lost business at Rs 500 crore a day. With industry at a standstill for four days, the loss amounts to Rs 2,000 crore. Add to that the losses due to lack of transportation for products, and new orders, and the figure goes beyond any reasonable calculation. And the impact will be felt across India because in many ways, the performance of industry in Gujarat affects the nation’s overall economic performance.

Even though the state has only 5 per cent of the country’s population, Gujarat still accounts for 10 per cent of national consumption, 20 per cent of total exports and 30 per cent of India’s total stock market capitalisation. The state is home to a slew of key industries including those in such sectors like petrochemicals, fertilisers, paints, cosmetics and drugs and pharmaceuticals. Much of these statistics are likely to change now.

The sectors hit badly include textiles, automobiles and ancillaries, chemicals, dyes, engineering units and gems and jewellery—an important item in the export basket. Gujarat has 80 per cent of India’s diamond cutting and polishing units and over 55 per cent of India’s dyes and intermediate manufacturing units.

Says an analyst from a leading industry organisation: "Business confidence is down miserably. Many industrial houses are thinking of shifting base, as the political situation holds out little hope. Gujarat was a hot destination for old economy industries. Today, it’s not even a choice anymore." The industry fears that all its financial calculations would be affected. Says Sunil Parekh, senior director, CII: "March is a month of high deliveries when firms strive to meet production targets and make payments. It’s turned out to be one of the lowest. Balance sheets will be severely hit."

The worst part is that no one is hopeful of things changing soon. Says Cyrus Guzder, CMD, AFL Ltd: "It will be a sad mistake for us to indulge in wishful thinking—that riots and civil unrest are just a part of life, and that it’ll soon be back to business as usual. What we are experiencing in Gujarat are not mere riots; nor will business bounce back. Gujarat has been wounded deeply this time. And the seeds are being sown for still worse to come."

Investor confidence will suffer most. In the last few years, investment flow into Gujarat has been particularly high. In 2001, it attracted over Rs 11,000 crore. Says Chirayu R. Amin, ex-FICCI chief and CMD of the Vadodara-based Alembic Ltd where staff attendance has plummeted to 30 per cent: "People will definitely review investment plans in Gujarat. While those who have already invested will be forced to stay, new ones will have second thoughts."

Says Guzder: "Not hundreds, but thousands of crores of investment will be turned away over the next few years if normalcy doesn’t return now. We already know that British Gas, due to invest $500 million in the state, the foreign strategic partners of Maroli Port, McDonalds, Samsung, LG and a host of others are openly discussing a review of investments in Gujarat."

But there are some optimists still left. Says Naishadh Parikh, MD, Amtrex-Hitachi Appliances: "In 1969, we had riots but investment continued. In 1974-75, the student agitation continued for 3-4 months, but investments didn’t stop. After the anti-reservation agitation of 1985-86, investments actually accelerated. So why should it not take off from here?" CII’s Parekh agrees: "Gujarat came back from the earthquake to attract India’s largest investments. It will definitely come back from this."

In more ways than one ways, Gujarat controls the nation’s business nerve. If normalcy doesn’t return soon, the whole of India will be paying a heavy price.

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