The Baddi Special Economic Zone – A Review

Industry policy and development in North India

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Several states in India have set up Special Economic Zones (SEZs) with the intention of promoting investments in production facilities that would generate substantial local employment and help develop the relatively “backward” areas.
One of the much touted schemes was that set up by the Government of Himachal Pradesh, a state in North India, in 2003 at Baddi, situated about 45 kilometers from the city of Chandigarh. The Baddi-Nalagarh-Barotiwala belt was designated a SEZ and several financial and tax incentives were announced to encourage development in that area. The incentives were as follows:
– Exemption from payment of excise duty (presently 16.36 per cent) on all products manufactured at new units set up here.
– 100 per cent exemption from payment of income tax for the first 5 years and 30 per cent exemption for the subsequent 5 years.
– Capital investment subsidy of 15 per cent on plant and machinery subject to a ceiling of INR 3 million.
– Adequate allotment of cheap land and faster clearances from all government departments. – Creation of the necessary basic infrastructure.

The incentives were made available to all new units as well as existing units going in for expansions or fresh investments. However, one condition laid down was that at least 70 per cent of the workforce at these units would have to be local.

Many companies, especially those in the pharmaceutical and FMCG sectors, have consequently set up new plants in the Baddi-Nalagarh-Barotiwala belt. These include well-known names like Ranbaxy, GSK, Cadila, Torrent, Alembic, Panacea Biotec, Sun Pharma, Dr. Reddy’s Labs, Nicholas Piramal, Wockhardt, Zydus Cadila, Hindustan Unilever, Dabur, Colgate Palmolive, Balsara, VVF, Wipro, Bajaj Electricals, Gillette, Cadbury, Lenovo and Singer. They also persuaded several of their packaging suppliers to set up shop in this area so that they could source duty-exempt packaging materials from close by. More than 100 packaging units have set up facilities here and some of the larger ones are Essel Propack, Hindustan Tin Works, Jauss Polymers, Borkar Packaging, Baddi Print Pack, Best Packaging and Janus Packaging.

We visited the Baddi belt and talked to manufacturers there to assess how successful the whole exercise has been to bring you this report. We found that some of the companies were using it only as a tax haven and not really as a “manufacturing” base as defined by law. They were only carrying out peripheral activities like preservation and storage, cleaning operations, packing or repacking, labelling or relabelling and sorting which did not really amount to manufacture. This has led to the Government of India issuing a notification on the 18th of January 2008 clarifying that the excise duty exemption is not available to units that are not actually involved in manufacture. Consequently, the exemption has been disallowed in such cases and demand notices have been issued to recover past dues. According to our information, two major companies affected by this are GSK and Gillette.

The overall experience of manufacturers – both end-users of packaging and packaging material suppliers – in the Baddi area has been one of relative disappointment. The reasons for this are as follows:

– There is a severe shortage of skilled labour and the companies have had to invest a lot of money in hiring and training local people to conform to the 70 per cent local workforce law. In many cases, compliance with this law has not been possible despite the investment.
– Basic infrastructural facilities are very inadequate. There is no organised “industrial estate” system or development of communal infrastructure on any reasonable scale.
– The area is not connected to any major town or city by rail. Even road connections are of poor quality. The most important road link – the bridge that connects Baddi to Nalagarh – has collapsed over a year ago and there has been no move to restore this.
– There is a strong local truckers’ union that charges exorbitant rates for transportation.
– The local cost of living is high and basic amenties are woefully inadequate making it difficult for employees.
– Power outages are frequent and all units must willy-nilly install 100 per cent generator back-up.

As a result, many people who were proposing investments in this area are now looking more favourably at setting up manufacture in the neighbouring state of Uttarakhand, which now offers the same financial incentives and is much better organised in terms of infrastructural development and connectivity. (Major packaging suppliers who have invested there recently include Paper Products, Alcan Packaging, ITC and 21st Century Packaging.)
Only large companies like Hindustan Unilever seem to be less unhappy. Even they admit infrastructure is a serious bottleneck but, being large and well organised, they have been able to work around this handicap. They are, however, happy with the boost to their bottom lines as a result of the financial incentives. Most packaging suppliers have, nevertheless, seen large gains in sales volumes from customers located in this belt. There is an apprehension that the basic excise duty rebate may be brought down to 8 per cent from 16 per cent.