Why development has come to a standstill in Andhra Pradesh

Businessmen in Hyderabad are eagerly looking forward to the year 2014. That's because they believe nothing will transform the depressed business environment in the state till the next general elections.

A combination of local and national crises has taken its toll on Andhra Pradesh.

The prolonged stir for separate statehood for the Telangana region, acute shortage of power and tight liquidity all played a part in slowing economic growth in the state (see table).

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Last week, for the second time this year, the state government declared a three-day power holiday every week for industry.

This power cut, according to industrialists, is resulting in a 25 per cent drop in productivity and a 50 per cent rise in energy costs.

Added to their woes is the arrest of industrialist-turned-politician, Y S Jagan Mohan Reddy (known as Jagan for short), Kadapa MP and son of former Chief Minister, the late Y S Rajasekhara Reddy (YSR), in a disproportionate assets case.

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Though the CBI probe was ordered by the Andhra Pradesh High Court, the arrest is being widely perceived as the product of political rivalry with the ruling Congress – Jagan floated a breakaway party when he was not given the chief ministership after his father died – and is unlikely to turn the tide.

In the first information report (FIR) filed in a local court, the Central Bureau of Investigation (CBI) alleged that several companies have secured undue favours from the government in return for investing in companies owned by Jagan.

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These companies include, among others, Aurobindo Pharma, India Cements, Hetero Drugs, Ramky group, Trident Life Sciences, Mantri Developers, Dalmia Cements and the Penna group.

The CBI has also identified 26 government orders (GOs), issued during his father's regime, as the source of quid pro quo deals benefiting Jagan companies.

The Supreme Court, on March 12, had issued notices to six ministers who continued as members of the state Cabinet after YSR's death in a helicopter crash, besides some senior Indian Administrative Service officers for their involvement in the issue of the GOs.

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The CBI had so far arrested one of the six ministers, Mopidevi Venkataramana, and a bureaucrat, Brahmananda Reddy, in this connection.

Nimmagadda Prasad, the founder of Matrix Laboratories that was sold to the US-based Mylan, is the sole businessman so far to be behind bars for allegedly making questionable investments in Jagan companies.

"The business climate has been vitiated by all these factors. Industrial activity has come to a standstill. Every bureaucrat, politician and businessman has decided to postpone decisions," Devendra Surana, managing director of Surana group and senior vice-president of the Federation of Andhra Pradesh Chambers of Commerce and Industry (Fapcci), told Business Standard.

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"No company has considered expansion plans or making further investments in the state in the past two years," added the promoter of a pharmaceutical company.

 In January this year, the state received investment proposals worth Rs 648,000 crore at the Partnership Summit held by Confederation of Indian Industry (CII) and the Union commerce ministry in Hyderabad.

Among the companies that signed memorandums during the summit are the GMR Group, which had proposed an over Rs 33,000-crore refinery project in the 10,000-acre Kakinada special economic zone, and the Kuwait-based Al Qebla Al Watya Inc, which came forward to set up an oil refinery at an investment of $2 billion (about Rs 11,000 crore).

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According to a senior government official, the companies that proposed large investments have obviously opted to wait to see how the political situation pans out.

For instance, though the state government allotted 1,200 acres for its project, the Kuwait company is yet to take possession of the land. GMR, which has close political links in southern India, maintains that it is yet to find a strategic partner for refiner.

To be sure, not all of the inaction is the result of the state's unstable politics. Of the Rs 678,000 crore (Rs 6,780 billion) proposals, the energy sector accounts for close to Rs 300,000 crore (Rs 3 trillion).

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Many of these power projects are expected to take much longer given the current uncertainty over supply of natural gas and coal.

Meanwhile and not surprisingly, Prasad's arrest and the interrogation of other industrialists in connection with Jagan's case have spooked the local business community.

"They (the industrialists) are facing hardships for no fault of theirs," said one entrepreneur, requesting anonymity.

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Their opinions are interesting. They maintain that the law should take its own course and the guilty should be punished. But also point out that anybody who wants to do business in the country can't be completely aloof from the political establishment.

"In a developing economy like India where so much money is being spent by the government, corruption can't be completely segregated from day-to-day life. This is because all people will not have the same values," says Chairman and Managing Director of Infotech Enterprises, B V R Mohan Reddy.

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In the light of the unfolding scams, the business community is seeking clear and transparent industrial policies. "When there is a transparency in government policies, corruption issues will not crop up," said Ramesh Datla, managing director of Elico Limited and former office bearer of CII.

While Fapcci President V S Raju thinks the current situation in the state is "temporary", others are waiting for a new regime in 2014.

Whether things will really improve after 2014 is a moot point.