ORISSA CONTINUES TO GROW IN IT, INDUSTRY, ANDMANUFACTURING

UNCLAS SECTION 01 OF 03 KOLKATA 000261 SIPDIS SENSITIVE SIPDIS DEPT PLS PASS USTR - AADLER E.O. 12958: N/A TAGS: ECON PGOV EIND EINV PHUM EMIN IN KS SUBJECT: ORISSA CONTINUES TO GROW IN IT, INDUSTRY, ANDMANUFACTURING REF: KOLKATA 88 ¶1. (U) Summary: During a July 31-August 2 visit to the East Indian state of Orissa, ConGen met with a range of local politicians, bureaucrats, business people and media representatives to assess the present economic conditions in the state. The Orissa government has been intent on developing the state's great mineral resources and since 2004 has signed over 45 memorandums of understanding (MOUs) with investors in the mines, minerals and energy sector. Approximately 23 agreements are presently operational. However, the business community is closely watching the fate of two large projects in the state: South Korean steel manufacturer Pohang Steel Corporation's (POSCO) 12 million ton per year greenfield steel plant in Jagatsinghpur district, with an estimated investment of USD 12 billion and Tata Steel's six million ton per year integrated steel plant in the Kalinganagar Industrial Complex in Jajpur district. Both projects are embroiled in land acquisition disputes. The state government has been slow to respond to the concerns of the tribal communities to be displaced by these projects and officials also concede that the Maoist insurgency, present in some of the mineral rich areas, will take advantage of a possible anti-industrialization backlash. In addition to the manufacturing sector, Orissa is seeing significant development in its Information Technology (IT) and infrastructure sectors. While Orissa appears to be on the edge of a significant economic boom fueled by its great natural resources, the state government still struggles to find the appropriate balance between industrialization and social development, a problem that affects India as a whole. End Summary. ¶2. (U) Orissa is a state of contrasts, being one of India's poorest, with 46.4 percent of the population living on just 35 cents a day; while also having huge reserves of India's key resources critical for the country's economic growth. Orissa has 33 percent of the country's iron ore, 24 percent of its coal, 50 percent of its bauxite and 98 percent of its chromium. All these minerals will be needed to build India's new infrastructure and industry, which is why foreign investors such as the POSCO, Mittal-Acelor and others have been looking for a presence in the state. ¶3. (U) However, the Orissa government has been slow in acquiring and providing the land to the investing companies, following recent violent land disputes in the state and in the neighboring state of West Bengal (reftel). In January 2006, in Orissa's Kalinganagar district police fired on protestors opposed to the loss of their land for Tata Steel's planned six million ton integrated steel factory and killed 13 people. In March 2007, West Bengal police fired on and killed 14 villagers protesting the loss of their land to a proposed Special Economic Zone (SEZ). In addition to delaying land acquisition, state government officials developed compensation and rehabilitation packages that would be more attractive to displaced villagers. This new Orissa Resettlement & Rehabilitation Policy was announced on May 14, 2006 and is currently in operation. The Metals and Minerals Sector -------------- ¶4. (U) For the business community, POSCO and Tata Steel's projects have become the principal barometer of the state's investment climate. Tata's project requires around 2000 acres of land, most of which is home to thousands of tribal villagers. However, Tata Steel's head of the Kalinganagar project Sanjay Pattnaik was confident that the problems will soon be resolved. According to Pattnaik, civil work for the first phase of the project has already started. Tata Steel Managing Director B. Muthuraman also announced to the media that the company would place orders for blast furnace, sinter plant, and coke oven unit in August 2007. "We are on course in Orissa. We have identified the mines and applied for mining lease to the state government," he said to the press. ¶5. (U) In POSCO's case, of the total 4,004 acres of land required by the company, 3,566 acres belongs to the government. However, encroaching villagers on the government land are resisting leaving the land. Home Secretary T.K. Mishra and Chief Secretary A.K. Tripathy both claimed that the KOLKATA 00000261 002 OF 003 rehabilitation and resettlement (R & R) package designed by the state government is one of the best being offered in the country. They also said that POSCO was willing to meet the demands of those losing their land. POSCO has even agreed to offer the compensation package to the squatters on government land. Many of the encroachers are betel vine cultivators and POSCO is willing to find alternate cultivation sites for them. In addition to the land issue, POSCO India Executive Director G.W. Sung, in Bhubaneswar for over a year, was frustrated with the bureaucracy he has faced in getting clearances from a variety of government departments both at the federal and the state level. ¶6. (SBU) Business leaders in the state believe that one of the major difficulties the `mega projects' face is that the government went on a MOU signing spree without the administrative means to implement the agreements. They feel that the politicians and many of the old-school bureaucrats do not have the understanding to respond to the private sector's requirements. The government has only recently sought to develop its capacity to handle large industrial projects. Managing Director of Orissa's Industrial Infrastructure Development Corporation (IDCO) Vishal Dev, a more business-sensitive bureaucrat, is now leading the government's land acquisition work. Dev conceded that land acquisition is a contentious issue and that the government was going slow. He felt that the best way forward was to reach out to the protesters and explain the details of the compensation package and the benefits for the local people and the local economy if the planned projects were allowed to proceed. He has been doing this, traveling frequently to the troubled project sites in Jajpur and Jagatsinghpur districts to speak to villagers. The Maoist Problem -------------- ¶7. (SBU) Related to the concern over displaced villagers is the potential for Maoist insurgents in the state to capitalize on the popular discontent in the affected areas. Orissa's Maoist problem is not as acute as in the neighboring states of Chhattisgarh, Jharkhand and Andhra Pradesh although Home Secretary Mishra said that 18 of the state's 30 districts were SIPDIS affected by Maoist activities. The Maoists tend to take refuge in the state when the police in Andhra Pradesh or the other two bordering states crack down on the insurgents. According to state officials, the Maoists intimidate tribal villagers and seek to incite them in areas where there are land disputes such as in Kalinganagar. Business people in Bhubaneswar believed that the situation is presently manageable but were concerned that Maoist activities in the mineral rich tribal districts were increasing and that the police were not effective in responding. IT and other sectors -------------- -------------- ¶8. (U) In addition to heavy industry, Orissa has attracted India's top IT companies, including Infosys, Satyam and Tata Consultancy Services. Software and IT exports in 2006-07 were approximately USD 180 million, registering a 58 per cent rise over the previous year. A number of new investments are also planned. Wipro will soon open offices and employ 3,000 people by 2009. U.S. company Genpact will open by December 2007 and employ 5,000. ICICI Bank is setting its back office eastern region hub in Bhubaneswar and is set to employ 12,000. IBM will start operations in September 2007 with a facility employing around 80 people, it is said to be the precursor to a fully fledged development center in the near future, according to IDCO Managing Director Vishal Dev. Dev says that the real estate and retail sector in Bhubaneswar too is experiencing a spurt in growth, to meet the demands of a growing number of employees in the IT sector. ¶9. (U) Besides the IT sector, the state government is also setting up infrastructure to attract bio-pharmaceutical, chemical and petro-chemical and automotive companies. A mega-Petroleum, Chemicals & Petrochemicals Investment Region (PCPIR) is already under development at Paradeep and a 63 acre bio-pharma park is being set up in Bhubaneswar and an automotive hub is planned in Choudwar anticipating the growth in the steel KOLKATA 00000261 003 OF 003 industry. Infrastructure projects -------------- ¶10. (U) Orissa is a power surplus state. According to Vishal Dev, 13 additional thermal power projects are under various stages of implementation, with total capacity of 13,500 MW. Major investors include Tata Power, Reliance Energy, Sterlite Energy, Mahanadi Aban, Monnet Ispat, Essar Power, Lanco group, NavBharat Power, CESC and GMR Energy. U.S. company AES, which had a turbulent relationship with the state authorities, recently resolved its long standing disputes. AES has been awarded a coal block in Jharsuguda district near its current generation plant. AES plans to augment its generation capacity from the current 420 MW to an additional 1200 MW through the addition of two 600 MW thermal power plants. With regard to port development, a new private port at Dhamra is being developed by a joint venture of Tata Steel and Larsen & Toubro Limited called the Dhamra Port Company Limited (DPCL). Managing Director of DPCL S.K. Mohapatra said that after a long battle with environmentalists, work on the port has started. The port will have a cargo handling capacity of 80 million tons. In the roads sector, investment of USD 6.1 billion over the next 5 years is planned to upgrade state and national highways and improve connectivity between the mining and metal production belts and between the hinterland and ports. The rail network too is being expanded, with an investment of USD 1.46 billion over the next 5 years. ¶11. (SBU) Comment: Orissa is just now seeing the benefits of India's economic reforms, with development of its mineral resources, growth of its IT and services sector and expansion of its infrastructure. However, it still suffers from a sclerotic state bureaucracy and persistent poverty, which slow rapid economic growth and foster conditions favorable to the Maoist insurgency. To fulfill its economic potential, Orissa will need more rapid and demonstrable proof of the broader social benefits of its commercial policies. Otherwise, poor communities will agitate against industrial plans and investors will pull the plug on projects. As a positive indicator, even with the problems experienced by Tata Steel and POSCO, the state government appears to be achieving a degree of success at the mid-sized business level as evidenced by the projects being implemented and the continued expansion of many companies and in the IT sector. U.S. companies are also finding opportunities in Orissa as in the case of AES, GenPac and others. Orissa presents very real challenges but as with much of India, the overall commercial prospects tilt favorably toward continued growth. JARDINE