GOLDEN" MAHARASHTRA'S ECONOMY IS STILL INDIA'S BIGGEST, BUT

UNCLAS SECTION 01 OF 04 MUMBAI 000444

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TAGS: ECON EFIN EIND EINV ELAB ENRG ETRD IN
SUBJECT: GOLDEN" MAHARASHTRA'S ECONOMY IS STILL INDIA'S BIGGEST, BUT
CHALLENGES AHEAD

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1. (U) Summary: The state of Maharashtra has historically been
the seat of economic and financial power in India. State
government officials, members of the business community, and
investors told Congenoffs that Maharashtra's historical status
as the top investment destination is also driven by
business-friendly policies, and good investment facilitation
agencies. However, due to the lack of infrastructure
development and disinterested political leadership in
Maharashtra, pro-active state leaders in Gujarat, Tamil Nadu and
Andhra Pradesh have used good policies to attract increasing
numbers of investors. Nevertheless, with foreign investment of
USD 30 billion -- 40 percent of India's total foreign investment
-- flowing into the Maharashtra during the past two and a half
years, Maharashtra's reign as India's economic and commercial
powerhouse remains undisputed. For these reasons, interlocutors
noted that Maharashtra is simply too important to be ignored and
engaging with the local government is the best way to address
business obstacles and make the state -- and by extension most
of Corporate India -- more investor-friendly. Moreover, in most
cases, the state-level experience plays a much bigger role in
the outcome of an investment, making engagement with state
leaders an essential effort. End Summary.



Maharashtra: India's Epicenter of Commerce & Industry

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2. (U) Maharashtra, the second most populous state in India and
the nation's largest employment provider, accounts for 13
percent of national income, one-fifth of the total industrial
output, and a quarter of the total exports of the country.
Maharashtra averaged 9 percent growth rate from 2004 to 2008.
(Growth declined to 6.7 percent in 2008-09 largely due to the
economic slowdown and global financial crisis.) The average per
capita income in the state is USD 1000, compared to the national
average of USD 750 per year. Mumbai, in the center of coastal
Maharashtra, is India's commercial and financial capital. It
houses the country's leading business conglomerates and is the
seat of economic and financial power in the country. The state
leads in total project investment with USD 107 billion worth of
projects planned or under execution according to Projects Today,
a leading Indian research organization. The state is also the
number one destination for foreign direct investment (FDI,) with
inflows of USD 35 billion, or over one-third of total FDI since
2000, according to Reserve Bank of India (RBI) data.




3. (U) Relative to other Indian states, Maharashtra has
historically had a reputation for having well-educated public
servants, a high standard of policing, progressive business
policies, a vibrant civil society, and an extremely dynamic --
and philanthropic -- business community. In post-independence
India, Maharashtra led in implementing pro-development and
pro-growth policies, developing irrigation and agriculture,
promoting industrial parks, permitting private education, and
building infrastructure. Mumbai itself claimed some of the most
modern road and rail systems, the best urban public transport
system, and some of India's finest universities and hospitals.
For much of India's independent history, Maharashtra and Mumbai
led India's growth, development, and modernization.



Historical Legacy, Pro-Business Policies and Good Investment
Facilitating Agencies Seen as Investment Enablers

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4. (SBU) A. M. Khan, the Principal Secretary for Industries for
the Government of Maharashtra, noted that the state's
geographical location, abundant manpower and natural resources,
and the presence of Mumbai as India's commercial and financial
hub has traditionally drawn investors to the state. According
to RBI data, Maharashtra attracted USD 30 billion of FDI in the
past two and a half years. In contrast, the other emerging

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pro-business and investor-friendly states of Gujarat, Karnataka,
Andhra Pradesh, and Tamil Nadu collectively secured FDI of USD
17 billion during the same period. Moreover, Khan claimed that
successive state governments, irrespective of their political
affiliation, have been consistent and clear in adopting and
implementing business-friendly policies to ensure that investors
remained committed to the state. Khan noted that after an
investment receives central government approval, if necessary,
most of the key decisions about the investment, as well as its
outcome and implementation, are made at the state level.




5. (U) Khan highlighted several favorable investment-enabling
industrial policies passed by the Maharashtra government. Since
the Biotechnology Policy of 2001, the state has garnered a 33
percent share of all investments in biotechnology. Similarly,
the IT and ITES policy of 2003 has led to an eight-fold increase
in IT exports and the wine policy of 2001 has resulted in the
state garnering a 90 percent share in wine production in India.
Business interlocutors pointed to the mega project policy of
2005 which they claimed made the state more investor friendly.
This policy assured fast-track approvals, single window
clearance, and infrastructural facilities for projects over USD
25 million, USD 65 million or USD 130 million or employing over
250, 500, or 1,000 persons depending on the location. Khan said
that 159 mega projects with proposed investment of USD 291
million and an employment potential of 200,000 new jobs have
been approved since the policy was announced. 41 of these
projects have been implemented, with 19 located in
underdeveloped areas of the state.




6. (U) In a series of discussions with the business and
investment community in Maharashtra, interlocutors acknowledged
the state's long-standing attractiveness to businesses and
investors. Maharashtra's business community largely agreed that
politically stable policies were crucial, and pointed to other
states where government-dictated business policies can change
with every new government, and where business can depend on
competing political patrons for success. Businesses also
praised the role of state government agencies, especially the
Maharashtra Investment Development Corporation's (MIDC),in
creating a business-friendly investment environment. MIDC was
formed to develop infrastructure and create investment
opportunities in Maharashtra's less developed areas. In MIDC's
230 industrial parks, an investor is assured of sound
infrastructure facilities, clear land ownership and established
connectivity with other states and to the ports, they noted.
MIDC's initiatives in creating industrial parks in Pune helped
transform the region from Mumbai's poor neighbor to a business
and investment competitor. The City Industrial Development
Corporation (CIDCO) and the Maharashtra Airport Development
Corporation (MADC) have played similar roles in transforming
Navi Mumbai and Nagpur.




7. (U) Business interlocutors noted that Maharashtra has
historically attracted investment dating back to the British
rule. Longstanding investors are reluctant to shift from the
state as inertia and comfort with the status quo sets in, said
Pradeep Bhargava, the MD of Cummins Generator Technologies. As
linkages with the customer and supplier base are especially
important for the manufacturing industry, Maharashtra is the
natural choice for many businesses whose customers or suppliers
are already present in the state, he added. In contrast,
process industries like chemicals and petroleum which do not
require close proximity to customers or suppliers can flourish
in states like Gujarat, which many claim is more
business-friendly. There are exceptions to this argument;
Hyundai and Ford chose to establish manufacturing facilities in
Tamil Nadu away from Maharashtra's "auto alley" devoted to the
production of automotive components, largely due to investment
incentives.



The Decline of Mumbai

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8. (SBU) Maharashtra's flourishing business climate
notwithstanding, almost all interlocutors agreed that its
capital, Mumbai, is no longer the center of growth and
innovation it once was. First, Mumbai's infrastructure has
eroded, with too few projects in the pipeline, after long
delays. Second, it has no discernable urban leadership, and
state leaders, most of whom come from rural provinces, show
little interest in Mumbai's future. Instead, the continued
demand for land and urban development has spurred a boom in real
estate and land speculation. The most dynamic businesses in the
city are now property and land developers who, in league with
local politicians, conspire to manipulate and control the
allocation of land and construction permits, instead of focusing
on innovation. According to one investor, "Mumbai has now
become an extraction economy; there might as well be oil under
the ground, given all the fights over land." Given this focus,
most factories and industries have long ago relocated in
industrial belts far from Mumbai.




9. (SBU) On the other hand, other cities, such as Hyderabad,
Bangalore, and the New Delhi region, have become centers of
excellence for IT, entrepreneurism, and innovation, and have
greatly improved in livability and sophistication. With cheaper
living and working conditions, more modern infrastructure,
easier accessibility to high-quality schools, and space to
expand, these cities offer more for the young entrepreneur and
the business. Representatives of several private equity firms
told Congenoff that almost all their prospective investments now
come from these cities; almost none come from Mumbai. In a
business survey conducted five years ago, 80 percent of
respondents interviewed said that they were downsizing their
operations in the city.



Is Maharashtra Losing its Investment Allure?

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10. (U) While Mumbai suffers from the typical urban challenges
that affect large cities, weakening infrastructure is one of
Maharashtra's greatest liabilities. The state faces a peak
power demand deficit of 24 percent resulting in four to twelve
hours of scheduled power outages in most parts of the state,
excluding Mumbai. Physical infrastructure -- rail, roads,
sewerage and water -- is deteriorating or non-existent. Project
execution has been poor, and while a few new projects are moving
forward, new infrastructure projects have suffered from delays,
long even by Indian standards. As a result, many emerging
states with increasingly better infrastructure and pro-business
and pro-development programs are catching up. However, Ashutosh
Parasanis, Managing Director of PTC Software, argued that the
pressure on existing infrastructure is much higher in
Maharashtra due to its high growth rate and increasing number of
new businesses and migrant population.


11. (SBU) Moreover, contacts widely agreed that ten years of
indifferent governance by the ruling Congress/Nationalist
Congress Party coalition -- which was re-elected in October 2009
- have further decreased investor confidence in the state.
Businesses repeatedly claimed that political leaders devote most
of their time to the politics of remaining in office instead of
developing and implementing development and economic policies.
Contacts acknowledge that corruption exists in almost every
business transaction in the state, though no more or less than
other states in India. Businesses must bribe government
officials to secure permits and permissions, payouts are made to
politicians and labor leaders to ensure peace in factories, and
commissions are a mandatory component of any government
contracts or tender. Maharashtra's inability to improve
governance, implementation, and infrastructure development at
the same rate as some other states has caused it to lose ground
in relative comparisons. For example, an India Today study
ranked Maharashtra at no. 8 among all Indian states in the
overall quality of life performance indicators in 2009, down two
places from the sixth position it held from 2004-2008.




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12. (SBU) Businessmen and officials commented that
Maharashtra's leaders have traditionally had a governing style
that puts them at a disadvantage. While Maharashtra government
officials are reticent and modest by nature, and shy away from
aggressive marketing and promotion efforts, other state leaders
aggressively tout their strengths to attract investors.
Business still applauds Gujarat Chief Minister Narendra Modi's
personal and pro-active involvement in business, despite his
role in the 2002 Gujarat carnage. Former Andhra Pradesh Chief
Minister Chandrababu Naidu single-handedly transformed his state
to a leading global IT hub. Dynamic leadership in other states
coupled with tax incentives, concessions and a warm and
welcoming environment could continue to lure business away from
Maharashtra, businessmen noted.



But Engagement with Local Government Could be the Key

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13. (U) Members of the Mahratta Chamber of Commerce, Industry,
and Agriculture (MCCIA) believe that business chambers of trade
and commerce like their organization play a vital role in
bridging the gap between government and industry. For example,
they said that their own chamber hosts bi-monthly meetings with
the "guardian minister" of Pune and other government officials
from different departments and its members where problems are
discussed which the government commits to resolving. In this
way, through direct engagement and interaction with the
government, business chambers can assist in removing investment
roadblocks and addressing challenges to business. Naser Munjee
of the Development Credit Bank believes that civil activism will
spur the government to action. He, however, admitted that
direct engagement with local government to solve problems is
more difficult in a large state like Maharashtra, or a large
city like Mumbai, due to the plethora of government agencies and
multiple layers of bureaucracy. Munjee pointed out that
whichever mechanism businesses chooses to adopt, engaging with
leadership at the state level is key to ensuring greater trade
and investment relations with India. The central government can
only develop policies to facilitate investment into the country
but the states are central in developing a favorable business
climate, he maintained.



Comment: State-Level Engagement Key to USG Efforts in India

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14. (U) Maharashtra's undisputed reign as the nation's prime
investment destination is not without its share of problems and
challenges that have to be addressed for the state to maintain a
favorable business and investment environment. Indeed,
overcoming the state's political lethargy and meeting the
state's infrastructure needs may be beyond the current crop of
political leaders. However, we recommend that USG agencies
consider more engagement with state leaders, as the majority of
decisions that impact the experience of an American company in
India are within the purview of the state, and not the central,
government. The business community agrees that the state
government is open to discussing, debating and even resolving
problems and issues that plague business. Increased interaction
and direct engagement with local government officials may,
therefore, be the best way to push concerns and demand remedial
action. End Comment.
FOLMSBEE