Tata's pull-out from Singur: A blessing in disguise for West Bengal?

Written by: S Sivakumar, CA
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AFTER weeks of intense speculation, Mr Ratan Tata has finally announced that they are pulling out of Singur. As expected, the blame game is on and the Left has slammed Ms Mamta Banerjee for the fiasco involving the shelving of the prestigious Nano Car project. Are there any lessons to be learnt from this latest development involving the pull-out? A lot, perhaps.

Undoubtedly, Mr Ratan Tata is one of the most respected industrialists of the country heading, perhaps, India's most ethical Group. Mr Ratan Tata had caught the fancy of the whole world by announcing his decision to sell the Rs one lakh Nano Car, which he unveiled with much fanfare in January 2008. Of course, the Nano project has run into several problems, including the much publicized compulsory land acquisition drive by the Govt of West Bengal and Ms Mamta Banerjee's opposition to the project.

For a long time, many of us used to wonder as to what made Mr Tata choose West Bengal in the first place. Perhaps, we thought, the WB Government should have offered incentives and subsidies on land and taxes, a tool commonly used by State Governments to attract projects. Thanks to the pressure that has been applied by Ms Mamta Banerjee, the salient features of the agreement have been quietly put up on the website of the West Bengal Industrial Development Corporation. The cat then is out of the bag and a quick look at the package would indicate that the WB Government is the larger investor in the project, as compared to the Tatas.

The package not only matches the benefits that the Tatas would have enjoyed in Uttarkhand and Himachal Pradesh, which are officially designated backward areas for the purpose of tax exemptions but actually goes, much beyond.

Let's take a look at some of these….

- Rs 200 crore loan to Tata Motors at 1 pc interest per annum, repayable in five equal annual installments starting from the 21st year of the date of disbursement of loan. This loan was released within 60 days of the signing of the agreement.

- Power for the project was to be supplied at Rs 3 per KwH, as against the going rate of around Rs 4.15 per KwH. In the case of a more than 25 paise per KwH increase in tariff in every block of five years, the government would provide relief through additional compensation to neutralize the additional increase. In effect, therefore, the project would have continued to get power at Rs 3 per KwH, irrespective of the market rates.

- The WB Government had also agreed to provide 645.67 acres to Tata Motors on a 90-year lease on an annual rent of just Rs 1 crore for the first five years and with an increase at the rate of 25 per cent every five years till 30 years. After 30 years, the rent would have been fixed at Rs 5 crore a year with an increase at the rate of 30 per cent after every 10 years till the 60th year. After that the rent was to be Rs 20 crore a year.

- The state government had also agreed to significantly subsidize the cost of land required for the factory and the interest paid by Tata Motors on loans taken to build the project. Thus, the West Bengal Industrial Development Corporation (WBIDC) was to provide Industrial Promotion Assistance in the form of a loan to Tata Motors at an unbelievable 0.1 per cent interest a year for amounts equal to gross VAT and CST received by the government of West Bengal in each of the previous year ended March 31 on the sale of each Nano from the date of commencement of sales

- Now, coming to fiscal incentives, the WB Government had agreed to provide excise exemption for the first 10 years and 100 per cent income tax exemption for the first five years and 30 per cent for the next five years, on par with the incentives offered by Uttarakhand.

The Tatas had promised the WB Government that they would invest around Rs 1500 Crores in the project, with about Rs 500 Crores expected to be invested by Tatas' vendors and sub-contractors. So, the total investment in the project is around Rs 2000 crores. But, what is the estimated cost of the subsidies and exemptions that the WB Government has offered to the Tatas?

Can we try to estimate the financial implications of the incentive package for the State, to the best of our knowledge, ability and arithmetic skills?

- Let's try to work out the cost of the interest subsidy vis-a-vis the Rs 200 cr loan at 1pc per annum. A simple compounded interest calculation at the current Banks' PLR of around 13 pc for 20 years would indicate that the Rs 200 Cr loan given by the WB Govt would have swelled to more than Rs 2300 Crores. And if we are to add the five year repayment period beyond the 20 years' moratorium, we have an additional Rs 700 odd crores. So, in effect, the Government's largesse on this account would work out to around Rs 3000 crores.

- Now, take the cost of the lease rental that would get charged to the Tatas and their vendors. As per calculations available, the average lease rental for the Tatas works out to about Rs 1,290- per acre, while the lease rental has been fixed at Rs 8,000 per acre per year for the Tatas' vendors. I don't know the prevailing market lease rates in Singur. If we were to assume a modest amount of Rs 20,000- per acre per year, the monetary benefit to the project would work out to around Rs 2 crores per year. For 20 years, this would work out to about Rs 40 crores.

- Let's now try and work out the cost of the power subsidy. On a wild guess, this could work out to around Rs 100 crores per annum and for 20 years, we have a staggering Rs 2000 crores worth of a largesse from the Government.

- What about the fiscal incentives. The 12 pc central excise duty on the Nano is to be borne by the State Government for the first ten years. Assuming a modest production of around 20 lakh Nanos over the first ten year period and based on an average ex-factory price of just Rs 1 lakh, the central excise duty alone would work out to around Rs 2400 Crores over the 10 year period.

And, we would also need to estimate the income tax benefits for the project, which are pegged at 100 pc for the first five years and 30 pc for the next five years. Mr Ratan Tata is not setting up this project for charity, of course. Tata Motors should be making handsome projects, thanks to the incentives given by the WB Government which should go a long way in reducing the cost of production of the Nano. Assuming a modest 5 pc profit before tax, on sale volume of around 10 lakh cars in the initial five years on an average selling price of Rs 1 lakh per car, the profit before tax would work out to Rs 500 crores. And, the income tax exemption for the next five years would work out around Rs 150 crores. Thus, we have a total of around Rs 650 crores thro' income tax benefits.

The total of exemption of central taxes would then work out to around Rs 3050 crores.

- And, does the story at least end here… No, Sir. We would need to calculate the value of the loan to be given by the WBIDC @ 0.1 pc covering the VAT and CST collected by the State Government (which means that the State Government effectively earns no sales tax). Assuming that around 10 pc of Nanos are swapped by people residing in the State, this should work out to another Rs 500 crores, on an estimated VAT rate of 12.5 pc, over a 20 year period.

- Further, the agreement states that the State government also promised to revisit the computation of the comparison of benefits offered by Uttarakhand and Himachal Pradesh.

- And to cap it all, the agreement states that the WB Government of West Bengal and Tata Motors will make joint efforts to maximize sales of the cars from the plant. (One shouldn't be surprised to see Mr Buddhadeb Bhattacharya inaugurating a Nano Dealers meet in, say, Dharwar, in Karnataka).

Jokes apart…. the Singur fiasco raises several disturbing questions with regard to the extent the State Government went, to have the Nano project located in the State..

- What is the economic logic of getting a Rs 2000 Crore project, when it involves an outgo of at least Rs 8,000 crores to 10,000 Crores from the Government's side? Has somebody in the WB Government worked out the cost of the incentives and subsidies given for the Nano project and will the Government will at lease now, come out clean with the complete details of the incentives that it has offered to the Tatas?

- Where is the justification for the Communist Government, which calls itself pro-poor, to be grossly unjust vis-a-vis the poor farmers of Singur in terms of land acquisition prices, when it has been so magnanimous to the Tatas, the classic capitalists from the Communists' point of view? It has been reported that out of the 13000 odd small and marginal farmers whose lands had been acquired by the State Government, only about 2000 odd farmers were against the project? Why the Government which had the heart to offer incentives equivalent to four times of the Tatas' investment had to act in a rather stingy manner?

- Why has the WB Government been so very desperate to get the Nano project and where was the need for it to compare itself to the tiny Uttarakhand, in terms of fiscal incentives to be offered to new projects? Uttarakhand and Himachal Pradesh are small economically backward states and extending incentives to set up plants is fully justified. How can the WB Government justify extending comparable incentives for a project coming up at a place which is just 45 KMs from Kolkata?

- Why has the CPM Government been totally reluctant to give out details of the package offered to the Tatas, all these days? That, for a party which has been questioning the Central Government's transparency in the nuclear deal, the Singur package badly questions the CPM Government's own transparency record, is very bad news indeed.

I am no great admirer of Ms Mamta Banerjee. But, it would be grossly unfair to blame Ms Banerjee for the Tata pull-out. She has shown the guts to take on the Buddhadeb Government and it's because of her efforts that we now have the broad details of the incentives that WB has offered to the Tatas.

Now that, the Tatas are pulling out of Singur, we can look forward to other States vying for the project. There are already reports that States like Karnataka and Gujarat are wooing Mr Tata, to re-locate the Nano project to their respective States, though it is not clear if they are aware of the incentives and concessions that West Bengal had committed itself to the Tatas.

Before parting......

- Mr Ratan Tata undoubtedly deserves our appreciation for trying to bring out the Nano at Rs 1 lakh. But, shouldn't we also appreciate Mr Buddhadeb Bhattacharya for working towards significantly reducing the cost of production of the Nano, by offering a package, which is unmatched and unheard of, in India's history. In fact, but for this largesse from the WB Government, Mr Ratan Tata would not have been able to look forward to selling the Nano at Rs 1 lakh.

- While one can understand offering of sales tax and other State taxes on concessional terms as a means for attracting new projects, one is completely baffled by the WB Government's decision to waive off excise duty which is a central levy. By doing this, the WB Government would have actually extended benefits to the purchasers of the Nano cars outside of WB, which would actually come at the cost of the taxpayers located in WB, which is gross unfair for a State Government to do.

- Shouldn't the incentives have been capped at the value of the investment made in the State? If the Tatas along with their contractors, etc. are investing Rs 2,000 crores in WB, where is the justification for the incentives to go much beyond Rs 2,000 crores? One can understand a zero investment logic but how can investment go 'negative', as is the situation in the Singur case?

- And remember, this is not even a Special Economic Zone project. This is a project for manufacture and sale of cars mainly in the domestic market. Incentives to SEZs are understandable given their export potential. But, to extend unheard of incentives for a domestic project is not justified.

- Did the Tatas commit a mistake by letting the Government negotiate the land purchase? Shouldn't they have directly negotiated with the farmers? Perhaps, Ms Banerjee might have been more forgiving, if the CPM Government had not assumed the role of a land acquirer for the Tatas and Mr Buddhadeb Dasgupta had not assumed himself to be the project's CEO.

- And, having negotiated a dream package involving unheard of incentives and concessions, shouldn't the Tatas been more understanding, in terms of meeting the expectations of the local small farmers with jobs, etc. considering the fact that out of the 13000 odd small and medium farmers whose lands had been acquired, only 2000 odd farmers were opposing the project?

- And, let's bear in mind, that the pull out happens mainly because of issues related to the compensation payable to the farmers. Couldn't have the WB Government been more liberal in terms of the compensation payable to the farmers, which in any case, would have formed a rather small portion of the overall financial package offered by the Government. Shouldn't the compensation been attractive enough for farmers to voluntarily give away their land for the project? The fact that the State Government went back and forth in enhancing the compensation payable to the farmers is proof of the lack of its honest intentions. Is this then a typical 'penny wise pound foolish' approach by the State Government that has cost it, the prestigious Nano Car project?

- And, should we not have a law that would lay down that the total quantum of incentives and concessions that a project cannot exceed the cost of the project?

Lastly, from an economic and non-political point of view and at the cost of becoming highly unpopular, the pullout by the Tatas, in my opinion, will do a lot of good for the Bengal's taxpayers, in terms of the incentives and concessions saved. While the CPM might have lost badly, in terms of the pullout by the Tatas, I would strongly believe that the taxpayers of the State have actually gained.

So, is the pullout then, a blessing in disguise for WB? And, will Karnataka, which seems to be very keen on getting the project, ensure that it does not fall into the same trap that West Bengal had fallen, vis-a-vis the Nano Car project?

(The author is Director of S3 Solutions)

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