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Investing in North East India

The Pros and Cons

The special fiscal package which was devised to boost up investment in Northeast has entered 15 years. However the policy has failed to trigger investment flow in the region in the manner as it was conceived.

Big corporates are still shying away from the region and mega investment is eluding the region.The government of India announced a separate industry policy namely the Northeast Industrial policy (NEIP) in 1997 to promote industry which has however failed miserably.

Former Managing Director and CEO of Tata Consultancy Services (TCS), S. Ramadoroi remarked that big corporates like TCS don’t come to a place for incentives. The remark was made soon after a presentation was made to him on the incentives available in North East India.

NEIP led to the mushrooming of some industrial units in and around Guwahati. The policy managed to attract investment to the tune of just `1000 Crore and led to the mushrooming of nearly 700 industrial units. These investments have been made in tea, coal, plastics, cement, cosmetics, pan masala, mosquito repellant, metallurgical and other miscellaneous sectors.
The policy was extended to Uttranchal in 2002 and in the span of three years Uttranchal has managed to attract more than `2000 Crores in investments. According to the Commerce Ministry, under the old policy at least 20,000 people have received employment. The government of India has to admit that that level of investment did not commensurate with the expectation of the government.

After much deliberation, political pressure and lobbying, the government came up with another industry policy as the policy of 1997 lapsed in 2007. The government claimed that the new policy is a much improved version and has taken into several upcoming sectors.

The North East Industrial and Investment Promotion Policy (NEIIPP) included Sikkim. The policy increased the capital subsidy and included service/biotechnology sector within the ambit of the policy.

Under NEIIPP, 2007, all new units as well as existing units which go in for substantial expansion, unless otherwise specified and which commenced commercial production within the 10 year period from the date of notification of NEIIPP, 2007 will be eligible for incentives for a period of 10 years from the date of commencement of production.

The incentives under the NEIIPP, 2007 will be available to all industrial units, new as well as existing units on their substantial expansion, located anywhere in the Northeastern Region. Consequently, the distinction between ‘thrust’ and ‘non thrust’ industries made in NEIP, 97 will be discontinued from the date of notification of NEIIPP, 2007.

Under NEIIPP, 2007 incentives on substantial expansion was given to units effecting ‘an increase by not less than 25 percent in the value of fixed capital investment in plant and machinery for the purpose of expansion of capacity/modernization and diversification’ as against an increase by 33 ½  percent prescribed at present.

Under NEIIPP, 2007, 100 percent excise duty exemption was continued as at present on finished products made in the Northeastern Region. However, in cases where the CENVAT paid on the raw materials and intermediate products going into the production of finished products (other than the products which are otherwise exempt or subject to nil rate of duty) is higher than the excise duties payable on the finished products, ways and means to refund such overflow of CENVAT credit will be separately notified by the Finance Ministry.

According to the policy, interest subsidy has been made available at the rate of 3 percent on working capital loan under NEIIPP, 2007 as at present.

Under NEIIPP, 2007, new industrial units as well as the existing units on their substantial expansion are eligible for reimbursement of 100 percent insurance premium under the Comprehensive Insurance Scheme

In a big departure from the earlier practice, the policy discontinued tobacco and tobacco products, pan masala, plastic carry bags and goods produced by refineries from the benefit of incentives under NEIIPP.

It was observed that provisions of the NEIIPP, 2007 would provide the requisite incentives as well as an enabling environment to speed up the industrialization of the Northeastern region which is otherwise less than 4 percent per annum as against a national average of 8 percent.

However the euphoria generated by the new policy started fading away when the Finance Ministry slammed restrictions and diluted provisions relating to Central Excise Duty.  Prior to the dilution, a manufacturer was entitled to a 100 % excise duty exemption on goods manufactured in the region. However, after the amendments, with effect from April 1, 2008 the manufacturer is stipulated to get the refund of only duty paid on value addition in the place of unlimited refund of duty paid in cash.

This notification had hard hit FMCG companies like Godrej, Hindustan Unilever (HUL), Emami, a Century Plyboards subsidiary, even ferroalloys and gas-cracker project.

According to Federation of Industry & Commerce of North Eastern Region (FINER) the notification affected excise refund to the tune of `700 Crore. RS Joshi, Chairman of FINER said, “Investments will shy away from the North East as in other places like Uttaranchal and Himachal Pradesh the companies will continue to get 100 percent excise refund.”

The Finance Ministry has withdrawn the total exemption of excise duty paid from the personal ledger account (PLA) and allowed exemption only up to 56% of total excise duty paid from PLA on medicines and cosmetics & toiletries. Exemption rates are different for various industries.

Assam Chief Minister Tarun Gogoi has argued before the planning commission that that the industry policy has not benefited small and marginal enterprises. “There are a number of small units in Assam giving employment opportunities in village areas. Besides this handicraft, handloom and micro sector have also given maximum employment opportunities, but there is no separate policy for this sector. A liberal policy package should be declared for assistance of Village & Cottage Industries (handloom, handicraft and micro sectors). The package may consist of 50 percent Central Capital Investment Subsidy on fixed investment in plant & machinery, building and other equipment, 5 percent investment subsidy on working capital and subsidy for yarn procurement, setting up of  Central Raw Material Depot.”

Now that the incentives have continued for 15 years has this led to substantial change in the industrially backward North East India? Has it brought any substantial change as far as the lives of common people are concerned?

Units here are entitled to transport subsidy. A whopping `974.82 crore as transport subsidy was disbursed in the fiscal year 2008-09 and of `1209.49 crore in 2009-10 fiscal. A sum of `107.61 crore was disbursed under the capital investment subsidy in 2008-09 and `125.03 crore was disbursed in 2009-10.

However there were several bogus claims in connection with transport subsidy. An audit by the Comptroller and Auditor General in 2008-09 also revealed several cases of inadmissible payments.

Several forums have put a question mark on the continuance of subsidies. For example they say the price of cement here is always on the higher side despite the fact that cement units set up here have hugely benefited from the subsides.

There are suggestions from certain quarters to the Department of Industrial Policy & Promotion (DIPP) to change the rail head. Presently Siliguri in North Bengal is the railway head from which raw material and finished goods are eligible for subsidy.

Sources said, “This scheme was made in 1971 when North East India hardly had a railway network, now railway network is there in Upper Assam areas and touches states like Nagaland and Tripura. The Ministry of Railways has made a massive investment in rolling of network, so there is no need for Siliguri as the rail head under the scheme.”

There is another problem plugging the industry namely the untimely release of subsides. Numerous applications are pending for the capital investment subsidy.  

The Union Ministry of Development of North Eastern Region (DoNER) has asked the Finance Ministry to widen the ambit of fiscal incentive and include emerging sectors like higher education in the private sector as well as in the Public Private Partnership (PPP) mode within the policy.

DoNER Ministry pleaded to develop the North East as a Special Export Zone as the region has a vast international border. In line with the norms of the SEZs, the eligible units of the NER should be exempted from the levy of Service Tax.

The DoNER Ministry has observed that for Power Generating Units based on both conventional and non-conventional sources there is the need for enhancing the limit up to 200 MW in place of 10 MW for a unit to be eligible for availing the Capital Investment Subsidy, Interest Subsidy and Insurance Subsidy.