Impact of 2002 riots? Gujarat has long way to go to catch up with Maharashtra: CMIE

Income generated from a rupee invested into net fixed assets

By Rajiv Shah
The Centre for Monitoring Indian Economy (CMIE), India’s topnotch independent economic thinktank headquartered in Mumbai, has suggested that half-a-dozen biennial Vibrant Gujarat business summits sponsored by Gujarat chief minister Narendra Modi to whitewash the impact of the 2002 communal riots have failed achieve their desired result. In a recent commentary, it has said, the Gujarat industrial investment was severely hit “following the 2002 riots”, and the result was, the “net capital formation was negative for three consecutive years following the riots.”
“In the last two years for which the Annual Survey of Industries (ASI) data is available (2009-10 and 2010-11), Gujarat made good progress on investments”, opines CMIE’s Mahesh Vyas, adding, “Its fall post the 2002 riots and its recent rise in investments as seen in the ASI data matches our observations from CMIE’s CapEx data.” However, Vyas regrets, “But, the last two years cannot undo the damage of the fall in investments post riots too soon. A ten-year perspective reveals that Gujarat has still a long way to go to catch up with the industrial leader Maharashtra.”
While pointing out that “Maharashtra, Tamil Nadu and Gujarat are the leading industrial states of India”, the CMIE expert, in his commentary titled “Matchless Maharashtra”, states, “Each of these is characteristically different. While Tamil Nadu is a labour-intensive industrial state, Gujarat industries are capital intensive. And, Maharashtra is the state that deploys both, labour and capital better than both the other two states.” The expert underlines, on the basis of his analysis, Gujarat is among the worst users of capital.”
Despite Gujarat’s capital intensive nature of industries, Vyas points out, they “are not the most efficiently run ones”. He says, “A rupee invested into net fixed assets generates an income (net value added) of 33 paise in Gujarat. A similar investment in Tamil Nadu yields 49 paise and in Maharashtra it yields 64 paise. Thus, the lead that Gujarat has in terms of the amount of investments made in the state is lost on the lack of sufficient efficiency in the utilisation of the assets created. In fact, on this count (efficiency in the use of capital), Gujarat fares very poorly as it ranks 28th of the 32 states and union territories covered in the ASI data.”
“According to the Annual Survey of Industries (ASI), Tamil Nadu employed 1.9 million in the organised factory sector in the state in 2010-11. This was the highest amongst all states. Maharashtra followed with an employment of 1.7 million in factories and Gujarat and Andhra Pradesh were a distant third with 1.3 million, each”, says Vyas, adding, “Tamil Nadu’s lead in terms of employment can be appreciated better when we see factory employment as a per cent of the size of the state.”
Thus, “factory employees account for 2.7 per cent of the population of the state, implying that roughly 12 per cent of the households could have a factory employed person in the state. This is much higher than other states. Factory employment, of course, being a part of organised employment is a preferred employment. And, Tamil Nadu clearly leads in this respect.”
But, according to the expert, “Tamil Nadu factories are not the best of paymasters. Total emoluments per employee at Rs115 thousand in the southern state was lower than Gujarat’s Rs.143 thousand and, it was much lower than Maharashtra’s Rs 198 thousand. The disparity is much bigger in terms of wages per worker (workers constitute about 75 per cent of total employees). Wages per worker in Maharashtra were nearly twice as high as in Tamil Nadu, and Gujarat was closer to Tamil Nadu than Maharashtra.”
“Tamil Nadu’s relatively large factory employment at relatively low wages has spread employment, but these low wages have not helped the factories in Tamil Nadu to be more productive”, Vyas says, adding, “Net income per employee in the state at Rs 310 thousand was nearly half of Gujarat’s Rs 599 thousand and way below Maharashtra’s Rs 780 thousand. Profit per employee in the factories of Maharashtra at Rs 542 thousand is 2.5 times higher than the Rs 165 thousand profit per employee in Tamil Nadu and 27 per cent higher than in Gujarat.”
“Part of the reason for this low productivity of Tamil labour is the low investment of capital”, says the expert, adding, “Productivity of labour can be increased by the appropriate infusion of capital. Tamil factories invest Rs 0.8 million into fixed capital per employee, which is much lower than Maharashtra’s Rs 1.4 million and even lower than Gujarat’s Rs 2.1 million investment into fixed capital per person employed.”
“Like Tamil Nadu could not capitalise sufficiently on cheap labour, Gujarat is unable to capitalise on cheap capital. Both seem to have deployed their respectively cheap factor of production maximally, but both have failed to deploy it sufficiently efficiently”, says the expert.
However, the expert insists, “Maharashtra wins on both counts. The better utilisation of labour and capital by Maharashtra makes it the leading industrial state in the country by a huge margin. The net value added in factories in Maharashtra at Rs.1.5 trillion is way above any other state. Gujarat, which trails Maharashtra, has a net value add of only Rs.0.89 trillion. This is followed by Tamil Nadu, whose net value added in factories at Rs.0.71 trillion is less than half of the value added of Maharashtra.”
Coming to employment, the expert says, “Over the period 2000-01 through 2010-11, total employment in the factory sector in Gujarat grew at an impressive 5.6 per cent per annum. This is a tad higher than Tamil Nadu’s 5.5 per cent and much higher than Maharashtra’s 3.7 per cent per annum.” But, he points out, as the long term investment growth rate is unimpressive, which works out to less than 2 per cent per annum for the period 2001-02 through 2010-11 (since investments were negative in 2000-01, this could not be used as a base year for Gujarat)”, future looks better for Maharashtra.
“Maharashtra’s fixed capital investment per person employed rose faster (9 per cent per annum in the decade ended 2010-11) than that of Gujarat (8 per cent per annum) in the same period. And, its value added per person employed in factories has also risen faster - 12.6 per cent per annum against Gujarat’s 11.8 per cent per annum”, he says.
“Maharashtra has tremendous head-room for further industrial growth. Only 1.5 per cent of its population is employed in factories compared to 2.1 per cent in Gujarat and 2.7 per cent in Tamil Nadu. Maharashtra has only 71 factories per square kilometre, while Gujarat has 86 and Tamil Nadu has a much larger 202. So, while Gujarat and Tamil Nadu need to improve their efficiency in the use of capital and labour, Maharashtra needs to capitalise on its leadership and expand industrialization”, the expert says.