Rationale For Choosing Gujarat over Maharashtra

Two days ago, Chairman of Vedanta Group Shri Anil Agarwal announced on Twitter about the signing of MoU with Government of Gujarat to set up a US $ 20 bn (INR 1.54 lakh crores) semiconductor manufacturing facility in Dholera. This is a 60:40 joint venture with Foxconn. This has raked up one more controversy and war of words between the united opposition of Maharashtra – the Maha Vikas Aghadi, comprising Indian National Congress, Nationalist Congress Party and Uddhav Thackarey faction of Shiv Sena, and the ruling alliance of the Bharatiya Janata Party and the Eknath Shinde faction of the Shiv Sena. The MVA has accused the BJP of allowing Gujarat to snatch away the prestigious project and failing to close the deal with Vedanta– Foxconn. The

MVA has also accused the BJP of compromising with Maharashtra’s interests to benefit Gujarat.

While this controversy and war of words between political parties continues, it would be important for all to understand the critical factors in the deal, which could have led to Vedanta– Foxconn JV preferring Gujarat over Maharashtra. It is imperative for industry and foreign investors to focus on certain issues before shortlisting a particular State or even a country.

As per media reports, Vedanta– Foxconn wanted 1,000 acres on a lease for 99 years for free from the State Government as well as water and high fidelity power supply at fixed and concessionary rates for the next 20 years. Vedanta Group was in talks with Gujarat, Telangana, Maharashtra and Karnataka State Governments among others, evaluating incentives and access these regions could provide. If media reports have to be believed, Vedanta–Foxconn also wanted higher incentives on the investment which Gujarat could afford but Maharashtra couldn’t. It is understood that Gujarat offered incentives to the tune of 40 per cent of the investment which translates into around US$ 8 bn (INR 60,000 crores). It is understood that Vedanta–Foxconn’s deal with Karnataka (again a BJP-ruled State) could not go through because the company expected 20 per cent incentives, which the Karnataka Government couldn’t fulfill. It is important to note that the Maharashtra Government under the leadership of Shri Eknath Shinde and Shri Devendra Fadnavis offered an incentive of 25 per cent. However, Gujarat could better the offer. It is obvious that the company was on a “term sheet” shopping drive to see which States offer the best deal, and then the company closed with the State that provided the best deal that can be quantified in excel sheets.

In a State that faces water scarcity with challenges to provide water to areas in Marathwada and parts of Vidarbha for irrigation, it would be interesting to understand how the company would get committed supply of water for a very long term, i.e 20 years

Along with tangible and quantifiable benefits and risks, there are many intangible and unquantifiable risks that an investor has to weigh up on when he is investing in a particular State or a country.

Extremely High Water Dependency

Semiconductors manufacturing is heavily dependent on water. Ultrapure water is used to rinse every chip. This is done to clean chips by removing all debris of ions, silica, other particles, etc and also prevent chips from getting contaminated. Water is also used to cool all equipment used in the production process. If industry experts are to be believed, then a large chip fabrication plant would consume anywhere around 10 million gallons of water. It is understood that every 30 cm integrated circuit board that holds the chips in a mobile phone requires at least 2,000 gallons of ultra pure water. To manufacture 1 gallon of ultra pure water, 1.4 – 1.6 gallons of tap water is required. This is a lot of water.

In a State that faces water scarcity with challenges to provide water to areas in Marathwada and parts of Vidarbha for irrigation, it would be interesting to understand how the company would get committed supply of water for a very long term, i.e 20 years. In a State where former CM and current Dy. CM Devendra Fadnavis had to implement Jalshivar Yukt Abhiyan to save water and reduce dependence on water tankers, is such a project easily possible? Taiwan had faced these challenges in 2015 and later during droughts. Here, it is stated that the Government of Maharashtra had assured ample water supply. It would also be interesting to understand whether the “ample” water supply assured by the Government of Maharashtra would be enough for the Company or not. More importantly, the plant was to be located in Talegaon, in Pune district. Hence it is important for all to know whether the water supplied to the Company would be diverted from the same source that supplies water for sugarcane farming in the sugar belt of Maharashtra. If that was the case, how would the State Government assure ample water supply during droughts and periods of lesser rainfall? Would the State Government reduce water supply to the sugar belt and divert water to Vedanta–Foxconn? Would that result in public discontent and agitations, especially because the sugar lobby of Maharashtra is politically and financially very strong and has a large number of farmers and people dependent on it? It is obvious that the company would be concerned about these factors.

Unpredictable Political Environment

This leads us to another aspect of the State’s politics, which is the adversarial and unpredictable political environment in the State. This is not led by fringe organisations but by the mainstream political parties. The glaring example is Aditya Thackarey – whose party – the Shiv Sena – was in power with BJP, participating in the “Save Aarey Campaign” and that too against the project approved and thereafter undertaken by the ruling government, in which the Shiv Sena was a part of. Members of the ruling alliance and government opposing the government in a Leftist Agitprop against economic and development project has huge ramifications and sends extremely negative signals to the industry and investors. Subsequently, after the Shiv Sena came in power with the Indian National Congress and the Nationalist Congress Party, they stalled the metro car shed and delayed the project causing loss to the exchequer. It is natural that such an action would not go well with industry and investors. It becomes more serious when an industrialist has faced similar agitprop funded by foreign NGOs, which resulted in closure of their plant in Tuticorin, resulting in losses of billions.

Vedanta–Foxconn also wanted higher incentives on the investment which Gujarat could afford but Maharashtra couldn’t. It is understood that Gujarat offered incentives to the tune of 40 per cent of the investment which translates into around US$ 8 bn (INR 60,000 crores)

If the possibility of similar Leftist and foreign funded agitation against Vedanta–Foxconn JV in Talegaon has to be simulated in a scenario of drought is explored, the situation can be draconian. It would be scary to imagine water being diverted from sugarcane farming to semiconductor chip manufacturing. In such a situation if mainstream political parties try fishing in troubled waters, by starting some kind of farmers’ agitation demanding water, it would be difficult to imagine the loss to the investor. This problem would get accentuated if the farmers backed by mainstream political parties, who have 3M – i.e. money, muscle and media on their side, run an agitprop against the company.

Political Hooliganism and Extortion

Extortion, political vandalism, and political parties backed hooliganism are one of the biggest concerns for any investor. This adds to the operating costs.

The country saw a suspended police officer who was also a member of the ruling Shiv Sena planting gelatin sticks in a SUV and parking that SUV outside the house of India’s leading industrialist. It was later discovered that the said member of the ruling party was demanding Rs. 100 crores from the industrialist, and to threaten the said industrialist, he went to the extent of planting gelatin sticks outside his house. This was a veiled threat to the said industrialist to cough out Rs. 100 crores. Unfortunately, the ruling party went to the extent of defending and protecting the extortionist, and its alliance partners in the Government remained silent. Later the said police officer confessed that even the Home Minister of the State was involved in the extortion racket, and the matter is now subjudice.

Bureaucratic Interference

This brings us to the way bureaucracy functions in a State. This is one factor that can make or break the deal, based on how the bureaucracy deals with industry and investors. Their conduct determines the results. Anil Agarwal tweeted how he was engaging with various State Governments and finally chose Gujarat over Maharashtra and other States. Here it must be noted that the Maharashtra Government announced its incentive policy in July 2022 after the BJP and Eknath Shinde faction of the Shiv Sena came to power. Till then bureaucracy in Maharashtra was not proactive in attracting the said project in the State. Now compare that with Gujarat which announced the policy in the same month. It is understood that Gujarat announced the policy only to formalise all incentives to be given to Vedanta–Foxconn JV, whereas Maharashtra was struggling to cut a deal. It is also understood that when the BJP–Eknath Shinde Government was formed, Vedanta– Foxconn JV had reached substantially significant comfort and understanding with Gujarat. They had to start at zero with Maharashtra. As Agarwal tweeted, Maharashtra tried its best but Vedanta– Foxconn had reached a stage of deal closure with Gujarat. As per Agarwal’s tweet they were negotiating for the last two years with all State Governments. Karnataka expressed its inability to offer 20 per cent incentives on investment, and Gujarat was able to reach an agreement with the company. Maharashtra Government needs to disclose the efforts it took during those two years when the MVA was in power, to attract the project in the State.

This is not one standalone project that the State lost. One other incident was stated by the Chief of a trade body during the launch of a report by a global multilateral agency, and one very senior bureaucrat from Maharashtra Government was present in that event. The Chief of that trade body, in the presence of the officials of the said global multilateral agency stated that nearly 17 companies operating in China visited Mumbai to explore investing here in order to shift their plants from China. After seeing the situation in the state, those companies preferred Vietnam over India. This was an extremely serious issue raised by the trade body, in the presence of the global multilateral agency. However, we haven’t seen the administration reforming to make the state investor friendly. It is worth questioning how and why will any investor prefer Maharashtra with such an administration?

These could be the most probable factors that could have weighed heavily against Maharashtra and pushed Vedanta–Foxconn to opt for Gujarat. There is an urgent need for all mainstream political parties to come together to address these issues. At the same time, it is imperative for the BJP to initiate reforms in the Government to address the last two issues mentioned above.