By Margaret Gangte
Introduction
The incentive package scheme under the North East Industrial Policy, 1997, reintroduced as the North East Industrial and Investment Promotion Policy (NEIIPP), 2007 intended to promote biotechnology and power generation up to 10 MW and employment generation for the region. The strategy is to incentivised investors with subsidy grant on capital (30%) and insurance (100%) along with total exemption on tax and customs.
The policy was greeted with overwhelming positive response from the business communities for the generous incentive package. The policy enthused investors, raised hopes of the people in the region as it sets a pathway to unleash potentials of the region in its hydel power resource, flora and fauna and human assets.
However, the revision of the policy subsequently in 2007 led to withdrawal of facilities and concessions including reduction in transport subsidy that eluded investors with disappointment. Imposition of Minimum Alternate Tax (MAT), full income tax payments and restriction of excise exemption only on the value addition on raw materials reduced drastically the incentive amount.
Similar incentive package extended to Uttarakhand, Himachal Pradesh, Chhattisgarh and J&K has been seen as disincentive as these states weaned away business from the northeast region.
Fiscal incentive scheme is critically assessed in the context of policy making process in government. The paper raises speculation about the inadequate policy process adversely affecting the policy effectiveness.
Goal and Purpose
A policy must have a purpose and a longer term goal. The mounting and ongoing problem of employment dominates the entire socio- economic and political dilemma of the region. Unemployment problem affects governance condition that in turn caused low investment and retarded economy for decades. It is in this context that the goal of a development policy for the region should be identified. For the northeast region, security and development are most critical for the region. Therefore the identified goal will be stability, growth and equity.
The stated goal can be achieved only through development linked to investment. To achieve the objective of development, the strategy is to adopt a participatory approach of involving local communities through gainful employment of youths in projects and programmes.
The strategy must plan for effective ways to trap potentials and development of capacity. Mere recognition of potentials without commitment to action betrays the hopes and dreams of people. Development policy must reflect the expectations, hopes and dreams of people through the stated goal, purpose and strategy.
The NEIIP however has an ambitious goal of development through industrialisation for northeast region. It adopts a strategy of investment through private sector participation and motivating their participation through fiscal incentive scheme. The goal of industrial development for a remote landlocked region is quite unrealistic. The strategy of the policy is not local need based as it represents mainly the interest of business community. The policy formulation has not adopted a participatory approach and therefore critical issues of the region remained unresolved viz; problem of unemployment, governance and retarded economy.
Process and Approach
A policy must be formulated through a process which is credible, reliable and transparent. The history of NEIIP from its inception till the recent modification speaks for itself. The original policy promised a 100% exemption but it delivers only 57% exemption after the revision in 2007.
The reduction of the exemption was effectuated in the policy by usage of the term ‘value addition’ translated into accounting format to mean ‘added activities on the raw materials’ to receive the exemption. It means, excise duty will not be charged on additional activities on the raw material while it will be charged on raw materials only. Raw materials occupy a substantial component in the production line and mostly supplied by local entrepreneurs.
The excise duty charged on raw materials completely excluded the local entrepreneurs from receiving the benefit of the policy. The larger external investors nevertheless do not stand to gain from the policy either. It has been stated that all the old and existing projects had factored in the 100% exemption in the cost estimates.
When the project cost estimates were changed under the revised policy due to reduced exemption, it led to distortion in the cash flows and dislocation of investment plans. The reduced exemption increased the cost of production and makes the project unviable financially.
The incentive policy has been regarded as deterrent by investors. But for the region, the loss of credibility of the policy is in greater degree. The policy debate does not speak a line on the development agenda of the region while it got completely absorbed on the issue of reduced incentives. The policy evidently had been biased towards the business community and is least involved with local needs.
Frequent changes in policy terribly have shaken the investor’s confidence. Changes occurred to correct a mistake. The mistake in this case is the misuse of the benefit of NEIIP, 2007. The misuse occurred because there is no mechanism to detect the misuse and restrained the defaulters by punitive actions to deter repeat of actions. Instead of identifying the problem and taking corrective action to rectify the mistakes, the policy provisions evinced keen interest on the misused amount instead of putting in place a system to stop the misuse.
The huge incentives by way of capital subsidy, working capital subsidy, interest subsidy and insurance subsidy are granted to production units only after proper verification of their credibility. In other words, wrong information furnished by the production units can be subjected to severe punishment.
The policy paper based on the notification by the Department of Revenue remained silent on how to detect the defaulters or how the defaulters would be punished. Without risk identification and risk management plan in the policy to detect and punish defaulters, the process cannot produce credible, reliable and transparent policy.
Assessment of outcome
The first subsidy was introduced for transport sector to cushion the high transportation costs of a remote and landlocked region. The full exemptions of revenue and duties gradually emerged by 1977 as a special fiscal package for the region.
The incentives, however, failed to induced growth and development. From the national perspectives, the overall cost benefit analysis of the amount foregone as subsidies and the exemptions do not commensurate employment generation and associated growth level. From regional perspective, the incentives contributed to growth disparity in the region with 91% of investment concentrating in Assam and Meghalaya.
The impact assessment of Tata Evaluation Committee (TEC) evidenced the low investment and the low level of employment in the region during the period 1977-2004 in comparison with other peripheral states availing the same fiscal incentives. From sectoral growth perspectives, the region’s potentials in hydel power, tourism, tea and horticulture are not prioritised for strategic planning and development.
It led to a lopsided, unplanned and undesirable growth in tobacco and its products which further contributed to health hazards in the region. Reports of cancer caused by use of tobacco in the region are the highest in the country.
The incentive package in the end could not induced investors due to protracted decisions and consequent withdrawal of the incentives over the past few years. The incentive has neither promoted local entrepreneurships nor has it alleviated the condition of poverty through employment or helped to tap potential in unexplored areas. The incentive policy had fallen far too short of the expectation and failed to deliver the good promise of development for the region.
Statistics provided by TEC, 2007 for the period 1997-2004 revealed the failure of the policy, 1997 to achieve the goal of industrialisation and to bring north-eastern region at par with the rest of the country. The region’s participation in the economic development is at abysmal low level at 4% GDP against the national level at 27% GDP, industrial growth registered only 3% against the national level of 7%, market linkages remain undeveloped, low credit deposits at 2% deter investment, low investment results in the low employment opportunities. The stagnant situation sustained the socio-economic- political problems and the region remain undeveloped and alienated.
The second policy, 2007 did not show better strategy to improve development of the region. The subsequent modifications reduced the incentives and discouraged the investors. It has been apprehended that small scale and local enterprises stand to loose completely from the benefits assured by the original policy granting full exemption on huge capital investment.
The NEIIP, 2007 did not envisage a long term goal of growth, stability and equity. It sets the objective of development on a medium term but this objective is overshadowed by a dual unspoken objective of providing fiscal incentive to investors with very little focus on the development agenda of the region.
The prime concern seems to be to help the business community out of this policy than helping the region. This objective eventually is reflected in the current debate on the size of the incentive rather than on the impact assessment of the policy on development of the region.
Conclusion
If the goal is stability, growth and equity, the objective should be development. If development is a genuine agenda, it should not be confined to few sectors alone like power or biotechnology but must include unexplored potentials in ecotourism, horticulture, dairy, fishery and small scale enterprises as driver of engines of growth and development. If the strategy is to achieve the objective of development in order to reach the goal of stability and growth; policy makers must reverse the top down approach with bottom up approach to involve local participation.
If the policy process is credible, reliable and transparent; it will fix accountability on the mis-utilisation, underutilisation and pilferages. Finally, if the policy is in the interest of the region, the fiscal incentive would translate into visible development. If none of the above happened, the policy has not helped. The way forward is to look ahead and think on how to do it again.
(The writer is currently based in New Delhi. She is the Deputy Financial Advisor, Ministry of Defence, Department of Finance, Government of India. Feedback can be send at margaret_gangte@hotmail.com)
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