February 18, 2008

Article at Reuters

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Doing business the hard way in Bihar

HAJIPUR, India (Reuters) - The white envelope filled with ten 500 rupee notes was dispatched to the electricity board official as a “goodwill gesture”.

Labourers stand at a road construction site in Bihar January 22, 2008. REUTERS/Desmond Boylan

Soon it came back, with a message from a subordinate. The official was not playing ball -- at least not at that price.

“He refused to accept it, and now he is cooking up a problem,” the factory manager said as the envelope was handed back. “I will have to pay the bugger 20,000 in the evening.”

The manager had wanted a second power line for an extension for his small factory in the Hajipur Industrial Area in Bihar. A simple request, the official had threatened to tie it up in endless red tape, unless he was paid.

The routine way the bribe was offered, and the way the episode unfolded in front of a Reuters correspondent, offers a tiny insight into the problems of doing business in a state which has become a byword for poverty, lawlessness and corruption.

India’s boom has not reached Bihar, a state of 90 million people almost completely disconnected from the global economy.

It is the country’s poorest and one of its slowest growing states, with “exceptionally low” levels of private investment, according to the World Bank. There is no sign of any foreign investment at all.

Chief Minister Nitish Kumar took over two years ago promising to turn things around. Since then he has been wooing rich Indians at home and abroad, trying to attract the investment his state so desperately needs.

Last December, the World Bank said he was moving in the right direction. His government had initiated comprehensive reforms, it said, improved the investment climate, stepped up public investment and improved the delivery of health and education services -- albeit from an extremely low base.

The Bank loaned Kumar’s government $225 million, but private investors have not been so enthusiastic. India’s biggest industrialists have been visiting the state capital Patna, but so far they have kept their money firmly in their pockets.

The sad fact of Bihar is that it has little or no raw materials, intermittent power, terrible roads, a reputation for kidnapping businessmen and some of the least business-friendly bureaucrats in the capitalist world.

“People say things have changed, but we have yet to see that change,” said the manager. “The red tape is the same, the bureaucracy is the same.”

Law and order may be improving but Kumar’s reforms are still only scratching the surface of the problem, says Shaibal Gupta of the Asian Development Research Institute in Patna.

“Why would anyone invest in Bihar?,” he asked. “In a place like Bihar you have to build everything from scratch. Where is the rate of return?”

Its factories get power when the rest of the state is in darkness, but only because they pay bribes. There is no drainage -- factories just dump tens of thousands of litres of effluent every day in nearby ditches or ponds.

Squatters camp on the grass verges beside the factory walls, cows munch grass and wander across the pot-holed roads. Armed guards man security gates to ward off kidnappers.

“This so-called industrial area is really in a pathetic condition,” the manager said. “Bihar really is a hopeless place to do business.”

On the wall behind his head he displays nearly two dozen licences he needs to keep his business open, standards for health, safety, labour laws and pollution. Each costs a few hundred rupees a year to renew, plus a 10,000 rupee bribe.

“Twenty-three departments have the power to shut down this unit,” he said. “They create problems, make money, go back.”

“So much for a liberal economy.”

Rajesh Singh took a Masters in Business Administration (MBA) at Bombay University, before returning to Bihar to set up a tiny factory on his family’s farmland to manufacture jams, juices, sauces, pickles and canned fruits.

“I realised things in Bihar were not very good, so I decided to start an agri-venture,” he said. “It was a mix of good potential and good intentions.”

But Singh has found the odds stacked up heavily against A1 Farm Solutions. His friends and even his father tried to convince him out of the idea, before his bank manager took over.

“The banker was telling me I was a fool to leave my job and start a business here,” he said. “That is the attitude to coming back, to dissuade you.”

It took Singh five years to get a bank loan, of just 500,000 rupees. To get it, he needed to offer 3 million rupees as security and have 250,000 parked in fixed-term deposits.

Today, his loan has been extended to 4 million rupees -- still, in his terms, “a meagre amount”, equivalent to just 10 days of raw material and labour costs.

“I had a lot of orders from the UK, from Sainsbury’s for lychees, but I couldn’t complete them because bankers are not ready to back us,” he said. “I am educated and I have assets. If I can’t get finance, how can ordinary Biharis get finance?”

If bankers were not hard enough to cope with, Singh has also found himself sucked into the divisive caste-based politics and society of Bihar.

His high-caste parents feared they would be made outcastes because he employs Dalits or “untouchables” in a food processing factory, since upper-caste Indians are barred from eating anything which has touched a Dalit hand.

Then a lower-caste boy was killed on his farm when he fell under a tractor trailer. A local politician tried to exploit the issue to get Dalit votes, filing a police complaint in which he claimed the boy had been shot in the head.

Although everyone knew this was untrue, the accident cost him a year, he said.

“No one was willing to work for us, we couldn’t get financing,” Singh said, adding that all the time the police had been demanding money to drop the charges.

As we travelled down the pot-holed road to Singh’s factory, a 35-km, three hour trip on a “state highway”, he looked around at the congestion, the poverty, the crumbling infrastructure.

“Look at this,” Singh said. “Someone has to come back... but at times you feel like asking ‘what am I doing with my life’.”

Is anywhere in the world more challenging to do business? “Maybe Somalia,” he said. “They are shooting at you there.”