Paul Hugentobler, the head of India operations for Holcim, the world’s second largest cement producer, has discovered that manufacturing cement in India is becoming increasingly expensive. It was possible to build a plant in India at $60 per tonne three years ago. Today, it costs $120-130 per tonne because of rising cost of land, equipment and project delays. In China, it costs $80 per tonne.

Subterranean Damage
Eventually, a host of subterranean costs such as regulatory delays, power costs and poor infrastructure contribute to a high-cost economy. India ranked 48 among 131 countries in the World Economic Forum’s Global Competitiveness Index in 2007-08, a fall from 43rd in 2006-07, behind China (34), Lithuania (38) and Latvia (45).

Take logistics and transportation infrastructure, which are estimated to raise product costs up to 25 per cent. Globally, trucks travel 1,000-1,200 km every 24 hours; in India they do barely 300-500 km. The 2,130-km Mumbai-Kolkata route takes up to eight days with 22 stopovers, each taking 30 minutes-3 hours due to lack of automation at checkpoints. “Each state in India is like another country, requiring separate declarations,” says K. Prabhakar, president & CEO of XPS, a subsidiary of Transport Corporation of India. “In Europe, a truck can go through electronically across different countries, without a barrier.”

Road infrastructure isn’t the only culprit, ports are equally inefficient and expensive. Mooring a vessel at Indian ports is nearly 50 per cent more expensive than Singapore, Dubai or Colombo. Besides, handling costs are also prohibitive. According to one of India’s largest retailers, loading a 40 ft container in the US costs $6, in India loading a 20 ft container costs $48 (Rs 2,000).

Also inadequate is power, hurting power-intensive industries such as cement, petroleum and petrochemicals. While the state supplies commercial power at Rs 6-8 per unit (power in the US costs Rs 1.50-3.50 per unit), the supply is mostly erratic, forcing companies to invest in large expensive gensets. The cost of running these gensets adds up to Rs 18 per unit.

Then there is the mother of all subterranean costs — regulatory delays. “Every delay has a value,” says Patu Keswani, managing director & CEO of Lemon Tree Hotels, which is setting up a chain of mid-range hotels in India. “The opportunity cost of delay has a financial impact.” Keswani says building a hotel in India is 45 per cent costlier than in the US. Due to procedural delays — of land acquisition, its approvals, getting the nod from the fire department, civil authorities, police, airport and pollution control — it takes him around three years to build a hotel that can be ideally built in a year. “If I take a 1:1 debt equity ratio in a Rs 200-crore project, Rs 100 crore isn’t giving returns for at least two years,” says Keswani. “That’s at least Rs 30 crore added to the project cost.”

Lastly, high tax regulations and structures and the cost of their compliance also raise the overall cost of business. Corporate tax rate in India, for instance, is among the highest in the world (see table ‘Taxing Hurdles’). One of the biggest criticisms of the Sarbanes Oxley Act in the US is that it has raised the cost of compliance manifold. HSBC has declared that its compliance costs in India are 10 per cent of its overall cost. Companies are required to maintain wage registers and leave registers, with revenue stamp, even though ERP systems these days cater to all this electronically. “Global companies don’t understand this in an era of electronic funds transfer,” says IT services firm Quattro’s Vice-President S. Varadarajan.

Stringent regulations impact companies in a myriad other ways. Take shipping. More than half the new cargo ships being bought by Indian firms are being flagged (registered) outside India. This is to sidestep two things — cumbersome tax laws and a mandatory clause that Indian flag vessels must have an Indian crew.

Paul Hugentobler, Holcim’s member of executive committee and head of Indian and south Asian operations, says, “the government of India is building an expensive country. The effort should be to build it cheaper.” India must realise that a high-cost economy is unsustainable.

Many elements such as wage costs are purely due to demand-supply imbalances and, as Dasgupta says, driven by the laws of economics, but companies can still take remedial measures like either controlling their wage costs or moving to higher value-added businesses. But the government can certainly take measures that are within its control — like removing regulatory hurdles in land acquisition and setting up of power projects — and streamlining the tax rates. At least, then, India could avoid creating ghost towns in the near future.

With inputs from Noemie Bisserbe

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(Businessworld Issue 15-21 July 2008)