Hyderabad faces threat of losing sheen as a preferred investment destination

HYDERABAD: Is Hyderabad facing the threat of losing its sheen as one of India’s preferred investment destinations and are investors worrying over their investments in the city after it has become capital of the country’s newest state of Telangana?

Days after engineering giant L&T expressed concerns over the viability of India’s largest metro rail project coming up in Hyderabad involving an investment of over Rs 16,000 crore, several businessmen ET spoke to affirmed similar concerns.

While businesses are mainly concerned over the fall in floating migrant population that would affect the revenues, they are also worried about the sharp deterioration in power supply in Telangana that is forcing production holidays and sharply increasing operating costs.

The Telangana Rashtra Samithi (TRS)-led government, which had earlier brushed aside such concerns and termed them totally unfounded and instigated by anti-Telangana forces, admitted for the first time on record on Friday before the 14th Finance Commission that the environment was indeed unfavourable.

3,000 Businesses Shift Base

The state government, which had contested ET's report in June on 700 companies shifting their base out of Telangana, told the commission that at least 3,000 businesses had shifted their base to residual Andhra Pradesh in the past three months, fearing that “the momentum will pick up in the years to come“.

For the first time, the government also said, “There will be erosion in tax base not only in respect of VAT but also stamps and registration, motor vehicles tax and state excise“. Further, Telangana Chief Minister K Chandrasekhar Rao said that “there will be erosion of tax base in the short-tomedium term“ and that “despite the suitability of the state for location of industry , power shortage in the state is a major hurdle“.

Flagging these serious concerns, Rao added, “The present tax base of the state will witness massive erosion once Hyderabad ceases to be the common capital of the successor states of Andhra Pradesh and Telangana. The number of people visiting Hyderabad will come down drastically and there is likely to be a consequent fall in sales of petroleum products and commodities.“

Corroborating the distress, the chief executive of a public sector bank said on condition of anonymity, “Of late, we have been receiving increasing number of loan restructuring requests from our borrowers, mostly from hospitality, realty, construction, entertainment and shopping malls in and around Hyderabad, citing fall in footfalls and occupancy ratios.“

Force Majeure Clause

A top bureaucrat, who did not want to be named, said, “Telangana has a large number of PPP (public-private partnership) projects in roads, urban infrastructure and public transport. If the number of people visiting Hyderabad comes down drastically as being feared by the state government, then we could soon see private partners in PPP pro jects invoking force majeure clause seeking compensation through incentives and extension of concession periods.“

He added that there were already some indications from the private partners in this regard.

B Vinod Kumar, TRS' politburo member and the party's deputy floor leader in Lok Sabha said the chief minister was only trying to give a fair picture of Hyderabad in terms of tax revenues post bifurcation even as he added that there was nothing to seriously worry about.

“If L&T pulls out of Hydera bad metro rail project, there are several players ready to take up the project. We are confident of proving our detractors wrong on capital flight from Telangana and will attract large-scale in vestments like what Mumbai did after separation of Gujarat from Maharashtra,“ he said.

Last week, L&T wrote to Telangana government that following bifurcation of the erstwhile Andhra Pradesh “the position of Hyderabad in drawing invest ments, both from the central government and private sector has altered...the change in the status of Hyderabad has resulted in significant change in the economic and political outlook of Hyderabad, thereby causing material adverse impact on the financial viability of the (Hyderabad metro rail) project“. The state government moved to placate L&T after the company threatened to pull out of the Hyderabad metro rail project, the country's largest public-private-partnership project.

Apprehension Over Image

The alarm bells sounded by L&T raised apprehensions over the image of Hyderabad and Telangana as a businessfriendly destination.

E Sudhir Reddy, chairman of infrastructure group IVRCL, said, “The Telangana government should immediately dwell into the reasons behind Hyderabad-based businesses looking at shifting their base to residual AP. If it is because of special tax benefits that the Andhra Pradesh government is proposing to offer, then the Telangana government should also ensure similar benefits. It helps not only to entice new businesses but also retain the existing businesses.“

Opposition parties blame the “irresponsible hate statements“ of the CM targeting the settlers responsible for businesses moving out of the state.