State capitalism in Bihar - what's the alternative?

Harish Damodaran has a very good story in Indian Express on a confluence of public investments based industrial revival in Bihar, in its old industrial capital of Begusarai district.

The Hindustan Fertilizer Corporation Ltd’s (HFCL) ammonia-urea complex at Barauni town of Begusarai district, shut down in January 1999, is now being revived – through the setting up of a brand new plant on the same 480 acres land that housed the earlier project. At Rs 7,043.26 crore capital cost, it would be Bihar’s biggest industrial investment. It is expected to create over 5000 jobs when commissioned by December 2021.

The project is being undertaken by Hindustan Urvarak & Rasayan Ltd (HURL) - a joint venture of Coal India Ltd, NTPC, Indian Oil Corporation (IOC), HFCL and Fertilizer Corporation of India. It is also putting up two other similar-sized ammonia-urea complexes at Gorakhpur (Uttar Pradesh) and Sindri (Jharkhand). These, like Barauni, are greenfield natural gas-based plants in locations that previously had units running on naphtha and fuel oil, respectively, and lying closed for two decades or more.

The production of urea from Barauni is supposed to meet the requirements of Bihar farmers, whose supply now comes from outside the state. The gas for these projects will come from GAIL's Jagdishpur-Phulpur-Haldia pipeline. 

The revival story is not confined to fertilisers. Take this about petroleum, 

IOC’s oil refinery at Barauni was India’s second after Assam’s Digboi. It came on stream in July 1964 with a one million tonnes (mt) annual crude processing capacity, augmented to 3 mt in 1969 and 6 mt by 2002. On January 30, after nearly 18 years, the IOC board approved a further expansion to 9 mt at an estimated cost of Rs 13,779 crore. This project – entailing the setting up of a new 9 mt atmospheric and vacuum distillation unit, the contract for which was awarded to L&T Hydrocarbon Engineering in April – is to be commissioned by April 2023.

This in power sector, 

Equally significant is the Barauni Thermal Power Station (BTPS). This coal-fired project, too, came up in the early-sixties, with five units of 145 megawatt (MW) aggregate generation capacity being made operational between January 1963 and December 1971. All of them were retired by 1995-96. Units 6 and 7, of 110 MW each established in 1984-85, were taken up for renovation and modernisation. On December 15, 2018, NTPC acquired BTPS from the Bihar State Power Generation Company. Today, not only are units 6 & 7 running, a new 250 MW plant was declared operational from March 1, this year. Another 250 MW unit is expected to be added by 2021, taking the total to 720 MW.

And in dairying, 

The Barauni Dairy, with a turnover of Rs 755.36 crore, it is not just Bihar’s, but also eastern India’s, largest cooperative dairy union. In 2019-20, the Deshratna Dr Rajendra Prasad Dugdh Utpadak Sahkari Sangh, as it is called, made Rs 499.03 crore of payments to 1.32 lakh farmers and procured 4.55 lakh kg per day of milk on an average. Barauni Dairy is planning to invest Rs 95.5 crore in what will be the country’s biggest plant for making indigenous milk products. The proposed plant will consume 2 lakh litres per day of milk to exclusively produce rasagulla, gulab jamun, peda, cham cham, kalakand, misti dahi, raskadam, milk cake, khoa, paneer, lassi and plain dahi. The dairy union is already using 70,000-80,000 litres daily now for producing indigenous milk sweets under the ‘Sudha’ brand.

Note the common thread. All these are public sector led initiatives. There is no private sector involvement. Besides, many also involve revival of old and sick facilities.  

How do we interpret this?

The conventional wisdom would be to dismiss them as money down the drain. After all, many of them are only repeating failed paths. Instead of government making these investments, they should create enabling conditions to attract private investments. Further, the opportunity cost of scarce public resources merits investments in infrastructure etc. 

Here is another view. No private investor is likely to either revive these units or make large investments in these and other areas in the foreseeable future. Creation of the enabling conditions is a work in progress, and by itself will not catalyse private investments. It also needs some successes, in turn, required to create the minimum industrial base. Besides, industrial development histories across the world have all been driven by state capitalism. Finally, these are not exactly fungible resources - these investments are not from budget resources but corporations making investment from the internal resources. 

Several questions follow.

The point about "enabling environment" assumes that there is something called a right level of "enabling environment", which in turn can be targeted and realised by the state as it exists today in Bihar through specific actions and in finite time, and on which private investments will follow despite a landscape where there are no other investment precedents and where the narrative on such investments in dismal. How correct and/or realistic are these assumptions?

Governments face a challenging reality. No large private investor would invest in Bihar. And government's ability to undertake the reforms to improve environment and encourage investors is questionable. So to break this gridlock, does industrial policy demand that investments by PSUs is an essential requirement, but if only as part of efforts (along side other reforms) to trigger growth impulses? 

And what about lessons from history about the importance of state capitalism? How about the use of public sector entities to produce felt needs (fertiliser, petrol, power, milk products etc) which are currently not locally produced? 

What are the accompanying "enablers" that state government could supply so as to maximise the potential for an economic take-off for the region? Is the state government cognisant of this rare growth opportunity for the region?

This is also interesting in so far as the multiple sectors being simultaneously brought to play here - though petroleum, power and fertilisers are closely intertwined. It will be extremely useful to see its impact ten years hence. This is the closest to a big-push development example from recent times in India.