COIMBATORE, India, March 11 (Reuters) - Crippling power cuts
in the southern Indian state of Tamil Nadu are shutting
factories and threatening an industrial debt crisis that is
wrecking its second-largest city's plan to become the country's
next business Mecca.
Electricity shortages are emerging as one of the biggest
brakes on India's ambitions to rise up the ranks of the world's
major economies, and match regional rival China as a
Nowhere is this clearer than in Coimbatore, a city of 3.5
million people which once seemed to offer investors looking for
the 'new Bangalore' everything they wanted: a long history of
manufacturing, an educated workforce and the vision to attract
But bad policymaking has allowed one of the country's most
promising regions to run into a brick wall, and now Coimbatore
businesses selling everything from car parts to IT services are
struggling with blackouts that last up to 14 hours every day.
Failure to invest in generation and distribution meant that
when growth hit double digits and drove up demand during the
booming Noughties, the grid was pushed beyond its limit. On
average India suffers a 9 percent peak-time power deficit, but
in Tamil Nadu state the average is twice as bad, at 18 percent.
The grid's inadequacy is forcing firms to rely on expensive
back-up power that drives up export costs at a time they should
be reaping the benefits of a weaker rupee currency.
Many business owners say they are thinking of moving to one
of the handful of Indian states that has reliable electricity.
K. Ramasamy owns a company that sells car horns to
Mercedes-Benz. Coimbatore is his hometown and, with
its agreeable climate and cheap land, was a natural location for
his first factory 43 years ago.
For years Ramasamy flourished as Coimbatore grew, opening
eight subsidiaries. In keeping with the hill town's casual
character, he founded a yoga centre. Now he is thinking of
leaving for distant western states like Gujarat and Maharashtra.
Every day for 15 months, electricity cuts lasting many hours
have hit Ramasamy's Roots Group, so to keep working he must
power his horn factories using on-site diesel generators that
cost him nearly three times the price of grid energy.
"I don't think this is going to be solved in a year or two,"
Ramasamy told Reuters, noting he was "seriously considering"
offers from officials in Gujarat who guarantee 24/7 electricity.
"We can't be waiting all the time, we need to make a move."
Last year, though the number of new investment projects
begun in Coimbatore and nearby district Dharmapuri increased
marginally, the figure for abandoned projects rose five-fold,
according to data provided by the Centre for Monitoring the
Indian Economy (CMIE), an independent research group.
Fabric manufacturer VTX Textiles Ltd., whose international
clients include Macy's Inc, fears it may soon join the
ranks of failed projects after half a century in Coimbatore.
The lights flickered off as VTX Chairman and Managing
Director A.L. Ramachandra sat in his plush office explaining how
his energy costs have doubled.
Downstairs, in one of his four factories, the power stayed
on because VTX has spent close to $90,000 on battery systems to
ensure a seamless transition to generators at his plants when
the grid gives out.
Even with this makeshift solution, blackouts have cost the
company a tenth of its customers and pushed it to restructure
its debt. In 2012, according to Ramachandra, VTX lost over $2
million in revenues as a result of air freight delays as energy
shortages stopped factory lines running on schedule.
Ramachandra said the power crisis as well as a rise in
capital costs are hampering Coimbatore's chances of becoming the
"Multinationals do not go to the tier II cities; they don't
come to Coimbatore," said Ramachandra. "Why would the
multinationals come here when the power situation is so bad?"
BIG CITY PROBLEMS
Some still believe in the long-term promise of Coimbatore,
particularly IT companies that require much less energy than
Cognizant Technology Solutions Corp, a growing
U.S.-based outsourcing firm, opened a site there in 2005, and
Microsoft India has launched a research centre.
Venugopal R., a vice president with Robert Bosch GmbH
, a German engineering firm with a three-year-old
campus next to Cognizant, said his company has put growth plans
on ice for now, but he anticipated expanding soon, and predicted
that larger firms like his will anchor more business growth.
But for now, what began as a power crisis is also becoming a
banking one, as small companies searching frantically for loans
to cover their energy needs teeter on the brink of bankruptcy.
In January, M.C. Kumaran, a small manufacturer of automotive
metal castings, started making desperate calls to competitors.
Afraid of defaulting on a 30 million rupee ($550,000) loan,
he was trying to sell his decade-old foundry, where production
had shrunk to one-third of its peak. The unit is still on the
"I thought we'd have power shortages for a few months but
didn't dream it would continue for two to three years," said
Kumaran. "I cannot even run a night shift, it is useless."
Kumaran spoke of plans to invest up to 50 million rupees on
a foundry in Gujarat, and said he regularly pores over local
newspapers crammed with "Invest In Gujarat" advertisements.
Coimbatore branches of two national banks admitted to rising
loan defaults that spurred them to lobby India's central bank,
the Reserve Bank of India, to relax restrictions on multiple
"This year is a year of concern where things have gone from
bad to worse," said one Coimbatore bank official, speaking on
condition of anonymity because he was not authorised to comment.
Roots Group, which buys a fifth of its materials locally,
recently began offering two-year, interest-free loans to half of
its 120 Coimbatore suppliers to keep them afloat. Smaller
foundries, unable to afford generators, take loans to keep staff
and equipment for the precious hours of power.
Even the bigger firms are not immune.
Elgi Equipment Ltd, one of the city's largest manufacturers,
saw its energy costs rise by 10 percent in the second half of
2012, Manoharan A., a deputy general manager said.
"We are a debt-free company," he said. "But if this
situation continues one more year or so, definitely we'll be
trapped in the debt crisis."
Analysts who once touted second-rung cities as India's next
great growth centres now say low investment in power and other
infrastructure means towns like Coimbatore, though far smaller
than Mumbai, Delhi and Bangalore, are starting to suffer big
"Tier II cities are also beginning to burst through their
seams due to haphazard growth," said Mahesh Vyas, Chief
Executive of CMIE.
"We desperately need to work on building better
infrastructure or else this growth will come to a grinding