The slogans on signs in Singur — the West Bengal site where Tata Motors plans to manufacture the Nano, its $2,500 small car — say it all. Most are in Bengali, but the few in English capture the overriding sentiment. “Nano No No,” reads one. “Atta not Tata,” says another. Atta, which is flour made from whole wheat, refers to the core question of the dispute: Should fertile farmland be requisitioned for industrial purposes? Does food get priority or factories?

According to faculty at Wharton and the Indian School of Business, the impasse over the plant in West Bengal threatens to increase the Nano’s production costs and could delay its entry into the domestic market. Moreover, they say, it will likely impact investment in the region, as outside companies shy away from antiquated land laws and political disruption.

As things stand today, work has been suspended at the Nano plant. Tata has closed shop because, as chairman Ratan Tata told journalists in Kolkata (formerly Calcutta): “I can’t bring our managers and their families to West Bengal if they’re going to be beaten, if there is going to be violence constantly, if their children are afraid to go to school.”

Tata has faced trouble ever since it got the go-ahead for the plant on May 18, 2006. Just a week later, there were angry demonstrations by farmers objecting to the “forcible” acquisition of land for the project. The Trinamool Congress, a political party led by Mamata Banerjee, who has been spearheading the agitation against the Left-ruled West Bengal government and the plant, even staged a hunger strike.

Matters came to a head recently, with the Nano due to roll out in October this year. On August 24, the Trinamool Congress started an indefinite protest at the factory gates and stopped all access to vehicles. On September 3, Tata suspended work and said it was evaluating alternative sites outside West Bengal.

Since then, the Trinamool Congress has called off the protest on the basis of unspecified promises by the state government. Talks have been held between the two sides, though Tata Motors has been left out of the discussion. In a statement on September 8, the Tata Group said: “Tata Motors is distressed at the limited clarity on the outcome of the discussions between the West Bengal state government and the representatives of the agitators in Singur. In view of the same, Tata Motors is obliged to continue the suspension of construction and commissioning work at the Nano plant. We will review our stated position only if we are satisfied that the viability of the project is not being impinged, the integral nature of the mother plant and our ancillary units are being maintained, and all stakeholders are committed to develop a long-term congenial environment for smooth operations of the plant in Singur.”

Jitendra Singh, a Wharton management professor who is currently dean of the Nanyang Business School in Singapore, characterizes the standoff in Singur as “essentially political blackmail.” He says the issue is broader than how it will impact Tata’s ability to deliver a $2,500 car. “While India has made a great deal of progress and the economy is doing well, the weak leg continues to be its political system,” he says.

There may yet be a face-saving formula worked out and Tata could resume operations. But it is clear that trouble will strike again. The first Nano will roll out of some other existing Tata Motors location. The plant in Singur, even if it goes through, will play second fiddle.

Some are more optimistic. “I don’t think that the Tatas will actually pull out unless the situation worsens a lot,” says Rajesh Chakrabarti, assistant professor of finance, at the Hyderabad-based Indian School of Business (ISB). “I think they will find a solution.”

Paying a Price

If Tata Motors does pull out of Singur, it could cause the project cost to increase and therefore impact the company’s ability to produce a low-cost car. But other factors have also changed in the external environment, points out John Paul MacDuffie, Wharton management professor and co-director of its International Motor Vehicle Program. “A lot of things have happened to threaten the $2,500 price point,” he says. “Commodity prices have been going through the roof, and there are other cost increases that are going to affect everybody. The real question is: What cost increases are idiosyncratic and distinctive only to Tata that might erode any kind of advantage they have?”

Singh agrees that the current crisis will eventually show up in the cost of the car. But he says he wouldn’t be surprised if Tata pulls out. “Of course, it will cost them to do that, but better to do it now than to be open to blackmail in the future. There will be a one-time relocation cost, but I’m sure he will find another state willing to take the project.”

MacDuffie believes the new costs brought on by the Singur standoff could compel Tata to take a second look at its competitive edge in the domestic Indian market. “There may be some Maruti products at the low end of the market that will continue to be very strong price competitors because they have such high volume and they have long-established facilities, which are probably all paid for in India,” he says.

Maruti will be the one to contend with as Tata tries to rein in the Nano’s costs. “Suzuki, Maruti’s parent and the source of the design, is renowned in Japan for having extremely cheap designs and extremely cheap tooling, and they are very effective in running on the edge of what keeps things from breaking down in order to [have] a cost competitive position in the Japanese market,” says MacDuffie. “That know-how will make Maruti a formidable competitor at the low end of the market.”

MacDuffie suggests that Tata needs to focus on limiting the Singur damage to Nano’s costs even as it fights competition on other fronts. “If they can keep these idiosyncratic cost increases from becoming too large and avoid too much delay, and also avoid too much publicity that tarnishes them in a reputational sense, they should be in a good position for the Nano to have a large impact first in India,” he says.

Success in the domestic market is crucial to the Nano going global, says MacDuffie. “Being successful in other developing markets probably is dependent on a successful launch in India first for all sorts of reasons. [The Tatas] need the volume, they need the experience, they need the publicity of that success to come into other markets where they will face domestic champion competitors.”

But the Singur problem seems to have no easy resolution. Tata has been given 997 acres of land, acquired by the state government under the Land Acquisition Act of 1894. (This was challenged, but the courts have ruled that the acquisition is legal.) Of this, some 645 acres is for the mother plant and another 290 for a vendor park which will host various ancillary units for the Nano. The remaining 60-odd acres are with some state government agencies.

The Trinamool Congress and its partners were, in the beginning, opposed to the entire acquisition. Today, it has no problems with the mother plant. But it wants the vendor park moved elsewhere and the land returned to the farmers. Tata, on the other hand, says that the economics of the project won’t work if the ancillary units are moved out. The Rs. 100,000 Nano would end up with a heftier price tag.

“As part of the proposed integrated auto cluster in Singur, about 60 key auto ancillary suppliers to the Nano have taken possession of land in the integrated complex and have invested about $110 million towards construction of their plants and procurement of their equipment and machinery,” says a Tata statement. “The project’s auto ancillary partners, who had commenced work at their respective plants in Singur, were also constrained to suspend work in line with Tata Motors’ decision.”

Tata has also made significant investments. But Ratan Tata is prepared to write them off. “If anybody is under the impression that because we have made this large investment of about Rs. 15,000 million ($328 million), we will not move, then they are wrong,” he told the Kolkata Press conference.

Political Baggage

Speaking to a Tata Group magazine last year, Ratan Tata elaborated on how the Singur problem evolved. “I think Singur has been an exceptionally unfortunate and unique situation,” he said. “The problems there are mainly political — between two political parties — and we’ve been caught in the crossfire. The land acquisition was not our doing; the West Bengal government managed that. There was no problem when it was offered to us or when we accepted. Singur becoming an issue was an out-of-the-blue happening. The solution lies in sitting down with the state government and talking about compensation, retraining, reemployment and the rest, with Tata Motors being made a party to this activity. Instead, what we’ve got is a chorus of negatives, loose talk of returning the land, women and children blocking roads, and guns, bullets and firings.”

The state government has offered to provide 400 fertile acres elsewhere in the state to the agitating farmers, but there are no takers. Banerjee, herself, believes she is on a winning horse politically and is not prepared to make any concessions. In 2007, she had witnessed the popular appeal of the land issue when trouble broke out over a proposal to set up a chemical hub over 14,000 acres in Nandigram, a rural area 70 km from state capital Kolkata. This was to be situated in a special economic zone (SEZ), a 50:50 joint venture between the state-owned West Bengal Industrial Development Corporation and the Salim Group of Indonesia.

It was once again Banerjee’s Trinamool Congress that campaiged against land acquisition. The protesting villagers and farmers took over administration of the area, under the banner of the Bhumi Uchhed Pratirodh Committee (Committee against Land Evictions). On March 14, 2007, some 4,000 armed policemen were ordered to move in. At least 14 people died in clash. The site of the proposed chemical hub has since been moved from Nandigram. Meanwhile, in subsequent elections to the zilla parishad (a district-level governing body), the Left was badly beaten by the Trinamool — the first time in 30-plus years that the Marxists have lost in the region.

“All players are trying to revise their understanding of the ground realities based on what they have witnessed in the past few weeks,” says Chakrabarti of ISB. “It is a political-economy kind of problem.” He adds, however, that part of it is also pure saber-rattling. “The companies are just taking a stance and putting pressure on the political players because they know that the politicians want their investments.”

There have been no corporate casualties as yet, but there are some indicators of trouble. “We are yet to take any decision,” says Infosys director of human resources T.V. Mohandas Pai. “We will have to relook and rethink because we are concerned about the safety of our employees.” Infosys, the country’s second-largest information technology company, has been planning to invest $110 million on a software development park near Kolkata. It has yet to receive the 80 acres promised by the state. The Times of India reports that another IT giant — Satyam — has decided to pull out of a special economic zone (SEZ) it was planning to set up in West Bengal.

“What impact this episode has on other corporate investments into West Bengal depends on what stage of finalization their plans are in. But it will certainly be a dampener on new players coming into the state, especially because the controversy has been [going on] for such a long time and has also gotten so much publicity,” says Chakrabarti. “At the same time, one also needs to realize that not all investments require large amounts of land. Also, there are other players who have done their own land acquisition without getting the government involved. It is only when the industrial players try to cut a deal with the ruling government and the opposition manages to launch a strong enough protest that all hell breaks loose.”

An Impact on Investments

India Inc. is worried about the impact on investment flows. According to a statement by Reliance Industries chairman Mukesh Ambani: “A fear… is being created to slow down certain projects of national importance. The Nano project is a unique and innovative initiative which will establish India’s position as a small car hub. Indian Industry must be encouraged to make such large investments in order to build the country’s competitiveness as well as support job creation.”

“The Nano car is a statement of the coming of age of Indian manufacturing, and places India’s innovation skills high up on the world map,” says Jamshyd Godrej, chairman and managing director of Godrej & Boyce and past president of the Confederation of Indian Industry (CII). “It is, therefore, very unfortunate that the entire project is facing a political situation which it does not warrant.” Nano’s moving out would be a setback for not just West Bengal but also the entire country, says Godrej. Adds CII chief mentor Tarun Das: “The adverse impact is not restricted to Singur or West Bengal but will resonate in India’s global image.”

“Any delay will jeopardize the general investment climate in the country by undermining the confidence of foreign investors in the present difficult times, when a severe recession is threatening the global economy,” says Indian Merchants Chamber president M.N. Chaini.

Even Union Commerce and Industry Minister Kamal Nath is concerned about the impact on investor confidence, particularly in West Bengal. “We have to attract investments,” he says. “Incidents and such events obviously shake the confidence of the investor, especially in the particular state in which it is.” India hopes to get $40 billion in foreign direct investment (FDI) this year; in the January-June period, the actual FDI inflow was $20 billion.

Will the Nano effect impact this? “While the Singur issue has made headlines the world over, I don’t think this will be a very major issue at an international level,” says Chakrabarti. “Many other states have invited the Tatas to set up the Nano plant.”

Multiplier Effect

Will the Nano’s problems hurt the Indian automobile industry and its ability to fuel economic growth elsewhere as in the U.S. or other developed economies? MacDuffie feels that while the two situations are not strictly comparable, there could be lessons for India in the area of infrastructure investments. “A lot of what made that multiplier effect possible in the U.S. post-war economy was the decision by the federal government and the willingness to use some of the riches of those post-war years to invest very heavily in infrastructure. That allowed the car to have a transformative impact on a lot of the economy, on where people lived and on how they spent their leisure time and the like,” he says.

MacDuffie points to the construction of the U.S. interstate highway system as one of the most visible manifestations, adding that many other public investments increased the economic feasibility of dispersed growth into the suburbs possible. “There were deliberate choices to invest in infrastructure for the automobile rather than for mass transit and railroads and such — of course with the auto companies trying to influence that. If the government of India really wanted to gain that kind of multiplier effect they would need to be willing to make similar investments in infrastructure.”

Even as the controversy was at its height, non-resident Indian (NRI) and steel baron L.N. Mittal was holding a meeting of the company’s top managers in Delhi. “One can face this kind of problem in any other country,” said Mittal of Singur. “But the country as a whole is interested in growing. [Singur] does not give us nightmares. And we will not revisit our plan in India because of the Singur episode.”

Mittal admitted, however, that his projects were facing some roadblocks. He plans to set up two integrated steels plants in the states of Orissa and Jharkhand. But land acquisition, mining permissions and other approvals have kept the projects on the drawing board. The cost of the plants, announced in 2005 and 2006, has ballooned from $20 billion to $30 billion. “The more the delays, the more the cost overruns,” says Mittal.

Another NRI, Vedanta Resources chief Anil Agarwal, has also expressed his confidence in India. He has just announced a $9.8 billion global investment plan; of this, $7.6 billion is earmarked for India.

Antiquated Land Laws

But even as the world keeps knocking at India’s doors unfazed by Singur, there is a larger question that the controversy has given rise to: the whole issue of land acquisition. “We certainly need to revisit the land acquisition law,” says Chakrabarti. “It is very antiquated particularly because it does not take into account major projects that change the value of land dramatically. The current law still works fine if one wants to build a road or railway that needs just a small stretch of land, but it does not fit the current situation of acquiring land for industrial purposes.”

The law dates back to 1894; although there have been amendments, they have clearly been inadequate. Companies and governments have taken their own route, depending on circumstances.

The Jindal Group, for instance, is setting up a steel plant in Salboni in West Bengal. It has paid compensation up front. It has also offered free shares in the new company to all the people dispossessed of their land. Sajjan Jindal, vice-chairman and managing director of JSW Steel, says that had he been in Ratan Tata’s shoes, he would have offered the recalcitrant farmers double their holdings nearby. But Jindal had it relatively easy. At Salboni, some 90% of the 4,800 acres required was already with the state government. It was possible to be more than generous with the other owners.

Yet, despite their very high standards and ethics, the Tatas seem to have been embroiled in more than their fair share of land acquisition rows. Among projects in suspended animation or abandoned are a $550 million titanium project in Tuticorin in Tamil Nadu, several projects in Orissa steered by Tata Steel, and a port in the same state in partnership with engineering giant Larsen & Toubro. At Kalina Nagar in Orissa, where a $3.4 billion steel plant has been planned, there were violent clashes between the police and tribals. Some 14 tribals were killed in police firing in January 2006. (Incidentally, in July of this year, the Tatas also pulled out of four major projects in Bangladesh, which borders West Bengal. The $4 billion plan had made no progress since proposed in 2004.) For the Tata Group, the sun is setting in the east.

MacDuffie recalls another such crisis in Brazil in the mid-1990s, when the rules of the game suddenly changed for the automobile industry. Encouraged by strong economic growth at the time, the Brazilian government offered favorable tax treatment to small cars with engines below a certain size. “Suddenly, that part of the market just took off,” he says. “All of these multinational companies came flooding in to build capacity in Brazil.”

According to MacDuffie, a wave of optimism ran across the global automobile industry that Brazil would go on to offer generous government subsidies to open new plants. The unions too were willing to be “somewhat flexible in allowing innovative work arrangements,” he recalls. “Suddenly there were multinationals that were trying out innovative production concepts in Brazil that they hadn’t ever tried in their home countries. Volkswagen opened what they called a modular factory and General Motors followed suit with something similar.”

All that enthusiasm was short-lived, and the Brazilian government withdrew those incentives. Havoc followed. “In a very short period of time, lots of companies had all these unused capacities,” says MacDuffie, adding that the momentum was such that the investments kept pouring in even after the favorable market conditions shifted. “They just couldn’t shift gears quickly enough to withdraw and the consequences were paid later.”

Among the casualties in Brazil was a joint venture Chrysler and BMW had formed to build an engine plant, MacDuffie notes. “That got started late, and it just absolutely never got off the ground and eventually it was closed and all the equipment was sold to a Chinese firm.”

In India, other business houses are also facing unexpected changes in the playing field after making initial investments in projects. South Korean Pohang Steel’s $10 billion steel plant at Jagatsinghpur has run aground over acquisition of forestland. Goa has scrapped all the SEZs — 15 had been planned — after agitators against the takeover of farm and forest land threatened to target tourists, the lifeblood of the state. The same scene is being played out in many parts of the country. In early September, villagers in Potka (Jharkhand) humiliated and publicly paraded surveyors of Bhushan Steel & Power. The company wants 3,400 acres for a proposed steel and thermal power project.

“The crisis faced by the Nano project will certainly lead to major problems with other mega projects, like the $2.7 billion Nandagudi SEZ in Karnataka, the $6.6 billion Raigad SEZ in Maharashtra, the $2.6 billion Dadri (power project being implemented by Anil Ambani’s Reliance Energy) in Uttar Pradesh, the $8.7 billion Gurgaon-Jhajjar (gas pipeline project) in Haryana, and the $8.8 billion (Arcelor-Mittal) Keonjhar project in Orissa. India at this stage can ill-afford such a loss,” says Chaini of IMC.

There are no easy answers. In Maharashtra, at the Reliance SEZ project in Raigad district, a referendum is being conducted in 22 villages. Farmers will be voting on whether to give up their land. Reliance wants 25,000 acres for this mammoth project. The polling is a state government initiative; as with the Tatas at Singur, Reliance has been kept out of the loop.

Reliance has been negotiating with the farmers on its own, unlike at Singur where the state government is doing the job. As with Singur, one of the issues is compensation. Reliance is offering Rs. 1 million ($21,900) per acre; the farmers say the land is worth four times as much.

In Singur, farmers were paid $18,600 per acre of single-crop land and $26,250 for double-crop land. That was a premium, to-the-market rate. But, with the Nano plant making progress, the rate shot up to $87,500 per acre. The farmers feel they have been taken for a ride. Every project that involves land acquisition will, going forward, most likely face resistance; farmers will hold out for a better deal. In Singur, only 1,200 farmers out of 12,500 with less than 300 acres have not accepted the compensation.

According to Jindal of JSW, this is the reason dispossessed farmers should be made shareholders in the project. Tata has offered jobs and training, but that is clearly not enough. The Singur controversy continues, and agitation is likely to resume.

The Economic Times, meanwhile, contends that even the Leftists now feel that they are better off without the Nano. If they give in to Banerjee’s demands, they will — as in Nandigram — lose seats to the Trinamool Congress in the coming general elections. On the other hand, if they sacrifice the Nano, they can blame the party for any setback to the state’s industrialization efforts. Whatever the rhetoric might be, new jobs will only come from factories, not farms.

“Whether Tata stays or goes, both will be favorable for us politically,” says West Bengal transportation minister Subhas Chakraborty. “If Tata stays, we take the credit and if they pull out, we will blame the Trinamool.”