Road ahead for investments in Karnataka

Though the state government has been aggressively pursuing investments inflows, experts claim there are many legal hurdles

Karnataka, which has been the cradle and the guardian angel of the IT growth in India, came up with a rather disappointing economic survey recently. The state is expected to show a Gross State Domestic Product (GSDP) growth of 6.9% for fiscal year 2016-17, against 7.3% during 2015-16, less than a nationally-expected average of 7%, according to the survey.

While the fall in the GSDP raised a lot of flutters within various circles of the state, it was the steep fall in FDI into Karnataka that went unnoticed. The FDI inflow into the state for the first nine months of 2016-17 stood at $1,697 million, against $4,121 million for fiscal 2015-16. Though the numbers are not directly comparable, if the first three quarters are any indication of full-year numbers, even attracting half of the FDI that was attracted last fiscal seems to be an achievement.

Not only in absolute numbers, but the state’s share in national FDI inflow numbers also declined sharply. The FDI inflow into India, for first nine months of the current fiscal, stood $35,844 million, against $40,001 million in 2015-16. Again the numbers seem to be in line to show year-on-year growth, which doesn’t seem to be the case in the state FDI inflows.

The state’s share towards FDI inflow in the country, for first nine months of the current fiscal, stands at 4.73%, a sharp decline from 10.3%, last fiscal. The indication is clear — while the national numbers of FDI have increased, Karnataka seems to be on the decline — despite the state being home the ‘Silicon Valley of India’.

However, Karnataka still remains the most lucrative state in terms of investment intentions. According to the official numbers published by the Department of Industrial Policy and Promotion (DIPP), during October-November 2016, the state received investment intentions worth Rs 67,757 crore, three times more than the second placed Gujarat.

Also in a study report titled ‘Global Cities-The 2016 Report’, Knight Frank is quite optimistic about Bengaluru. “International investment is more likely to look at either established centres or the emerging cities that have moved into the global league, like Beijing or Bengaluru,” says its chief economist, James Roberts, in the report.

Bengaluru has gained the most from the growth of ecommerce. “The city, known globally as a major IT office hub, has witnessed substantial interest from the ecommerce sector. In 2013, ecommerce accounted for 1% of the total office leasing deals transacted, increasing to 4% in 2014. Although the sector’s share in the first half of 2015 (H1 2015) is just 2%, it stands at 35%, when pre-committed transactions in H1 2015 are taken into account,” the report adds.

Drought effect
According to Karnataka Minister for Large and Medium Industries and Infrastructure Development R V Deshpande, the prevailing drought in the state has been one of the primary reasons behind the fall of investments in the state, another being the national slowdown post-demonetisation. “Last three to four years, we have a severe drought here. This is the worst year. We don’t have even drinking water for Bengaluru,” he says.

“It has affected the agriculture sector, and has reduced the purchasing power of the people, hence  reducing consumer purchases. And that affects the production of the industries as well,” he adds.

In an astounding number provided by the government, 136 out of 175 taluks are facing a severe drinking water crisis, with a crop loss worth Rs 25,000 crore. Seconding Deshpande, Shekar Viswanathan, Vice Chairman of Toyota Kirloskar Motor, says that the drought does not let the government concentrate on the industry.

According to Deshpande, who has been aggressive in getting FDI inflow into the state, the state government has approved some key investments between 2013-14 and 2015-16. The investments include Biocon (Rs 1,060 crore), Manipal Health Enterprises (Rs 1,121 crore), Glaxosmithkline Pharmaceuticals (Rs 994 crore), Tata Power (Rs 1,025 crore), PepsiCo India (Rs 590 crore), Ruchi Soya Industries (Rs 455 crore), Mangalore Refinery and Petrochemicals (Rs 378 crore), and JSW Paints (Rs 600 crore), among others.

According to the data provided by the ministry, during Invest Karnataka in 2016, the state government cleared projects and MoUs worth over Rs 3 lakh crore across several sectors such as energy, steel, pharma, IT, biotechnology, agriculture, infrastructure and tourism.

Viswanathan is all praise for the Karnataka government which he thinks is very “efficient and business-friendly”, and adds, “I think Karnataka has been fair to investors like Toyota.”

Despite a huge number of investment intentions and approvals, Deshpande emphasises on the gestation period — of at least two to three years for investments to materialise. “If investments come into the state today, the results will be seen after two to three years. In 2016, we cleared projects worth Rs 1.77 lakh crore. Now all this benefit will be seen after three years. We have to realise that all these projects can’t be started within 15 days,” Deshpande says.

He also emphasised on the need to promote what he called “sunshine industries”. He adds that the government is looking for more investments in these industries, which include aviation, defence, nanotechnology, and robotics. Calling them the industries of the future, he adds that, “In our budget, we emphasised on these industries. They might take 20 years to bloom, but we have sown the seeds.”

Chandrababu Naidu effect
Prominent economist Govinda Rao says that aggressive campaigning by the neighbouring state of Andhra Pradesh could be one of the reasons for diversion of investment.

“Chandrababu Naidu has been going hammer and tongs and making a lot of noise. Given the fact that Andhra is a neighbouring state, he has tremendous capability to win away investments there. When you are giving away free land and many other incentives, the cost of capital reduces a lot. It all depends on the comparative structure of incentives that are offered,” says Rao.

He also highlights various other factors that have led to this situation, with a focus on the governance and tough labour laws, and the issue of land acquisition in the state. “Land acquisition is a major issue. And many of these foreign investors would need land. The state needs to look into its land banks,” he opines.

Though Deshpande negates that land acquisition is an issue, he states, “We have sufficient land banks across the state. If a company wants land we welcome it. But they can’t deny the land owners of their legitimate compensation. For the rural areas, it is four times the market value, while for urban areas, it is twice the market value.”

Viswanathan adds that maintenance of industrial estates and instability in the legal process (quoting recent change in age limit of retirement) will have adverse impact on investors. There are issues which the government can handle better, but on other hand, it also emphasises on high-tech sectors like aerospace, biotechnology and pharma, automotive, agriculture and food processing and medical devices.

Karnataka also has a huge potential for tourism, right from adventure tourism to environmental tourism, and from health tourism to cultural tourism, which is being promoted aggressively. According to Viswanathan, “The state should not only compete domestically, but also internationally with countries like Thailand and Indonesia for more investments.”

In addition, Bengaluru is emerging to be the startup capital of the country. The state was the first in India to come up with a multi-sector startup policy in November 2015. The opportunities in the state are endless, but somewhere laws need to be tweaked to make it easier to do business within the state.