Dead heat for foreign investment as Congress takes charge of Karnataka

For the new Congress government in Karnataka there shall be little time to lose in getting foreign investments for the state.

Apple supplier Foxconn broke ground on Monday for a production plant near Hyderabad, strengthening Telangana Chief Minister K Chandrasekhar Rao’s investment plans. The plant will employ more than one lakh people and Foxconn will reportedly invest $500 million on it. Just months before losing elections in May, the BJP government in Karnataka announced clearing a Rs 8,000 crore investment plan. Foxconn had not confirmed the investment.

Another Apple supplier Pegatron is soon expected to announce its expansion plans. Pegatron and Foxconn both have factories in Tamil Nadu. Karnataka government officials have said Pegatron’s investment is the prize they aim to win. Tamil Nadu is equally determined for it.

Karnataka’s economic policies are expected to continue in the same direction as before the elections. The rich states of Tamil Nadu, Telangana, Gujarat, Maharashtra, and Karnataka do not miss any trick to draw investments. Each of them has a well structured digital economy road map they use to chase investors.

The BJP government in Karnataka, earlier this year before elections, had sent a high powered delegation to Taiwan’s Smart Cities Expo to chase companies.

“We are trying and hope Pegatron will consider us favourably for their expansion,” said Sanjeev Gupta, CEO of Karnataka Digital Economy Mission (KDEM) who led the delegation.

KDEM is a 51:49 ratio joint venture company between the industry and the Karnataka government with its operating expenses supported by the state. Pegatron has declined to comment on KDEM’s move.

Next door, Tamil Nadu Chief Minister M K Stalin will visit Singapore in May to seek investments. His state has the numbers to make investors notice. Of the 12 Japanese industrial townships in India, three are in Tamil Nadu.

As the competition for investments narrows down to the states of Western and Southern India, governments there, irrespective of the party affiliations, are more or less in sync with what industry needs.

Karnataka, investment and politics

The Congress’ election manifesto for Karnataka avoided the trap of free electricity and steered clear of taking a hard position on labour law changes. The BJP government earlier this year had allowed for a considerable leeway in labour laws, including relaxing terms for eight-hour shifts.

The Congress party has promised freebies that will not impact investors. Its promise of providing 200 units of free electricity to households or an unemployment allowance will instead impact the state budget. But then like Delhi, Karnataka can afford to dole out freebies due to its impressive fiscal numbers. For FY23, Karnataka has revised upwards by Rs 20,000 crore its tax collection projection. For FY23, the state has budgeted Rs 1.65 trillion in tax projections.

In the first eleven months of FY23, Karnataka achieved a 95 per cent utilisation rate of its capex target of Rs 43,573 crore. It beat Tamil Nadu and Maharashtra, which have achieved only 61 per cent and 39 per cent of their annual targets, respectively. Karnataka has the best hospital bed ratio to population in the country, as per Niti Aayog data. Yet among large states, as per the same Niti Aayog data, it is 19th on the health preparedness index as of 2019-20, the last year when it was conducted. In the Panchayati Raj ministry performance awards this year, Karnataka just did not figure.

Data from the Reserve Bank of India (RBI) shows that during the five-year transition period (July 2017 to June 2022), the top five GST compensation receiving states were Maharashtra, Karnataka, Gujarat, Tamil Nadu and Punjab. Karnataka’s share of GST compensation in tax revenue has remained below 10 per cent on an average–it is just comfortable. As it works to keep to its manifesto promises, the new Congress government is likely to unleash expenditure programmes on the revenue side. What it needs to do is not go past this comfort zone.

In FY23, Karnataka was among states with the highest net market borrowing. Tamil Nadu and Maharashtra, industrial powerhouses like Karnataka, borrowed heavily, too.

How does Karnataka do it? Like all well-run states, Karnataka’s civil servants are usually left undisturbed once the first set of mass transfers happen under a new government. It has helped. Promises made by industry or IT secretaries or officials like Gupta are usually lived up to. Between October 2019 and December 2022, the state accounted for 24 per cent of the total FDI inflows into India. The run rate seems likely to continue.