Karnataka launches new industrial policy

Karnataka launches new industrial policy

India’s southern state Karnataka has launched a new industrial plan to revive state growth. Yet, achieving 12% industrial growth in an eco-system which is virtually stagnated will be an uphill battle, especially with intense competition among other states in Karnataka’s vicinity.

The state government of Karnataka unveiled its long-awaited five-year industrial policy 2014-19 with the following objectives:

  1. To maintain an industrial growth rate of 12 % per annum.
  2. To enhance the contribution of manufacturing sector to the State GDP from present level of 16.87% to 20% by end of policy period
  3. To attract investment of USD 110 billion
  4. To create 1.5 million jobs
  5. To create an environment to enhance ease of doing business in the state through e-governance

To achieve these objectives, the government promises to develop industrial infrastructure by helping acquire land and setting up reliable power and water facilities. It also encourages private participation for the development of inland Container Depots, container freight stations, logistics parks, harvest technology centres and ware housing facilities. In addition, the government will also upgrade existing industrial estates.

The Karnataka government plans to set up four new small industrial corridors within the state while expediting work on Chennai-Bangalore and Mumbai-Bangalore corridors with the central government’s help. Mangalore port will also be upgraded to improve cargo handling. Interestingly, the state government wants to decongest Bangalore and set up a special investment region (SIR) in Northern Karnataka.

Focal industries

Similarly to the previous version, the policy aims at scaling up specific sectors by leveraging existing strengths. Aerospace industry is one of the focus areas. Karnataka has an aerospace policy and a supporting IT eco-system already in place. Its expectation of an investment up to USD 4 billion by 2018 is not unrealistic, considering the fact that Prime Minister Modi’s central government is fast-tracking defence purchases.

Karnataka is also keen to leverage its auto-industrial ecosystem to attract further investments in the sector. The new industrial policy has announced incentives for research and development of hybrid vehicles. To further the machine tools industry, the government has proposed to promote an exclusive machine tools industrial park.

Steel and cements are areas where the state has been traditionally strong. Since Karnataka is endowed with an estimated 2 billion MT of iron ore, the government wants to leverage the mining industry to increase steel production.

Focus industries barring steel and cement will be given special tax incentives tailored in line with the quantum of investment besides interest free loans. All focus industries will be characterized as public utilities under the industrial disputes act. This is reassuring to potential investors as industrial action is restricted for public utilities.

Another major thrust in the new industrial policy is on micro, small and medium enterprises (MSMEs). In industrial estates, 20% will be allotted for MSMEs through a single window system. The state will also play a facilitator role in the collaboration of MSMEs with larger industrial entities. A system of self-certification will replace periodic inspections, thus reducing bureaucratic meddling.

Deficits and prospects

After a spate of populist welfare programs, Chief Minister Siddaramaiah of Karnataka wanted his government’s industrial policy to project his image as a business-friendly leader. Though the policy is claimed to have finalized after wide-ranging consultations, the document is only an incremental improvement over the previous BJP government’s industrial policy, outlining without providing details.

For example: the document fails to answer how the government will achieve generating 16000 MW over the next five years. A non-governmental study in 2013 concluded that the state’s power demand-supply gap would be close to 20%, even if the capacity addition as projected by the government is realized. Power will be a crucial determinant for success of new industrial policy.

Even as the policy aims at decongesting Bangalore, China’s Yunnan provincial government has expressed interest in investing USD 1 billion for an industrial park within 100 km of Bangalore and not anywhere else. This should serve as a reminder to the state leadership on the importance of global cities and their growth potential.

Furthermore, the policy was unveiled only a fortnight after domestic automaker Hero motors chose neighbouring Andhra Pradesh over Karnataka for its new plant. The negative sentiment generated by the auto major’s decision will persist for a while until some tangible success is achieved.

Karnataka’s state establishment needs to immediately address concerns about its slow bureaucracy. Due to lack of effective political leadership, industrial growth has declined in the last three years. According to the government’s own economic survey, industrial growth in FY 2014 was only 1.2%.

Investor sentiment has yet to improve in Karnataka even a year after the Congress government came to power with a comfortable majority. The present government is stable, but with an unstable leadership. A chronically faction-ridden state Congress leadership has forced the Chief Minister to be vigilant about his adversaries and concentrate on populist welfare schemes to consolidate his base.

Even the new industrial policy has a populist streak in that it promises to reserve 70% of the jobs generated for domiciles of Karnataka, potentially opening room for political and bureaucratic harassment of industries.

For Karnataka to revive industrial growth, the state political leadership and higher bureaucracy need to bridge a range of deficits from infrastructure to human capital. Achieving 12% industrial growth in an eco-system which is virtually stagnated will be an uphill battle, especially with intense competition among other states in Karnataka’s vicinity.

About Author

Sundar Nathan

Sundar is currently a contributing analyst for IHS. Prior to that, Sundar was a project member at the Institute for Defence Studies and Analyses. He also worked at the Janaagraha Centre for Citizenship and Democracy where he helped launch a comprehensive study of urban governance in India. He has a Masters in International Public Policy from University College London.