Karnataka State Incentives Prove Highly Popular for Foreign Firms in India
As Foxconn makes the decision to establish a new plant in Karnataka, eyebrows have been raised over the south Indian state’s ability to consistently attract large-scale investment proposals and industrial projects. Key factors that have facilitated this include Karnataka’s streamlined business environment, manufacturing clusters, investment promotion subsidies, a dynamic talent pool, and a rich natural resource profile.
Karnataka is preparing for state assembly elections on May 10.
Unpacking the state’s performance on investments
Karnataka, abundant in natural resources and leading the way in technological advancements, offers a diverse range of investment opportunities across various traditional and high-tech industries. With its cosmopolitan culture and efficient administration, it has become an ideal destination for businesses to thrive.
The month of March this year saw a large number of industrial projects and investments greenlit by the Karnataka government, including from Apple supplier Foxconn, rounding up a successful FY 2023 for the South Indian state. Key sector beneficiaries include renewables, electronics system design and manufacturing (ESDM), and agriculture.
Among the 18 projects worth INR 750 billion (US$9.13 billion) approved on March 20 by the state government, is a US$967.91 million proposal to set up a facility by an Indian unit of Foxconn. The US electronics giant Apple is intent on diversifying its supply chains out of China, having assembled more than US$7 billion of iPhones in India in 2022 via its contract manufacturers like Foxconn and Pegatron. Consequently, these suppliers are exploring new sites to steadily expand assembly and production capacity. Reuters reported last year, for example, that a Foxconn unit could begin production of AirPods in India by the end of 2024 in the neighboring state of Telangana – though the news has not been confirmed.
India’s southern states are overall becoming increasingly appealing to foreign manufacturers due to their advanced industrial ecosystem, quality infrastructure, and investment promotion subsidies for sunset sectors under their industrial policies. They may even have provided the blueprint for investment growth to some of the other ambitious states to the north and west.
Other factors determining location of manufacturing investments are proximity to the coastline and key ports, connectivity through air, road, and rail routes, warehousing, special economic zones, raw materials, and downstream industries, which cumulatively make logistics and production more efficient and cost-effective. Karnataka rates highly on all these metrics.
Infrastructure, logistics, and talent base
Karnataka boasts excellent connectivity to major markets with two international airports and five regional airports, 47 national highways, and 145 state highways. The state has a robust rail network spanning 3,818 km. Moreover, with a coastline of 320 km, Karnataka features 9 minor ports and a major port in Mangaluru. Major ports at Chennai and Krishnapatnam are 300-400 km away, while the JNPT at Mumbai is 980km away.
The state is intersected by both the Bengaluru-Mumbai Economic Corridor and the Chennai-Bengaluru Industrial Corridor, further bolstering its transportation infrastructure.
As of May 2022, there were 21 operational SEZs, of which 11 are located in and around Bengaluru. Top SEZs in terms of employment are Manyata Embassy Business Park, Pritech Park, and the Information Technology Park Ltd. Other prominent SEZs are in Udupi, Hassan, Mangaluru, Shivamogga, Mysuru (L&T), and Dharwad and Dakshina Kannada (Infosys).
Additionally, Karnataka’s education system provides a steady supply of technical and engineering graduates, researchers, and scientists, which benefits manufacturing industries. As of 2020, there were 234 engineering colleges, 57 medical colleges, 44 universities, and 16 international schools in the state. Bengaluru accounts for a 24-25 percent of India’s digital talent as per a report by IT industry body Nasscom. This includes skills like artificial intelligence, machine learning, low code development, and cybersecurity. Job creation is a primary objective for the Karnataka government, and subsidies are also offered to enterprises to promote local hiring.
Business reforms and streamlined bureaucracy
The improved ease-of-doing-business environment, featuring affidavit-based clearance with strict timelines, has played a key role in Karnataka attracting investments. This has enabled approved projects to commence operations without any delay for downstream approvals.
Additionally, Karnataka provides special incentives for investments in electronics, semiconductors, and solar cells, amounting to 25-30 percent of the investment. The state’s efforts to establish product-specific industrial clusters, such as the FMCG cluster in Dharwad, toys cluster in Koppal, bulk drugs park in Yadgir, and electric vehicles cluster in Ramanagara, are also expected to drive growth.
Further, the urban agglomeration around capital Bangalore (now known as Bengaluru) is the fourth-largest technology hub in the world and largest technology base in Asia. Located in the southeastern part of Karnataka, Bengaluru Urban has over 315 large scale industries and 211 medium scale industries across sectors like information technology (IT), biotechnology, aerospace, and food processing.
The Spoke-Shore initiative by the government aims to expedite the development of global capability centers (GCCs) within the state and establish a substantial talent pool outside of Bengaluru. The objective is to generate one million indirect and direct employment opportunities by 2026, focusing on the Mysuru, Hubbali, and Mangaluru clusters.
The Karnataka state administration has consistently sought to balance corporate interests with larger socioeconomic considerations. For instance, the Karnataka government recently introduced flexibility for manufacturing firms in terms of raised limits of work hours and allowing women to work night shifts. There are conditions attached but the labor reforms seek to bring the state at par with other competitor investment destinations in China, Vietnam, and Taiwan.
Some recent regulatory changes facilitate the following:
- Provision to avail ‘Fixed term employment’ to optimize labor capacity to cater to seasonality
- Recent amendments made to facilitate women’s work timings in night shifts, between 7 PM to 6 AM
- Overtime limit per quarter increased from 75 to 125 hours with the amendments to the Factories Act
- Exemption limit for Industrial Disputes Act increased from 100 to 300 workers
- Exemption limit for Contract Labor Act (seeking licenses) increased from 20 to 50 workers
Location and climate
Located in southern India, Karnataka shares borders with several states and the Lakshadweep Sea to the west. It is bordered by Goa to the northwest, Maharashtra to the north, Telangana to the northeast, Andhra Pradesh to the east, Tamil Nadu to the southeast, and Kerala to the southwest. Notably, it is the only southern state to share land borders with all four of its southern Indian sister states. Covering an area of 191,791 sq km (74,051 sq mi), Karnataka constitutes 5.83 percent of India’s total geographical area, making it the sixth-largest state in the country.
The climate of Karnataka is subtropical, with winter (January-February), summer (March-May), southwest monsoon (June-September), and post-monsoon (October-December) seasons.
Major foreign investors and MNCs in the state
Leading multinational companies investing in Karnataka include Boeing, HAL, Essilor, Foxconn, 3M, IBM, Microsoft, Texas Instruments, Dell, Bosch, Philips, Infosys, Intel, Goldman Sachs, GE, Wipro, Sun Pharmaceuticals, Pepsi, Reliance Industries Ltd., Schneider Electric, Tata Power Renewable Energy, to name a few.
Major Districts in Karnataka and Their Investment Viability
Key resources / sector
Investments announced in 2022-23
Some of the latest investments approved in the state for the financial year 2022-23:
- A third electronics manufacturing cluster (EMC) coming up in Hubli, Dharwad district – covering an area of 224.5 acres. The new greenfield EMC aims to catalyze investments of over INR 15 billion and generate over 18,000 jobs. Nine companies and start-ups have already committed investments of INR 3.4 billion and employment potential of 2,500 people.
- Mega textile parks planned in Raichur, Kalaburagi, Vijayapura, and Chikkamagaluru districts and 25 mini textile parks across Karnataka on a public-private-partnership (PPP) model.
- Over INR 2 trillion worth investment proposals in the green energy sector.
- The State Industries and Commerce Department cleared 78 investment proposals in March 2023 worth INR 52.98 billion (US$647.36 million) promising 13,917 jobs. Approvals were given to 17 important large and medium size industrial projects (that is, each project investment is above INR 500 million / approx. US$6.10 million), 59 new projects with investments of more than INR 150 million (US$1.83 million) and less than INR 500 million, and 2 projects of additional investment at about INR 2.03 billion (US$24.81 million).
Quick Glance: Karnataka’s Economic Profile and Industrial Ecosystem
- State GDP of US$260 billion in 2021-22 and per capita GDP of US$3800.
- Exports from Karnataka stood at almost US$115 billion in 2021-22 – 18.9% of India’s total exports.
- FDI inflows between October 2019 and December 2022 amounted to US$42.8 billion.
- Rise in investments from INR 165 billion in 2018-19 to INR 3.23 trillion in 2022-23.
- Karnataka was the top state attracting FDI during April 2021-March 2022 with INR 1.76 trillion worth investments. Total investments in Karnataka from FY 2018-19 to FY 2022-23 stood at INR 4.67 trillion.
- Key sectors in the state are aerospace and defense, food processing, auto, auto components and electric vehicles, biotech, pharmaceuticals, medical devices, electronic system design and manufacturing, clean energy, start-ups, steel, capital goods, toys, textiles and apparel, and tourism and wellness.
- A thriving technology industry.
- Karnataka’s digital economy is worth around US$130 billion.
- 700,000 fresh graduates annually and 400,000 engineering graduates annually.
- Home to over 400 Fortune 500 companies with their production, services, and global research and development centers located in the state.
- Bangalore, the state’s capital city, alone contributes to 60 percent of the total value of machine tools manufactured in India.
- Second highest producer of special purpose and heavy electrical machinery in India.
- The second largest chip design hub in the country.
- The largest software exporter in India.
- 2050 MW solar park set up at Pavagada, one of five biggest photovoltaic solar power parks in the world.
- Accounts for about 70% of coffee production and 33% of silk production in India. Leading producer of cashew nut, millets, marine products, rose onion, gherkin, green chilli, tamarind, sunflower and Byadgi Chilli.
- Generous investment promotion subsidies and higher incentives for tier-2 and tier-3 cities to expand investments beyond the capital.
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