State Spotlight: Investing in Karnataka’s Manufacturing Sector

Karnataka is pushing for industrial growth in regions beyond the city of Bangalore, its central technology and innovation hub. As it seeks to increase investment in manufacturing, development of large scale industrial infrastructure and incentives for Small and Medium Enterprises (SMEs) will be key components of this push.

Karnataka Background

With a population totaling 62 million, Karnataka is one of the more industrialized states in India and is the fifth largest contributor to India’s manufacturing GDP. About 18 percent of Karnataka’s total GDP is created by the manufacturing sector.

Bangalore is dominant in Karnataka foreign direct investment (FDI) – between 1993 and 2005, 90 percent of all FDI in Karnataka was concentrated in Bangalore. Although Karnataka is most known for its IT sector, the state has manufacturing capacity in electronics, garments, aerospace and defense, automobiles, biotechnology, and steel production. However, it has been losing investment to established industrial states such as Maharashtra, Gujarat, and Tamil Nadu. Karnataka’s manufacturing sector only saw a marginal growth of less than one percent between 2005 and 2011.

National Investment and Manufacturing Zones

As Karnataka plays catch up with other major manufacturing hubs, it is focusing on large scale industrial infrastructure development to encourage foreign investment. The state has 40,000 acres in its land bank on which it seeks to build crucial industrial infrastructure.

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Karnataka is at the forefront of developing National Investment and Manufacturing Zones (NIMZs) which are giant industrial townships that will promote world-class manufacturing activities. The state will set up NIMZs in four districts: Tumkuru, Bidar, Kolar, and Kalburgi.

Karnataka’s 2014-19 industrial policy states that, in line with the central manufacturing policy, Karnataka’s government will develop NIMZs as integrated industrial townships with state-of-the art infrastructure, land use plans based on zoning, and skills development facilities. These measures should attract investors who are normally hesitant of India’s poor infrastructure and difficult land acquisition regulations.

Small and large manufacturers will be operating together in NIMZs. This setup will allow for easy collaboration between businesses within a strong value chain, will help reduce costs and lead time, achieve economies of scale and encourage technology transfer.

NIMZs provide a wide number of benefits to businesses including low interest loans and investment subsidies, government purchase preference, fifty percent government support for international patent filing expenses, single window clearance, tax exemptions including exemptions from capital gains tax, and incentives for companies to buy green technology. Green technology acquisition for SMEs will be provided for by a technology acquisition fund out of which SMEs will be given access to a patent pool of up to INR 2 million (US$ 32,000).

SME assistance

SMEs are a crucial segment in the manufacturing landscape of India. They account for almost a half of India’s manufacturing output and 40 percent of total exports. The SME landscape in Karnataka is dominated by textile followed by the food and beverage industry. As of 2012-13, total investment in the SME sector in Karnataka stood at US$22 billion, with most SMEs located in the Bangalore (urban) district.

In order to encourage more investment by SMEs, Karnataka will provide a number of incentives, including reduction in cost of setting up business, increased fiscal benefits, and guaranteed land.

Starting April 1, 2015, the state will cut application fees for setting up industries by 50 percent. The current rates range from INR 30,000 to INR 3,000,000 (US$ 480 – US$ 48,000). Additionally, Karnataka’s Chief Minister Siddaramaiah has proposed double fiscal incentives for SMEs.

The Karnataka state industrial policy 2014-19 sets aside a minimum of 20-30 percent of allocable land for industrial development to SMEs. Karnataka is also working with the central government to increase the number of SME incubation centers in the state. This month it was announced that the number of SME incubation centers in the state would be raised from four to 10. The central government will be opening 500 incubation centers across the country.

Specific Sectors

Karnataka is a major manufacturing hub in the defense and airspace industry. The state produces more than a quarter of India’s aircraft and statecraft, and 70 percent of industrial activity in the defense and airspace sector occurs in Karnataka.

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Due Diligence

Expansion outside of Bangalore is already occurring in this sector. The Indian defense and aerospace PSU Hindustan Aeronautics Limited will spend INR 400 crore (US$ 64 million) to develop a Light Utility Helicopter in a manufacturing facility at Tumkuru.

Karnataka is also pushing for the development of second and third tier cities in the IT sector. Karnataka’s IT policy offers incentives and exemptions to facilitate existing and new firms to set up software or hardware development centers in tier-2 and tier-3 cities such as Belgaum, Gulbarga, Hubli, Mangalore and Mysore. The incentives include stamp duty exemption, concessions in power tariffs and exemption from state labor laws under the Industrial Employment Act.

Conclusion

Karnataka is one of the most industrialized and business-friendly states in India. It is further strengthening its industrial capacity by being at the forefront of NIMZ development in India and by providing multiple incentives to manufacturers. These measures will make Karnataka a leader in manufacturing and will help place the state in the center of the “Make in India” campaign.

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