State Spotlight: Investing in Telangana

By Dezan Shira & Associates
Editor: Nishant Maddineni

Following its separation from Andhra Pradesh in June 2014, foreign firms have been closely examining Telangana’s suitability as a destination for foreign direct investment (FDI). With a population of 35,286,757 and a GDP of $53.9 billion, there is ample room in India’s newest state for exceptional growth.

Many foreign investors were apprehensive about the creation of Telangana. These observers worried whether the state’s government would be able to provide the political stability necessary for a favorable business environment. However,  a number of encouraging initiatives and policies have been implemented to increase business activity and foreign interest in Telangana.

Life Sciences: a Burgeoning Industry

One sector that the Telangana state government has shown to be especially interested in is life sciences, with a new policy aimed at attracting investments worth Rs. 20,000 crore (US$3.24 billion) by 2020. Life sciences cover sub-industries such as biotechnology, bulk drugs, vaccines, incubation centers and R&D facilities. The policy should be helped by Hyderabad’s strength as a pharmaceutical hub; leading companies like Thompson Healthcare and Divis Labs operate in the city. Hyderabad also has several biotechnology parks , such as Genome Valley, Nanotechnology Park and Fab City.

To build on the city’s strengths, the government will expand Genome Valley park by adding another 200 acres at its location in Shamirpet on the outskirts of Hyderabad. There is also a proposed integrated pharma city about 20 km from the new Shamshabad airport that will contain a common effluent treatment plant, vaccine testing facility, and pharma university. Since these parks require large amounts of funds, there could be many opportunities for investors in the sector to build something on the cutting edge.

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Make in Telangana?         

The national government has sought to attract foreign manufacturers with the “Make in India” campaign. In Telangana, the state government has attempted something similar with the “In Telangana-Innovate, Incubate, Incorporate” campaign.

The state government passed the ‘Telangana State Industrial Project Approval and Self Certificate System’ (TS-iPASS), which is meant to speed up processing of the business registration process. It replaces the existing Industrial Single Window Clearance Act of 2002 to make Telangana appear more investor-friendly. In the local media, Telangana Chief Minister K. Chandrasekhar Rao described the old law as a “single window with grills” and the new bill as a “single window without grills”.

The new initiative will also create a state-wide investment facilitation board (T-SWIFT) to give provisional approvals to mega industrial projects within 15 days of receiving self-certified applications. A mega project is defined as one that has an investment of over Rs. 200 crore (US$32.2 million) and employs more than 1000 people. However, smaller projects will need to be approved by a state committee and clearances will take 30 days.

Despite the longer wait times for small and medium-sized enterprises (SMEs), the state government has provided incentives for investments into the state, including: 

• Special fund for IP registrations assistance;
• Special fund for technology transfer and modernization to SMEs;
• Access to adequate number of smaller plots in Industrial parks for SMEs.

The state government also intends to create a joint fund with industries and their associations to provide insurance for domestic SMEs.

Another significant aspect of the TS-iPASS bill is that it will rationalize taxes with other neighboring states in order to prevent tax evasion and smuggling of industrial products. This means that Telangana’s tax rates will be at least as low as neighboring states.

New Industrial Corridors on the Horizon

The Telangana state government has announced plans to create several industrial corridors in two phases. In the first phase, the aim is to create Hyderabad-Warangal, Hyderabad-Nagpur, and Hyderabad-Bengaluru Industrial Corridors. In the second, the aim is to create Hyderabad-Mancherial, Hyderabad-Nalgonda and Hyderabad-Khammam Corridors. These will be modelled on Special Investment Zones like the Delhi-Mumbai Industrial Corridor (DMIC).

These areas benefit from having significant amounts of government land that can quickly be allocated to enterprises investing under the new TS-iPASS single clearance system. This is particularly important because privately acquiring land is very difficult for foreign companies in India: they must be leased or bought directly from the government.

Chief Minister K.C. Rao said in a business event in Singapore, “Recent changes in land acquisition laws in India have made it difficult to acquire private land. Large-scale industrialization is possible in states where the government has enough land.” This gives Telangana an advantage – it has an estimated two million acres of land available that has been identified as unfit for agricultural cultivation. These lands are expected to be transferred to the Telangana State Industrial Infrastructure Corporation (TSIIC), who will then determine where industrial parks will be located and in which sectors the parks will be assigned.

RELATED: Land Acquisition May Become Easier in India, but Risks Remain

Conclusion

There are still some significant obstacles for FDi into Telangana. As with the country at large, one of the biggest problems is infrastructure. To fix this, the state is looking for the TSIIC to be responsible for the development of its industrial and related infrastructure. Ownership of the land is also meant to allow the TSIIC to gain revenue and thus become independent of government, reducing the potential for corruption.

For Industrial power in its industrial parks, the state government says it will encourage usage of non-conventional energy like solar power. The government also plants to set up Private Merchant Power Plants, for which it wants to rely on investment from Chinese and Singaporean investors. However, these initiatives are still in the planning stage and actually getting the investors interested will be much more difficult.

In the first six months of statehood, Telangana’s government has outlined an ambitious vision for economic development. According to Adam Pitman, International Business Advisory Manager at Dezan Shira & Associates, “Its legislative progress confirms that the state government has the political willpower to enact important reforms, which will improve the ease of doing business and the competitiveness of key industries. However, in the next year we will see whether this state government has the staying-power to make its vision a reality.” If it does, Telangana could be one of the biggest contributors to India’s projected economic growth.

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