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LOCATION AND OTHER CHALLENGES

This article discusses the location and other challenges in selecting the best Indian states for foreign investment. It provides information on published sources, practical involvement, and factors such as markets, infrastructure, labor laws, and government regulations. The investment climate and business climate in different states are also evaluated.

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LOCATION AND OTHER CHALLENGES

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  1. LOCATION AND OTHER CHALLENGES Where to Invest? Indian States Competing for Foreign Investment The Center For American and International Law By : Gautam Mahajan President - Inter-Link Services Pvt. Ltd. June 13, 2006

  2. We’ll discuss • Location • And some other Challenges I’m assuming you have read this paper, and would prefer to answer your queries!

  3. INDIAN STATES

  4. HOW TO SELECT LOCATION • Published Information • WORLD BANK • IFC • ICRIER • INDIAN STATES • Personal/Practical involvement • WE WILL CONCENTRATE ON THE PRACTICAL and remember: • Location, Location, Location!

  5. LOCATION: THE PRACTICAL WAY • NORMAL SITE SELECTION: • DEPENDS ON INDUSTRY • AGRI TO ZOOLOGY TO HIGH TECH TO MANUFACTURING • WHERE ARE MY MARKETS • WHERE IS IT EASY TO INVEST • PEOPLE • MY MANAGEMENT PEOPLE • MY WORKERS • TRAVEL AND SHIPPING • LONG TERM PERPECTIVE

  6. PEOPLE • AVAILABILITY • INCLUDING SUPPORT INFRASTRUCTURE • MANUFACTURING SUPPORT • LOCATION DESIRABILITY • EASE OF ACCESS • QUALITY OF LIFE • SCHOOLS, HOUSING, SOCIAL • WEATHER

  7. LOCATION: THE PRACTICAL WAY • NORMAL SITE SELECTION: STATES • EASE OF ENTRY AND EXIT • LABOR LAWS (PRO LABOR OR PRO CORPORATE) • TIME AND MONEY TO ENTER • STATE AND LOCAL GOVERNMENT • INFRASTRUCTURE • TRANSPORT • POWER • WATER ETC. • MANAGEMENT TIME AND EFFICIENCY • CORRUPTION • REGULATIONS AND REGULATORY HASSLES • GOVERNANCE • INTELLECTUAL PROPERTY • SKILLED MANPOWER • INVESTMENT AIDS • INCENTIVES • FINANCING • OVERALL COST OF DOING BUSINESS

  8. STATES:INVESTMENT CLIMATE • Good Investment Climate means opportunities and incentives for firms leads tohigher • productivity • investment • growth • And profits

  9. INDIA’S INVESTMENT CLIMATE DIFFERENCES AMONG STATES

  10. SIGNIFICANT PROBLEMS From Inter-Link/Xerox study STATE # OF PROBLEMS Red TapePowerTaxesTelecomTransportOther Corruption Delhi 10 4 4 1 2 2 2 Haryana 2 1 1 2 - - - Rajasthan - - - 1 1 - - Uttar Pradesh - - - - - 1 - Tamil Nadu 1 3 1 2 2 1 3 Karnataka 7 12 2 8 3 - 1 Andhra Pradesh - - - - 1 - - Bihar 1 1 - - - - - Orissa 1 - - - - - - Maharashtra 7 2 9 3 4 5 - Gujarat 1 - 1 1 - 1 TOTAL 30 23 18 18 14 9 7 NOTE: “Other” problems included are Labor (3), IPR Protection (3), Political Uncertainty (2) and Environment (1).

  11. INVESTMENT CLIMATE From Inter-Link/Xerox study STATE # OF RESPONSES Excellent Good Fair Poor Delhi - 8 10 3 Haryana - 3 2 - Rajasthan - 1 1 - Tamil Nadu 2 4 4 1 Karnataka 1 12 9 1 Andhra Pradesh - 1 - - Bihar - - 1 1 Orissa - - - 1 Maharashtra 2 20 10 - Gujarat 1 4 - - ______________________________________________________ TOTAL 6 53 37 7 ______________________________________________________

  12. BEST STATES TO DO BUSINESS From Inter-Link/Xerox study STATE MENTIONS 1. Maharashtra 65 2. Karnataka 52 3. Gujarat 41 4. Andhra Pradesh 36 5. Tamil Nadu 27 6. Delhi 9 7. Haryana 3 8. Punjab 3 9. Goa 3 10. Rajasthan 2 11. Uttar Pradesh 1 12. Madhya Pradesh 1 Note: Andhra Pradesh has only 1 US company, but the perception of the state is very positive

  13. OVERALL BUSINESS CLIMATE State business climate is good! 93% of the American find the business climate in the states they are located in is fair to excellent. 50% find it good to excellent !! 28% have noticed an improvement in past year. __________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  14. Classification of states according to Investment Climate SOURCE: (FACS 2003)

  15. Good Investment Climate States Maharashtra Gujarat Andra Pradesh Delhi Other States Punjab Tamil Nadu Karnataka Haryana Madhya Pradesh Kerala West Bengal Uttar Pradesh State groupings by investment climate: 2003

  16. Percent ranking factor as major or severe obstacle to business growth

  17. Percent ranking factor as major or severe obstacle to business growth

  18. Percent of outsiders ranking a state vis-à-vis own state

  19. The “Good” and the “Not-so-good” IC States

  20. Average annual growth rate of sales 10.0% 8.8% 8.0% 8.0% 6.4% 6.0% 4.0% 2.0% 0.0% Good IC Group Other States All India

  21. Annual Gross Investment as % of initial fixed assets 14.0% 13.6% 13.5% 12.7% 13.0% 12.3% 12.5% 12.0% 11.5% Good IC Group Other States All India

  22. Sources of Inter-state competitiveness gap:all sectors ( All India=100) 120.0 112.3 110.0 102.4 100.2 98.7 96.3 93.6 100.0 90.0 80.0 Wage rate Labor productivity Unit labor cost Good IC Other States

  23. Sources of Inter-state labor productivity gaps: all sectors 12.0 9.6 10.0 8.0 6.0 % shortfall from all India average 4.0 0.8 2.0 0.5 0.0 -0.3 Skill gaps Capital stock gaps TFP gaps -2.0 -1.6 -4.0 -3.7 -6.0 Good IC Group Other States

  24. Reported overstaffing rate (%) 16.0 14.0 14.1 14.0 10.9 10.5 12.0 9.2 8.6 10.0 8.0 6.0 4.0 2.0 0.0 Good IC Group Other States All India All firms Small firms

  25. Annual inspection visit days (number) 12.0 9.7 9.0 10.0 8.6 8.3 7.9 7.7 8.0 6.0 4.0 2.0 0.0 Good IC Group Other States All India All firms Small firms

  26. Days to clear customs 8.0 7.0 6.7 6.4 6.2 6.0 5.8 6.0 4.0 2.0 0.0 Good IC Group Other States All India All firms Small firms

  27. Management time spent dealing with regulations 18.2 20.0 17.6 14.6 13.8 12.9 15.0 12.1 10.0 5.0 0.0 Good IC Group Other States All India All firms Small firms

  28. Output lost due to power outages (%) 15.0 10.7 10.1 9.4 8.9 10.0 6.5 6.1 5.0 0.0 Good IC Group Other States All India All firms Small firms

  29. Other Challenges • Incentives for States • Varying opinions • Indians tend to be critical of India • Therefore look at comparative data between India and other countries • You will find India compares well • Do follow the same methodology you would use in the US for investment decisions and location..

  30. Appendix I Incentives for Investments in Indian States Inter-Link Services Pvt. Ltd. Tel: 011-26922006, 26831226; Fax: 011-26929055; E-mail: inter_link@vsnl.com / mahajan@interlinkindia.net Website: www.interlinkindia.net

  31. Incentives Offered by Indian Government • General Incentives • Developing Backward Areas • Exports or Some Specific Industries • No Distinction is made between Domestic and Foreign Investors • Regional Incentives • Specified Backward Areas • Free Trade Zones • Special Industry Incentives • Certain Industries, eg. Jute Textile, Tea Plantation, • Replanting, etc. • Export Credits

  32. Comparison of the Incentive Packages of All Indian States The National Council of Applied Economic Research (NCAER)

  33. Incentives offered by Andhra Pradesh • Rehabilitation of Sick Industries • Major Sick Industry Come Under the Purview of BIFR • Special Incentives and Services For the Mega and Pioneer Industry • Sales Tax Incentives

  34. Incentives offered by Kerala • State Investment Subsidy for Pollution Control Devices • Subsidy for Expansion / Diversification / Modernization of Industrial Units • Incentives for Mega Industrial Projects, Large Industrial Projects and Exemption in Electricity Duty • Waiver of Stamp Duty and Registration Fees • FDI and Large Infrastructure Projects • Exemption in Electricity Duty and Enhanced Tarrif

  35. Subsidies • New Industries Exempted from Income Tax in 12 Backward • Districts • Power Concessions • Total Octoroi Exemption • Incentives for Export Oriented – Units • Facilities for FDI and NRI Investments • Land and Building Tax Exemption • Special Package for Auto Units • Special Land Package for IT Industries Incentives offered by Rajasthan

  36. Incentives Offered by Karnataka Marketing Assistance for the SSI Sector Special Concessions for Export Revival / Rehabilitation of Sick Industries Investment Subsidy Entry Tax Exemption (5 Yrs For Backward Areas)

  37. Incentives Offered by Gujarat • Incentives to Industries • Interest Subsidy • Assistant for Research and Development and Patent • Registration Scheme • 92 Talukas of 21 Districts are Declared by the State • Government as Backward Areas Which are eligible for • Enhanced Benefits

  38. Incentives Offered by West Bengal State Capital Investment Subsidy Interest Subsidy Waiver of Electricity Duty Employment Generation Subsidy Remission of Stamp Duty and Registration Fee Subsidy for Conversion for Use of Piped Gas Subsidy for Quality Improvement in the Small Scale Sector

  39. Incentives Offered by Maharashtra Special Capital Incentives for SSI Units Sales Tax Incentives for Medium / Large / Small Scale Units Interest Subsidy to New Textile, Hosiery and Knitwear SSI Units

  40. Incentives offered by Tamil Nadu Most Backward Area Subsidy Backward Area Subsidy For Thrust Industries

  41. Appendix II India vs other Countries: Lessons to be learnt from Inter-Link Xerox study on The American Business Experience in India Inter-Link Services Pvt. Ltd. Tel: 011-26922006, 26831226; Fax: 011-26929055; E-mail: inter_link@vsnl.com / mahajan@interlinkindia.net Website: www.interlinkindia.net

  42. Before State Selection • Don’t get overly concerned about the difficulties: You are in a level playing field with competition • India competes well with many countries • Get the experience of your peers • Follow same due diligence as you would in America • Do not take short cuts (Avoid consultants who advise you to) • Know the rules • Follow ethical procedures and follow rules See some comparisons

  43. India Better Same India Worse (Rating 3) (Ratings 2 & 1) (Ratings 5 & 4) INDIA VS. CHINA Legend: __________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  44. ____________________________________________________________________________________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  45. ____________________________________________________________________________________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  46. The economic and political environment is not conducive, if not hostile You can’t do business without pay-offs The market opportunity is huge Not hostile, however - bureaucrats are a hindrance but also a stabilizing factor political and policies stability and reduction in duties are important exchange rate fluctuation and level playing field important Corruption is an issue, but not a major issue But, assess real market potential CONVENTIONAL WISDOM vs STUDY FINDINGS __________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  47. Indian customers are price-driven India is an incremental market for current/ obsolete products and technology The supplier base is poor While they want value for money, they are willing to pay money for value (Americans have discovered this segment, which has been ignored by Indian companies) Indianise products and bring in current/state-of-the-art technology Suppliers do not understand just-in-time and down-stream value chain impact. Suppliers are OK in service and availability CONVENTIONAL WISDOM vs STUDY FINDINGS (contd.) __________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

  48. India has a huge talented workforce Indians perform better outside of India The profitability and ROI are poor Foreign companies are unhappy in India India cannot make quality products Managerial talent is rated as outstanding and a key success factor Workers are good True Profitability and ROI are outstanding Satisfaction rating very high Sectoral issues are clouding the press India can make quality products CONVENTIONAL WISDOM vs STUDY FINDINGS (contd.) __________________________________________________________________________ American Business Experience in India: A study by Inter-Link India/ Xerox/ Optima

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