Race to the bottom

States should avoid special investment deals with one group

The Kitex group, which is a major manufacturer of garments for the global market, has created waves recently thanks to its decision to move out of its state of origin, Kerala. It has been announced that a new Rs 1,000-crore project is to be set up at a “mega textiles park” in Warangal in the state of Telangana. This has caused much comment and debate about the relative ease of doing business in Kerala and Telangana, not to mention the other southern states that were also in the running for investment from Kitex. Some of this discussion is relatively underinformed. For example, it has been suggested that Kerala’s high unemployment rate reflects its poor business environment, rather than being a product of the ability, common in areas with higher socio-economic development indicators, to spend longer searching for jobs or even to withdraw from the workforce temporarily. There are also reasonable questions that can be asked about Kitex’s involvement in local politics in Kerala, and how much that plays into its management’s harsh words on the state’s business climate.

The question of varying business environments in states of the Union, however, closely implicates the actions of the state governments vying for Kitex’s investment. It is unclear exactly what the cost to the Telangana state exchequer will be from its successful bid for Kitex’s presence. The other southern states had not stinted in their offers. Karnataka offered a 25 per cent capital investment subsidy, and a 5 per cent interest subsidy. Tamil Nadu capped that with a 40 per cent investment subsidy, discounted land, a waiver on stamp duty, subsidies on environmental protection and intellectual property, as well as offering to pay a share of the wages for years. Unsurprisingly, Kitex’s shares have rocketed as a response to state governments opening their purses so comprehensively and generously to a private company.

There is no question that competition on business-friendliness is a positive for the country as a whole. Yet this is nothing of the sort. This is a race to the bottom on subsidies — an attempt to win a public-relations war by enriching the private sector at the cost of the state exchequer. This is not the first time it has happened in India’s history, and many state industrial policies are open-ended as to the discretion allowed to chief ministers in terms of inducements for larger projects. Yet no state government should imagine that investors more generally will see a bespoke deal hammered out with a single company as representative of a friendly investment climate in a state. Arbitrary promises by one state government to a particular company can be quickly overturned when the political leadership changes, as the disruptions following the YSR Congress’ ascent to power in Andhra Pradesh made clear.

States should compete on transparent regulations, affordable and sustainable power supply, and good transport and communications, not on how much money they will shell out to high-profile investors. Telangana itself, given its tendency towards populist spending, is not exactly flush with cash any more. The state’s fiscal deficit in the current year is projected at 3.94 per cent of gross state domestic product — barely under the specially mandated 4 per cent — and in the past, the auditors have said the government has understated its deficit. At the very least, the Telangana government owes an explanation to taxpayers on how much of their money will be spent per job created by Kitex in the state.