Indian states take lead to woo investors

Maharashtra's $7b Foxconn deal shows how stalled reforms are being bypassed

MUMBAI/NEW DELHI • It took two months of courting, dozens of negotiators and final talks that ran into the early hours, but the western Indian state of Maharashtra secured its prize: a US$5 billion (S$7 billion) investment commitment from Apple iPhone maker Foxconn.

The five-year deal, announced last weekend, is a reminder of the pulling power of India's wealthiest states - even as the central government under Prime Minister Narendra Modi hits its biggest reform roadblocks to date, over tax and land reform.

India's states, often led by charismatic local heavyweights, have long courted big businesses individually. But for the first time under Mr Modi, previously chief minister of the state of Gujarat, states are actively encouraged to find solutions to reform hurdles and to compete among themselves for investors' cash.

That has provided reassurance for investors betting on India's economic growth, a lifeline for big business and a boost for states desperate to create jobs.

Days before Foxconn's agreement, General Motors announced it would invest US$1 billion in India, largely to expand its main plant in Maharashtra.

On Tuesday, South Korean steel-maker Posco said it would set up a new steel plant in the state, with an Indian partner.

The forward motion in the states contrasts sharply with stalled reforms in New Delhi, which has some Indian businesses fretting that a full-fledged recovery will not happen until next year or 2017.

Maharashtra's Chief Minister Devendra Fadnavis, a young party official from the Hindu nationalist heartland said to enjoy favour with Mr Modi, met Foxconn's management for the first time when he travelled to China with the Prime Minister in May.

Officials travelling with him said Mr Terry Gou, Foxconn's chief, spent a day with Mr Fadnavis then, and led a factory tour. They met several more times before a charm offensive - and possibly Mr Gou's professed love of Indian naan bread - got Foxconn what it needed: a hint that value-added tax refunds could be extended beyond the usual seven- to nine-year limit, permission for solar power generation and help with financial transfers.

"The bottom line of this entire thing is the production cost per unit. That should be less than China's, otherwise there is no point," said Mr Bhushan Gagrani, head of the Maharashtra Industrial Development Corporation, who travelled with Mr Fadnavis.

Of course, not all industries can work without national laws. Foreign supermarkets have found it hard to open in India because only certain states allow them to, affecting scale. And there are risks to a states-led development that will be skewed to India's wealthier regions and at the expense of others.

"It's a chicken and egg thing. You already have industry clusters... and if you are setting up manufacturing, you can't ignore those clusters," said Mr Gautam Chhaochharia, head of India research at UBS in Mumbai.

"The states have to move towards making investments easier, that is in the power of the state government," said Mr R.C. Bhargava, the veteran chairman of Maruti Suzuki, India's largest carmaker.

"The expectation is the competition between states will drive the so-called less fortunate states to change their systems and regulations, to create the infrastructure and environment for investment."

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 14, 2015, with the headline 'Indian states take lead to woo investors'. Print Edition | Subscribe