The face-off between Karnataka and Andhra Pradesh to attract aerospace companies exemplifies the fierce competition between states to attract foreign and domestic investments. This should be welcomed provided it does not entail a subsidy race to the bottom that seriously strains their finances. This spat is reminiscent of Maharashtra’s angst over losing out to Gujarat for a big-ticket semiconductor facility a few years ago. Karnataka similarly is miffed by Andhra’s invitation to aerospace companies to consider shifting their operations as plans for a proposed park near Bengaluru’s Kempegowda International Airport ran into land acquisition problems from protesting farmers. Andhra’s minister for human resources development, information technology and real-time governance, Nara Lokesh—who is also the son of the chief minister—indicated that 8,000 acres of ready-to-use land just outside Bengaluru was available, besides an attractive aerospace policy with best-in-class incentives. Karnataka accused Andhra’s minister of fishing in troubled waters and declared that not a single industry will move out of the state due to land shortage.
Agglomeration Advantage and Industrial Disparity
A complicating factor for Andhra’s ambitions to set up an aerospace ecosystem is that foreign and domestic investments are concentrated only in a few states like Karnataka. These are mostly richer states that have a head start in industrialisation. On foreign direct investments, Maharashtra, Karnataka, Gujarat, Delhi, and Tamil Nadu together accounted for over four-fifths of equity inflows last fiscal. These five states also account for half of the filed industrial entrepreneur memoranda and proposed investments. The tendency of investments to be attracted to such states only reinforces the Biblical axiom, for whosoever hath, to him shall be given! This reflects the agglomeration factor as these states offer significant advantages for investors with their manufacturing ecosystem in terms of availability of skilled labour, supplier base, and prospect of knowledge spillovers to collocate near existing units. Karnataka’s comparative advantages are considerable as it accounts for 65% of India’s aerospace and defence sector. For such reasons, the proposed aerospace park can come up in an alternative location in the state.
What Gives Andhra an Edge
The disproportionate share of the richer states in investments does not imply that they do not compete among themselves. Or that rivals like Andhra cannot break into this select group. Karnataka and Tamil Nadu have aggressively wooed Foxconn, the contract manufacturer for Apple. Despite being a bastion of industrialisation, Maharashtra steadily lost out to the more business-friendly Gujarat not just in semiconductors but also in aerospace like the Tata-Airbus project as investors rued the “lack of conducive” atmosphere in the state. Land acquisition problems have also bedevilled the state as was underscored by Jamshyd Godrej, chairman and MD of Godrej and Boyce, who told the Financial Times that getting land for a new manufacturing site about an hour’s drive southeast of Mumbai took a decade.
The advantages that Andhra has vis-à-vis Karnataka is not just its substantial land bank but also the fact that its policies are in alignment with those at the Centre. Andhra has also unveiled a vision document for 2047 to become a developed state with a focus on stimulating agriculture as well as building a robust manufacturing sector. Investors are bound to be drawn to Andhra due to its large English-speaking population and a vast diaspora of scientists, engineers, and software professionals based in the US and other developed nations who are significantly contributing to the state’s economic development.