Is Tamil Nadu losing its reputation as a great business destination? Should we be worried?

Tamil Nadu has been consistently falling in business rankings, and it needs to figure how to get the charm back.
Is Tamil Nadu losing its reputation as a great business destination? Should we be worried?
Is Tamil Nadu losing its reputation as a great business destination? Should we be worried?
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In 2012, American public policy think tank Cato Institute produced a comprehensive report on the economic freedom in the states of India. The report was authored by policy stalwarts Swaminathan Aiyar, Bibek Debroy, Ashok Gulati and Laveesh Bhandari. According to the report, Tamil Nadu was ranked number two in India with respect to economic freedom, the top state being Gujarat.

In many ways, the report showed Tamil Nadu in good light. The size of the government did not increase as much as the economic growth, which is considered a good sign for economic freedom. Tamil Nadu was ranked number two in terms of legal structure and security. If the judicial system of a state is quick, then it is better for business. In terms of regulation of labour and business, Tamil Nadu was ranked three. Chennai in Tamil Nadu was the second-most easiest city to export to or import from.

Even so, the report noted, consistently, that in spite of the comparative higher ranking of the state of Tamil Nadu, the state had seen a major decline in the years before the report was published. In 2009, the top state in India with economic freedom, according to the then Cato report, was Tamil Nadu.

Recently, the World Bank has released a report on Ease of Doing Business in the states of India, and keeping in mind the reputation of Tamil Nadu as a great destination for investment, the report paints a grim picture.

In the World Bank report, Tamil Nadu is ranked number 12 in India when it comes to ease of doing business. Today, doing business in Tamil Nadu is more difficult than Gujarat, Andhra Pradesh, Jharkhand, Chhattisgarh, Madhya Pradesh, Rajasthan, Odisha, Maharashtra, Karnataka, Uttar Pradesh and West Bengal.

From being a model industrial state, Tamil Nadu is now a state which ‘requires acceleration’, as per the World Bank ranking.

Coming just after the din surrounding the much-hyped TN Global Investors Meet, in which the state announced that more than Rs. 2.4 lakh crore worth of investments have been promised by private sector into the state, the World Bank report provides a contrast. (For a reality check on the huge GIM numbers, read this.)

The latest World Bank report has judged the ease of doing business in Indian states based on 8 areas – setting up of businesses, allotment of land and obtaining construction permits, complying with environment norms, complying with labour regulations, obtaining infrastructure related utilities, registering and complying with tax procedures, carrying out inspections and enforcing contract.

Of these 8, Tamil Nadu does not figure in the top-five in 7 categories. It is the fifth best state in India in enforcing contracts.

But overall, the report says that TN does well in land allotment, providing construction permits, digitization of records and in reducing judicial vacancies, among other things.

So where is Tamil Nadu faltering?

It can deduced from the report that Tamil Nadu is not very good in the ease of setting up of business, compliance with environment norms, compliance with labour norms, obtaining infra related utilities, tax procedures and in carrying out inspections. But there are other reasons.

Dr. DK Srivastava, former Director of the Madras School of Economics and Chief Policy Advisor for EY India, says that there are three main reasons why Tamil Nadu has been losing out.

First, the power situation in the state has not been very encouraging for private players. The state was reeling due to power-shortage and the expense was high for industries, which held businesses back. Professor R Srinivasan, Faculty of Econometrics at University of Madras, agrees with him, and says that the non-availability of power has been a major factor.

Second, Dr Srivastava says that there has been some sort of a policy paralysis in the state in the past few years. The government, due to political factors, has not been able take decisions in a timely manner. Third, he says that TN government is riddled with bureaucratic delays and that files are not moving as quickly as they should.

Further, Tamil Nadu has always benefited from a perception of being a pro-industry state – but others are catching up. “Other states are doing well now. Labour is available easily, land is being allotted quicker. The states which are rich in minerals are opening up, so TN has to compete with them,” says Dr Srivastava.

Prof. Srinivasan says that marginalization of labour is also a problem in Tamil Nadu. The organized sector is losing its workforce to the unorganized sector, which does not bode well for the state. He also says that while there are anecdotes of corruption and extortion, there is no proof of it, and if indeed companies are being held back because of such issues, the industry needs to speak up.

Dr Srivastava says the state of TN should be worried about the situation in the state, but Prof. Srinivasan adds that the situation might not be as dire as some international agencies project. “In the recent Annual Survey of Industries, Tamil Nadu has the third largest investment, after Gujarat and Maharashtra. That cannot happen if the situation is very bad,” he says. But there is no disagreement that the state needs to straighten things up.

“There must be as little intervention from the government as possible in business,” says Prof. Srinivasan, “and the government must concentrate on improving service delivery, right from roads for citizens to infrastructure needs for industries.”

Dr Srivastava says that the TN government needs to adopt newer strategies and must adapt itself to the changes in the business environment. “It is good that we have got huge investment promises through the GIM, but what is important is that we follow it up and translate promises into investment,” he says.

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