Nokia's plan to close Chennai plant sends a disturbing signal

Prime Minister Narendra Modi's desire to showcase India as a destination for manufacturing is well understood. 

His "Make in India" campaign has made headlines. At the launch, Indian business titans lined up to explain why India is a great destination for investment.

Electronics manufacturing has been singled out by Mr Modi for particular mention. That campaign seems to have received a body blow with the news on Tuesday that Nokia's mobile-phone manufacturing facility in Chennai will close down.

The closure of this factory, which at its height employed 8,000 workers and was the cellphone giant's largest in the world, has naturally questioned the government's claims of reviving the domestic manufacturing sector. 

The Nokia plant in Chennai has a history of problems. To start off with, the company was hit with an enormous tax bill - some of it for transfer pricing, and some for service tax. The combined bill was about five times the profit the company made in the quarter it was presented. Both bills were controversial.

For example, the service-tax demand was because Nokia had claimed a service-tax exemption for software exports. But, the authorities said, this claim was illegal - as Nokia exported software developed in India to Finland, and some of it was used in the overall software packages that were later sent to India to be put on phones sold to Indians.

The company had challenged the position the government had adopted. But it wasn't even the tax claims themselves, which could be decided either way, that worried Nokia and its fellow multinationals.

The tax authorities conducted a prolonged raid on the Chennai factory, along with sustained interrogation of Nokia workers and executives, which the company said were "excessive and unacceptable".

Disagreements piled up - the company complained that the Tamil Nadu government withheld credits for setting it up in the Sriperumbudur special economic zone, for example.

So wide-ranging and deep were the disputes with the Indian state that the Chennai factory had to be left out of the giant, complex purchase of Nokia's cellphone division by Microsoft earlier this year. 

Nokia has pointed out in a letter that it is shutting down the factory, not selling it. It cannot sell it because of the "continuing asset freeze imposed by the tax department", it says.

Whether or not this is completely true, it is certainly the case that shutting down the factory, as opposed to selling it, kills one of the few functional electronics manufacturing ecosystems in India. It is not clear if the company is at fault, or the government's claims are unjustified.

What must have complicated the entire issue is the reasonable assumption that there is virtually no hope of an early resolution of the dispute since India's tax settlement mechanism is notoriously slow and time-consuming.

The closure of the Nokia factory, therefore, sends out a bad signal for the country's investment climate. Investments cannot be easily attracted to a country where tax demands appear not just unaccountable, but where penalties demanded cannot be discussed and a settlement reached within a short and fixed time frame.

It is true the problems did not begin under Mr Modi's watch, and he can not be held responsible for the state that Nokia's relationship with the state is in. But it does show that Indian manufacturing will need more than glossy books and hype.

Even if keeping Nokia's doors open was impossible, demonstrating a willingness to reform the systemic weaknesses in the tax department should have been on the agenda. But that approach, so far, is conspicuous by its absence.