Why Tamil Nadu is one of the best states for doing business

Despite small hiccups, Tamil Nadu is a state with an urban outlook on life and where laws still work, says Aditi Phadnis.

It is with somewhat cynical amusement that the Tamil Nadu government woke up earlier this week to read the dire warnings of job losses in India issued by the Minister for Foreign Affairs in Finland, Erkki Tuomioja, who also said that for investors in Finland, India in general and Tamil Nadu in particular had lost their sheen as an investment destination. 

The reason? The supposed persecution Finnish company Nokia was facing from India's Income Tax department.

Chief executive officers of multinational corporations based in Tamil Nadu are very likely to have seen the statement, smiled to themselves secretly and resumed their breakfast (or whatever they do while reading the papers). 

For, the full story of how Nokia came to be taxed is yet to be told. And if anything, it should reinforce the belief that among all Indian states, Tamil Nadu is one of the best for the ease of doing business.

The credit for this should go as much to the Chief Minister Jayalalithaa as to the leader of the main opposition party, M Karunanidhi.

Since the Nokia case is in court it would be wrong to comment on it. But the crux of the matter is: Nokia operated from a special economic zone (SEZ) in Tamil Nadu, India to produce hardware. But the software and technology that goes into producing a Nokia phone was imported from Finland. 

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Nokia India was paying royalty to Nokia Finland. The royalty was related to use of technology for manufacturing goods or services in India for earning income in India. And Section 115A of the Income-tax Act, 1961, obliges an Indian resident to deduct a 10-per cent tax from royalty payments to a foreign company.

Nokia India hadn't done this for more than five years. Alert government officials caught this just before the company decided to sell out to Microsoft. The information technology department is seeking tax amounting to Rs 6,500 crore (Rs 65 billion).

Now that deal is in trouble and it is Tamil Nadu that is being blamed for it - when, in fact, it should be the consultants Nokia had hired to interpret India's admittedly complex tax laws.

Laws still work in Tamil Nadu. According to 2012 figures cited by the National Crimes Records Bureau, in Chennai there were zero cases of dacoity (where arms are used) and robbery in commercial establishments in 2012.

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As a police official explained, people in the state are afraid of breaking the law and respect the uniform.

The president of a European multinational firm said, with a small smile, that one had to suspend disbelief: he had neither been asked for a bribe nor had he paid one in the 15-plus years his company had set up a plant in the state. It had taken two years from the date of acquiring the land to commission the plant. 

"We faced no problems in land acquisition; we had some problems on account of ESI that a contractor hadn't paid: we fought the case in court and paid a fine. But we didn't have to bribe anyone," he said.

He reported low-level extortion in Gujarat though. Tamil Nadu has an organised workforce and labour disputes are not uncommon. But arbitration and conciliation is swift, even in a place like Tiruppur, where labour problems are endemic.

Tamil Nadu has an urban, rather than a rural outlook on life. It will never have an Andhra Pradesh (AP)-like dispute over Hyderabad, because while AP has just one city where capital has poured in, Tamil Nadu has six, seven cities. 

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The only problem is the shortage of power - on account of a historical neglect of the power sector. There seems no way out.

But both the ruling Anna Dravida Munnetra Kazhagam (ADMK) and the opposition Dravida Munnetra Kazhagam (DMK) appear to have a bipartisan understanding on issues relating to Tamil Nadu. Both are cadre-based parties but they stay out of each other's hair for the most part: not like Uttar Pradesh where every project started by Mayawati was either stalled or investigated by the Mulayam Singh Yadav regime. Both DMK and ADMK have zero tolerance for communal violence.

On the whole, the Jayalalithaa regime is more centralised and more efficient for that reason; while the Karunanidhi set-up has many power centres, so that taking decisions can be time-consuming. Industry is neither required to take sides, nor does it play that game.

Politically, Jayalalithaa has an upper hand at this point. Her scheme to provide subsidised meals (Amma Unavagam) is highly popular. Tamil Nadu has been a pioneer in many social schemes: the cradle scheme for the girl child (to prevent female infanticide); the mid-day meals scheme, etc. 

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The state in Tamil Nadu is benevolent. Between 2006 and 2011, Karunanidhi's DMK government spent Rs 4,000 crore (Rs 40 billion) to provide free colour TVs to eligible households.

The AIADMK, in its two years in power, has spent Rs 2,917 crore (Rs 29.17 billion) on mixies and grinders, and has allotted Rs 1,500 crore (Rs 15 billion) in the next financial year.

However, the chief minister seems a bit bored. She spends only about four hours in office every day. 

Her colleague Sasikala is out of the decision-making loop - so it is hard to know whom to turn to when there is a problem. But the chief minister runs a tight bureaucratic ship - so most problems do not escalate to her.

Tamil Nadu is a guided democracy. Jayalalithaa is a Lone Ranger. And she is keeping her options for a central partnership open.