Kia Motors Corporation, a South Korean automobile major, is mulling over the idea to shift its Andhra Pradesh plant to Tamil Nadu given its unresolved issues with the new policies of the Jagan government, reported Reuters.
The Anantapur plant in Andhra Pradesh has an annual capacity of 3 lakh units and created 12,000 direct and indirect jobs. The plant was completed in December last year with an investment worth 1.1 billion dollars. “(Kia) are facing problems (in Andhra Pradesh), they have been in preliminary negotiations with us … There is a secretary-level meeting next week, we might have more clarity then,” said an official to Reuters.
The sale of KIA’s models increased exponentially in the last few months, and the company performed well despite a severe slowdown in the automobile sector in 2019. KIA has long term commitment to India, therefore, the company decided to set up the plant and manufacture locally.
India is the fifth-largest automobile market in the world. KIA is a second-largest automobile manufacturer in South Korea after Hyundai motors which owns 33.88 per cent shares in KIA motors, too. In the last few months, especially since the Automobile slowdown, KIA and Hyundai have performed better than India’s dominant automobile player- Maruti Suzuki. Hyundai is the country’s second-largest automobile manufacturer.
KIA was willing to carry out “further expansion” once it started to utilize the full capacity of the Andhra Plant. The previous Chandrababu Naidu government offered various incentives to KIA to establish the manufacturing plant, but, since the Reddy government came to power, the KIA project, like all other projects started by the previous government, fell into trouble.
The major issue with the Andhra’s state policy is the newly passed act which reserves 75 per cent reservation to locals in the jobs in companies in the state. The Reddy government also decided to review the financial incentives offered to the company like breaks in electricity tax and deferred land payments.
The swift policy change with the change of the government is the major problem faced by the companies; it has become a major challenge to the investment climate in India. The policy uncertainty hinders the investment plans and therefore the states where a particular party is in power for a longer time, are more developed compared to those where regime changes in every few years.
The 75 per cent reservation to locals’ policy has gained popularity among the Congress party and other opposition parties in the last few years, along with farm loan waivers and unemployment benefits. The party won the elections in MP, Rajasthan, and Chhattisgarh on these populist promises and therefore implemented them. But, these policies have done immense damage to the macroeconomic condition of these states.
The reservation to locals is harming the economy of the states like Andhra Pradesh, as companies are not able to attract the best human resource from states around the country. This harms efficiency and company.
It has been almost 6 months since Jaganmohan Reddy government came to power in Andhra Pradesh. The government has already taken many disastrous decisions, which will damage the macroeconomic stability of the state.
After coming to power, the government cancelled 7,000 MW of solar and wind power projects, scrapping 40,000 crore rupees worth investment in the state. The investors are apprehensive that this will set a negative precedent for other states, and therefore they are considering International arbitration.
So far, the state government has not been able to match the central government’s enthusiasm for the ease of doing business and the enforcement of contracts. The state governments work in a partisan manner and therefore are vindictive towards the projects finalized during the previous governments.
The states must understand that the onus for economic growth does not lie only on the central government as the state governments must also participate actively to improve macroeconomic stability and ease of doing business. Only then, double-digit economic growth is going to be a reality.