Locating Your Export Base in Tamil Nadu
We spotlight various factors that make locating your export base in Tamil Nadu a business-efficient decision, due to its mature manufacturing and IT services industries and well-established connectivity infrastructure besides state-led efforts to ease doing business and setting up in preferential zones.
Tamil Nadu is one of the most developed states in India and is an important trade base due to its connectivity infrastructure and mature manufacturing ecosystem. Rapid industrialization and infrastructure investment in recent years has led it to become the third largest exporting state in India. An excellent network capacity to match its locational advantages, Tamil Nadu is a key export base for automobiles, leather, and textiles (produced within the state) as well as other sectors like chemicals, machinery, and electronics, which rely on the state’s industrial output.
According to the Good Governance Index (GGI) 2019, Tamil Nadu is among the best states in India across categories like judicial & public security, public infrastructure and human resource development and the overall assessment suggests a responsible and competent governance of economic affairs. In this article India Briefing assesses the potential of the state of Tamil Nadu as a base for export activity.
Geography and logistics
Tamil Nadu is the southernmost state of India, with a coastline of 1,076 kms on the Bay of Bengal. The state is surrounded by prominent industrial states like Kerala and Karnataka to the west, Andhra Pradesh to the north, and has the Indian ocean to its south.
The state transportation infrastructure consists of a vast network of railway stations, national highways, ports, and airports.
Railways: Tamil Nadu has a well-developed rail network – part of the Southern Railway – headquartered at Chennai. The network extends over a large area of the peninsula, and a small portion of Karnataka and Andhra Pradesh. There are 690 stations in the state that connect it to most major cities in India, with seven main junctions in Chennai, Madurai, Coimbatore, Salem, Erode, Tiruchirapalli, and Tirunelveli. The rolling stock includes electric and diesel locomotives with goods wagons as well as passenger coaches. The pandemic forced the Southern Railway to focus on freight services as passenger services were suspended. The goods train transported a reported 26.8 million tons of goods as per reporting for the last financial year.
National highways: The road network of Tamil Nadu covers about 261,000 km, with national highways, state highways, major districts roads (MDRs) carrying most of the freight traffic, and core road networks (CRNs). There are 28 national highways, and the north-south dedicated freight corridor (DFC) also passes through the state.
Airports: There are total seven airports in the state, with international airports in Chennai, Coimbatore, Madurai, and Tiruchirappalli. Chennai international airport is the third largest cargo hub in India.
Ports: There are three major ports and fifteen minor ports along the coastline in Tamil Nadu. The major ports are under the jurisdiction of Government of India, and the minor ports are controlled by Tamil Nadu Maritime Board (TNMB). Chennai port is the second largest port in India and the largest in the Bay of Bengal.
Setting up in Tamil Nadu
Entities like the Tamil Nadu Industrial Development Corporation Ltd (TIDCO), State Industries Promotion Corporation of Tamil Nadu (SIPCOT), Tamil Nadu Industrial Investment Corporation Limited (TIIC), and Tamil Nadu Small Industries Development Corporation Limited (TANSIDCO) are jointly responsible for developing industrial infrastructure in the state.
Tamil Nadu is highly attractive to foreign investors because of its special zones, industrial projects, and other infrastructure projects.
Special economic zones
In October 2020, Tamil Nadu had 57 formally approved SEZs, of which 46 were operational. Under SIPCOT, there is a leather SEZ in Vellore, a footwear SEZ in Kanchipuram, an engineering products SEZ in Erode, an automotive SEZ in Thiruvannamalai, a transport engineering goods SEZ in Tirunelveli, granite SEZ in Bargur, and high-tech SEZs in Kanchipuram.
Under TIDCO, Rankindo Developers Private Ltd. has jointly developed an integrated township with IT SEZ in Coimbatore. Additionally, an IT and ITeS SEZ-TIDEL – III, with an international convention center, is set up on 25 acres of land on the IT Expressway at Taramani in Chennai.
Madras Export Processing Zone (MEPZ)
The MEPZ is a multi-product export zone with 117 functional units. It was established in 1984 for the promotion of foreign direct investment, aiming to increase exchange earnings. It includes features like offshore banking units, container freight stations, in addition to liberalized customs procedures. In March 2013, an additional exit and entry point for heavy vehicles arriving at and leaving the MEPZ–SEZ was opened.
The SIPCOT Export Promotion Industrial Park (EPIP) is spread over 224 acres at Gummidipoondi in the Thiruvallur district.
An industrial park for the automotive, electronics, food processing, general engineering, and other non-polluting industries has been set up at Irungattukottai.
Sriperumbudur Industrial Park and Oragadam Industrial Growth Centre in Kanchipuram district house manufacturing units for electronics, telecom hardware, and support services. There are two apparel parks – one at Tirupur and the other at Irungattukottai near Chennai.
Chennai – Bengaluru Industrial Corridor (CBIC)
Designed by the Japan International Cooperation Agency (JICA), it is a comprehensive plan and strategy for the development of industrial investment setup and infrastructure in the CBIC Region.
Ponneri Industrial Node in Tiruvallur District, Tamil Nadu has been identified as one of the three nodes of CBIC. The shareholders’ agreement was signed in February 2020 to carry forward the development of Ponneri Industrial Township Area.
State policy, incentives, FDI
The Tamil Nadu state government has played an important role in developing the state’s competitive advantage as a hub for exports, extending support through development and maintenance of production linkage infrastructure.
The government also provides schemes and policies to incentivize companies and industries, making products more competitively priced and reducing dependence on imports.
The state’s 2021 Industrial Policy (The Hindu has uploaded a PDF document) aims to achieve an annual growth rate of 15 percent in the manufacturing sector, attracting investments worth US$135 billion, and creating employment opportunities for two million people by 2025. The industrial policy also hopes to increase the contribution of the manufacturing sector to 30 percent of the state’s economy by 2030.
The 2021 Industrial Policy aims to give a boost to new sectors like food processing while offering land at 50 percent of its cost and other incentives for those setting up industries in 22 identified districts, including districts that are industrially backward, such as Dharmapuri and Perambalur, among others.
Micro, small, and medium enterprises (MSME) policy
The Micro, Small, and Medium Enterprises 2021 policy (see PDF document here) aims to make Tamil Nadu the most vibrant ecosystem for MSMEs/ start-ups to thrive and scale-up. Other goals include attracting new investments worth US$26.5 billion in the sector by 2025, increasing the share of exports from the MSMEs in the state by 25 percent.
The policy aims to do this by fostering a culture of entrepreneurship and innovation and expanding access to affordable finance. The policy outlines ways to improve resources by augmenting infrastructure support and enhancing availability of skilled human resources. Lastly, the government also understands the need to strengthen ease of doing business and good governance and facilitating access to national and global markets.
Export Promotion Strategy 2021
The government of Tamil Nadu unveiled the Export Promotion Strategy in September, eyeing US$100 billion in exports by 2030. This is in line with the state’s target of becoming a US$1 trillion economy by 2030.
24 memoranda of understanding (MoU) worth more than US$265 million, including 14 MoUs pertaining to export-oriented units were signed to facilitate investments in textiles, chemicals, IT/ITeS, steel, and leather industries at various locations across the state.
The Tamil Nadu government has identified six champion sectors to spark an exports thrust. These are automobile and auto components, textiles, food processing, leather and footwear, electronic and communications, and machinery.
The state is also setting up an Export Promotion Council, headed by the Chief Secretary, to boost exports and tap new sectors and markets like batteries, renewable energy, and aerospace.
The Tamil Nadu Chief Minister highlighted that 10 export hubs will get infrastructure strengthening projects, reimbursing 25 percent cost, subject to US$1.3 million ceiling per hub. The identified hubs are Ambur, Chennai, Coimbatore, Hosur, Kancheepuram, Karur, Madurai, Pollachi, Thoothukudi, and Tiruppur. Additionally, the state is interested in developing two economic employment enclaves in Mannasellore and Thoothkudi, to decentralise export-import potential and develop districts as export hubs and create jobs.
Status of exports
Total merchandise exports from Tamil Nadu stood at US$30.02 billion in FY20. In 2018-19, Tamil Nadu’s export volume stood at US$30.5 billion for manufactured goods, contributing 9.25 percent to India’s total exports, while the volume for software and service exports stood at US$17.2 billion. Software exports from the state increased by 12 percent to clock INR 1.39 trillion (US$18.46 billion) in 2019-20. The government is now working to expand the IT sector’s capacity, beyond capital Chennai, into Tier-2 cities like Coimbatore, which is witnessing rapid growth in its software-as-a-service (SaaS) industry.
Meanwhile, for trade in goods, Tamil Nadu was responsible for 45 percent of India’s auto exports and accounted for 35 percent of India’s auto component exports in FY19. It reflects the fact that the state has a mature and export-oriented industrial base, heavily contributing to items that dominate India’s exports basket. Automobiles, textiles, chemicals, machinery, and electronics – all have production capacity in the state.
Production-Linked Incentive scheme: What is Tamil Nadu’s exposure?
A PLI scheme incentivizes companies to boost domestic manufacturing in specific industrial segments, seeking to advance India’s industrial value chain presence and reduce the country’s reliance on critical imports. The state of Tamil Nadu offers an industrial base for a number of PLI target sectors as shown in the map below.
Manufacturing electronics policy
To promote the growth of the electronics industry, the Tamil Nadu government released the Tamil Nadu Electronics Manufacturing Policy 2020, which seeks to facilitate foreign investment in electronic systems design and manufacturing (ESDM) and promote the growth of homegrown start-up enterprises.
Through the manufacturing policy, Tamil Nadu wants to raise its manufacturing output to US$100 billion by 2025 and account for 25 percent of India’s total electronics exports.
The policy offers location-based incentives in the form of subsidies, along with single window portal for ease of doing business.
There are separate financial incentives for MSMEs, large, and mega enterprises and for modified electronics manufacturing clusters. Lastly, the policy also aims at the promotion of research and development of products in the field and developing ESDM parks.
Additionally, the state government offers incentives to export-oriented micro, small, and medium enterprises (MSMEs):
- Financial assistance to the MSME sector for participating in trade fairs abroad;
- Full subsidies on rent and shipment of MSMEs that exhibit/participate in international trade fairs;
- MSME market development assistance scheme for airfare expenses (funding up to 90 percent) for MSME entrepreneurs to participate in overseas trade fair/delegation; and
- Funding also available for producing publicity material.
Foreign direct investment
Tamil Nadu is among the states with the highest cumulative FDI inflows from the year 2000 to September 2019. From October 2019 to December 2020, Tamil Nadu had the fourth highest share of FDI equity inflows in the country.
The government is willing to allow 100 percent FDI for foreign firms willing to a comply with a full transfer of technology in the aerospace and defense sector, with an aim of reach US$5 billion by 2025.
The food grain sector has witnessed a consistent rise; 100 percent foreign direct investment (FDI) is allowed under the automatic route for food processing (manufacturing), and a 100 percent FDI is allowed in food processing (trading, including through e-commerce) – through the government approval route.
Tamil Nadu is also expected to take a lead in electric vehicle (EV) adoption, it being a leading automobile production state, with the world’s largest electric two-wheeler plant built by Ola Electric Mobility operating in Krishnagiri district. The auto industry currently allows 100 percent FDI under the automatic route, meaning no prior approval is needed from the government of India or the Reserve Bank of India (RBI).
The IT sector has also made strides in its development, as exports in the year 2018-19 amounted to US$19.9 billion at a growth rate of 10 percent y-o-y.
The state’s textile sector is the third-largest recipient of foreign direct investment (FDI) to India – three-fourth of powerloom output is earmarked for direct and indirect exports.
Tamil Nadu will continue to be a major investment destination in India in the foreseeable future, looking at a cumulative assessment of factors like ease of doing business, FDI, economic growth, industrial output, cluster development, and governance quality.
The manufacturing edge of the state partnered with its locational advantage make for a clear choice in import-export trade and its IT industry has built an edge to support growing services exports.
Overall, the state’s vast network of railways, roads, airports, and ports with maritime access to the Bay of Bengal and Indian Ocean gives it an unmatched logistics reach across popular trade destinations.
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