BANGALORE, India -- Karnataka, home to the fourth-largest technology cluster in the world, is shifting its focus from information technology and IT-enabled services (ITes) to faster-growing e-commerce and startup businesses.
In a first for India, the state that encompasses Bangalore is drafting an e-commerce policy that seeks to provide a framework for next-generation companies, promote entrepreneurship, clear tax ambiguities and encourage innovation in rural areas.
To stay ahead of the competition, the state is planning to grow the number of tech-based startups fivefold to a total of 20,000, including 6,000 product startups, by 2020. Karnataka is also starting to draw big global players. Early in February state government officials said that Apple may be considering setting up a manufacturing plant on the outskirts of Bangalore that would begin operations by April.
"We have matured as an IT and ITes hub and are now looking at emerging technologies," Priyank Kharge, Karnataka's minister for information technology, biotechnology and tourism, told the Nikkei Asian Review in an interview. He said Apple's move showed that Karnataka was becoming a destination for foreign investment.
"To ensure we remain the leader, we are coming up with a center of excellence in cyber security, artificial intelligence, robotics and aerospace to create the necessary skills. Once we have the skills set, investments will follow," he said.
"We are the only [state] government in the country to have a multi-sector policy for startups. We have a policy for gaming, animation and visual effects, we have a policy for IoT (internet of things) and we are coming up with a policy for big data and e-commerce," he added.
The details of the policy have yet to be hammered out, but Kharge said the government was consulting e-commerce and logistics companies, industry bodies, tax authorities and the transport ministry to shape its design.
Karnataka has funded eight startups in the tourism segment, he said, including "virtual reality and augmented reality aspects of destinations." He added: "We are looking at aggregating the aggregators through AI, and we are also looking at GIS (geographic information systems) based audio guides." These projects are likely to be implemented before the end of February 2017.
Virtual reality and augmented reality systems allow tourists to point smartphones at landmark buildings or structures to unlock information and history displays on their screens. The technology also supports audio guides in different languages.
The government is funding projects at school and college levels to stimulate innovation in smaller towns and rural areas. It says it has funded 182 projects, of which 78 have registered as companies.
"They (Karnataka) are revolutionizing a lot of things themselves, and are in the forefront of technology adoption," said Ashish Fafadia, chief financial officer and principal of Blume Venture Advisors, a seed stage venture capital fund.
"Possibly they are trying to ensure that benefits reach the strata that commercial companies don't manage to or intend to reach. But they also have to ensure there is a level playing field and allow fair competition."
The state government, which committed to investing $60 million in seed funding last July, has so far set aside about half the money to fund innovative tech companies, but allocated only 5% to startups. Other issues include a two-year dispute over value added tax on Amazon transactions.
Tax authorities claim that once a product reaches its warehouses, Amazon takes ownership and is liable for VAT. Amazon denies that it owns the products, claiming that it only offers storage and delivery services to third-party sellers, who should be subject to the tax.
Other regulatory problems are also cropping up for companies such as cab-hailing services. The Karnataka transport department in January instructed Ola Cabs and Uber to halt their ride-sharing services, Ola Share and UberPool. It had previously barred them from operating bus-shuttle services and bike taxis in Bangalore. Under existing state transport law, only government operations are allowed to run shuttle services and cab-pool operations.
Kharge conceded that his government's policies were not evolving as fast as technology, but claimed that the state's new e-commerce policy will create a level playing field. "People are complaining about surge pricing, and drivers are complaining of something else," Kharge said, referring to a flexible pricing model based on demand for products or services at particular times.
"We have to draw a line somewhere. If it's not a good business practice, the government will have to intervene. And it is not that Uber has problems only in Karnataka. They are banned in several other progressive countries."
Kharge also addressed calls from Ola Founder Bhavish Aggarwal and Sachin Bansal, founder of the e-commerce giant Flipkart, for government policies that favor homegrown startups.
"As a government, it is my primary responsibility to encourage home-bred startups," said Kharge. "My policies are framed so that the Indian startup scenario improves and a lot of startups engage with the government of Karnataka because they are Indian."
However, Kharge also said that globalization can help drive up local standards. "If Uber is doing better than Ola, then Ola should pick their game up. And if Ola is doing well, then I will feel proud that an Indian startup is doing well."
While the uncertain policy framework is hindering the growth of high-tech companies, Bangalore's overstretched infrastructure is also a problem for some IT companies.
"My challenge [here] is not that the market is not developed, but it is the hassle of day-to-day life like the low bandwidth internet connections, lack of electricity and water, and the poor transport facility in the city that is making businesses very inefficient," said Sanjay Sethi, co-founder of Shopclues, an e-commerce marketplace. "Perhaps the state could think of creating special zones for the e-commerce sector, much on the lines of IT parks."
According to estimates by members of the Outer Ring Road Companies Association, an independent body representing major IT companies, the sector loses $3.5 billion in revenue each year because of time wasted commuting.
Meanwhile, Flipkart has set up its biggest warehouse in neighboring Telangana state, and Uber has chosen Telangana's capital Hyderabad for its largest facility outside the U.S.
But Kharge said he does not see a threat. Bangalore was recently ranked the world's "most dynamic city" in international realtor Jones Lang LaSalle's fourth annual City Momentum Index, beating Ho Chi Minh City and Silicon Valley.
"We have matured as an investment destination, unlike newer states from whom we're [facing] competition, which I feel is unhealthy," said Kharge. "[They are] incentivizing everything and giving free land, free power and free water. How long can you do that? I can understand it is to get investments initially."
He added: "Karnataka is doing much more than that. Besides having the natural advantage of a skilled ecosystem and a knowledge ecosystem that nobody else can offer, our policies are ensuring that we are future ready."
Kharge also criticized the administration of U.S. President Donald Trump, which is keen to restrict work visas for immigrants. "They need to figure out whether they want skilled people or not," Kharge said. "The reason why some of their companies are profitable is because they are getting high-skilled labor at low cost. He (Trump) wants jobs back. He wants to wish away India and China. It is not a very easy thing to do."