Karnataka’s export performance: Caffeinating India’s software hub!

Nikhaar Gogna | January 30, 2022

Karnataka is at the forefront of technological innovation and is known for its contribution of software and service exports, just as it’s known to be the land of coffee in India. However, to be a holistic export destination, the state still needs to replicate this success in its merchandise exports.

Karnataka houses 400 Fortune 500 companies & is India’s largest software exporter. It is also the fourth-largest manufacturer of automobiles in India, second- highest producer of special purpose and heavy electrical machinery.
In 2020-21, exports from Karnataka constituted 18.89% of the total exports from India. This can be attributed to a favourable policy environment, a pool of skilled labour and robust infrastructure network that make it India’s tech hub.
While the state has an excellent policy ecosystem and a conducive business environment, Karnataka needs to pick up on critical parameters like export preparedness and export performance.
Karnataka could envision a larger role for itself in leading India’s competitiveness in industries of the future including 3D printing, IoT, AI, machine learning and industry 4.0.

Historical evidences from ancient societies such as the Indus Valley Civilization and the Mesopotamian Civilization suggest that trade has been a backbone for society since the very beginning of human civilization. Even today, countries all over the world strive to promote their exports. This is attributed to the fact that exports offer economies and industries the opportunity to explore more markets, boost a nation’s foreign currency reserves, benchmark themselves with international standards and generate employment. This blog evaluates the South Indian state of Karnataka from the perspective of its export performance.

A sneak peek into Karnataka

First formed in 1956, Karnataka is surrounded by the Arabian Sea on the west, Maharashtra on the north, Andhra Pradesh on the east, Tamil Nadu on the southeast, and Kerala on the southwest. It is known for its abundance in natural resources and is associated with several powerful dynasties like the Nanda Empire, the Mauryan Empire, the Kadamba Dynasty and the Chalukya Dynasty to name a few.

Today, Karnataka is at the forefront of technological innovation and is associated with many achievements. For example, it is the fourth-largest manufacturer of automobiles in India, second- highest producer of special purpose and heavy electrical machinery, and among India’s top states contributing to the electronic industry. The state also prides itself in being a key operational hub for 400 Fortune 500 companies & is India’s largest software exporter.

This technological prowess can be attributed to the fact that ease of doing business in Karnataka is always a priority as the state is the top recipient state during the F.Y. 2021-22 (up to June 2021) with a 48% share of the total FDI equity inflows. Other factors such as the presence of a pool of skilled labour and robust infrastructure network – 2 international airports,14 national highways and 115 state highways, 1 major port & 10 minor ports and a rail network of 3,250 km – have further enhanced its attractiveness.

In addition to its expertise in the technological domain, Karnataka is accounts for about 70% of coffee production and 33% of silk production in India. It is also a leading producer of cashew nut, millets, marine products, rose onion, gherkin, green chilli, tamarind, sunflower and Byadgi Chilli. It is also the largest producer of aerospace and defence equipment in India.

Key exports from Karnataka

Karnataka has 52 notified Special Economic Zones, out of which 32 are operational. 45 of them are in the IT/ITES sector. Further, it has 1 each in textiles, pharmaceuticals, engineering, aerospace, bio-technology and electronics.

Source: IBEF

Karnataka state government’s website states that the state is “ranked 1st in the country in terms of overall trade (merchandise and services) and contributes around 18.9% to National trade (2020-21). The overall exports in 2020-21 stood at US$ 94,371 million. The State is ranked 6th in Merchandise exports and is contributing around 5.2% to national merchandise exports. The State is ranked 1st in Services Exports and its contribution to national service exports is around 38%.”

Some of the main exports of Karnataka (merchandise and services) are given in the table below. An analysis of the table shows that over the last 5 years, software and service exports constitute a major chunk (38% in 2020-21). In terms of merchandise exports, some of the major goods exported include silk products (49.61%), coffee (85.71%), aerospace (23.82%), and cashews (21.48%). However, share of merchandise exports has dropped in 5 years from 7.02% & 5.2% in 2020-21.

Leading exports by Karnataka

Commodity	*All India 2016-17 (US$ mn)*	*Karnataka 2016-17 (US$ mn)*	% share	*All India 2020-21 (US$ mn)*	*Karnataka 2020-21 (US$ mn)*	% share
A. Software and Service Exports	160,683	62,666.37	39	208,500	79230	38
B Merchandise Exports (Sl 1 to 21)	276,280.11	19,404.61	7.02	291,060.45	15,141.18	5.2
1. Semiconductor	113.34	25.33	22.35	173.57	25.69	14.8
2. Wool & woollen products	161.6	0.15	0.90	88.66	0.69	0.78
3. Silk products	86.95	56.68	65.19	79.21	39.3	49.61
4. RMG	22201.3	2174.98	9.80	17509.87	1,667.08	9.52
5. Aerospace	3007.75	450.32	14.97	1166.02	277.72	23.82
6. Petroleum	32277.05	1713.51	5.31	26881.28	1,000.79	3.72
7. Engineering	45074.4	4093.65	9.08	61579.24	5,714.88	9.28
8. Automobile	15021.05	406.12	2.70	13637.19	381.84	2.8
9. Iron ore and minerals	3779.2	136.17	3.60	7087.14	363.48	5.13
10. Basic chemicals, pharmaceuticals & chemicals	31,240.86	1,930.33	6.18	45,082.25	2,051.37	4.55
11. Agriculture and processed food	17,117.17	629.69	3.68	24,509	979.42	4
12. Coffee	560.09	491.1	87.68	470.21	403	85.71
13. Cashew & cashew kernels	790.62	150.63	19.05	420.43	90.29	21.48
14. Spices	2,035.11	47.61	2.34	2,850.44	109.14	3.83
15. Marine products	5,516.44	157.32	2.85	5,235.4	151.09	2.89
16. Gems & jewellery	43,784.76	5256.38	12.01	26,160.76	24.63	0.09
17. Handicrafts	11,484.43	166.67	1.45	3,175.01	106.03	3.34
18. Leather products	3,242.18	55.46	1.71	2,208.3	44.77	2.03
19. Chemicals & allied products	4,731.99	77.56	1.64	7,314.69	93.84	1.28
20. Plastic goods	5,315.02	133.47	2.51	6,870.87	196.71	2.86
21. Others	28,739.2	1251.48	4.35	385,60.91	1,419.42	3.68
TOTAL (A+B)	436,963.11	82,070.98	18.78	499,560.45	94,371.18	18.89

Source: Karnataka State Government Data

The state is exporting engineering products to Germany, China, South Korea, Brazil, USA, Malaysia, Thailand, South Africa and Singapore. Aerospace products are being exported to products to US, UK, Germany, Russia Mauritius, Malaysia, Nepal, Oman and Ecuador.

A critical assessment of Karnataka’s export performance

According to NITI Aayog’s Export Preparedness Index 2020, 70% of India’s export has been dominated by five states – Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana. Coming specifically to Karnataka, the state secured 9th rank overall (out of 36). According to the report, it performed very well in two parameters – export promotion policy (scoring 79.16) & business ecosystem (68.09).

Speaking of the policy pillar, Karnataka’s export performance can be attributed to business friendly policies, marketing support, policy focus on quality & standards, and the existence of a supporting institutional structure. Case in point is Karnataka’s One District, One Product policy for for exploiting the potential of unorganised micro-food processing by offering credit, avenues for the marketing of products, and technical know-how. Karnataka also has an excellent business ecosystem. This pertains to its innovative capacity, single window clearance, labour reforms, cluster strength, air cargo facilities and access to finance.

However, some of the pillars where the state can do well include export preparedness (where the state scored 43.93) and export performance (16.61). According to the think tank, the state needs to buckle up as far as setting up trade exhibition centers, hosting capacity building sessions, registering members in trade promotion councils, existence of R&D facilities, number of exporters and export penetration are concerned.

The state government of Karnataka has approved a new Information Technology (IT) policy that will help the state increase its contribution to the national objective of making India a trillion dollar digital economy and and creation of 6 million jobs during the policy period. The new policy, which will be in effect from 2020-25, will help Karnataka retain and leverage its position in technology and innovations, according to a government statement. The stated goal is to enable Karnataka’s “IT industry to contribute 30%” share in a trillion-dollar digital economy”.

Karnataka’s performance in India’s exports is quite well, especially as far as software and service exports are concerned. However, going forward, the journey from top 10 to top 5 exporting states of India can be traversed by following a few simple measures. These include identification & training of prospective exporters, setting up trade exhibition centers in the state, creating an ecosystem that promotes R&D, and diversification of products and their target markets.

The state has a high potential in sectors like aerospace, hardware, nanotechnology, biotechnology and pharma, where there needs to be greater focus. Moreover, it has also emerged as the startup capital of India, with over 13,000 startups out of the 57,000 startups in India. Karnataka could therefore envision a larger role for itself in leading India’s competitiveness in industries of the future including 3D printing, IoT, AI, machine learning and industry 4.0.