KERALA HAS ALWAYS BEEN A CONUNDRUM FOR economists. A state that boasts the best social indices in the country—the highest literacy rate, a progressive and forward looking populace—Kerala never fulfilled the promise it held to emerge as a leader in Indian industry. Until now.

For too long successive communist governments advocated socialistic principles, and the state failed to attract investors who emphasized not just job creation but also creating value for its shareholders.

All this changed after the resounding success of the Global Investors Meet, held in January 2003. The state's leadership has been on a high ever since its maiden attempt at attracting investors en masse proved a success, with approximately $5.4 billion in procured investment (see table).

But it wasn’t always this dismal for Kerala. Kerala lost its way midstream, despite having built the country's first technology park. Preoccupied with domestic problems, the state conceded the IT race to other forward-looking states like Karnataka and Andhra Pradesh.

The Global Investors Meet was the culmination of a series of measures undertaken by the state to boost its image. Kerala Chief Minister A. K. Antony and Industries Minister P. K. Kunhalikutty began by legislating IT a Public Utility Service (PUS).

The gambit worked. “Though companies at the Technopark in Thiruvananthapuram have never lost a single man over the past eight years due to labor trouble, it was clear that the government had to provide some assurances before we could invite investors. So we declared information technology a Public Utility Service (PUS), under the Industrial Disputes Act of 1943,” says Kunhalikutty.

“For the past few months, the state has been deluged by offers for investment,” says Kunhalikutty. “Software services companies and Business Process Outsourcers (BPOs) have expressed interest in setting up their development centers here,” he claims. One such company is the Bangalore-based BPO 24/7 Customer.com.

Says T.S. Hariharan, Vice President of 24/7 Customer, “If Kerala has to succeed and stay in the race to demonstrate that it can attract investment, this is its last chance. And Kerala has proven in the recent past, through various initiatives and regulatory systems, that they have the resolve to prove their detractors wrong.”

In recent weeks, at least four major firms have expressed their intention to start operations in Kerala. One of them, the U.K.-based financial services giant, Allianz Cornhill, said, “Availability of abundant local talent, proven infrastructure, excellent working environment and the quality of life in Kerala are all unique when compared to other states in India. That is why we decided to set up our first offshore facility in Kerala.”

Kerala has among the greatest density of science and technology personnel in India. Annually, 20,200 students graduate with a bachelor's degree in science and 2,100 with a master's degree in science. The state’s 32 engineering colleges accept 14,000 graduates, with a polytechnics intake of 15,000.

The state also has a Regional Engineering College (Kozhikode), an Indian Institute of Information Technology Thiruvananthapuram, and an Indian Institute of Management.

The availability of such an abundant talent pool would ordinarily make a state a haven for technology companies. Yet, for decades, the state was anathema to the investor who seriously hoped to justify his decision to set up shop in India. The state’s well-documented labor problems had prevented Kerala from attracting investments.

The Kerala government went so far as to create a custom-built labor regime for IT and ITES services. Under the new regime, software companies would be deemed as establishments under the Kerala Shops and Commercial Establishments Act of 1960. “The need of the hour was to build regulations based on real needs by real companies,” says Aruna Sunderarajan, IT Secretary to the government.

Sunderarajan is also conscious of correctly branding the Kerala value proposition. “Most companies already have development centers or operations in tier-one cities like Bangalore and Hyderabad. But they also want to set up centers in tier-two cities as a backup. Here Kerala wins,” she contends. “Among second-tier cities, Kochi and Thiruvananthapuram win over others like Chandigarh because of the huge talent base we have. Being a small and compact state, we can draw resources from all over the state.”

Hariharan agrees. “I think the government is doing everything possible to attract investment and I am sure, given the great culture and the environment that Kerala has, that there will be many companies wanting to set up operations sooner rather than later.” Most companies that have set up shop in Kerala sing the state's platitudes. “Technopark offers complete facilities like state of the art communication and an inspiring ambience. We were fully operational within six months of our decision. The added plus has been the wealth of talent in Kerala,” says Bill Dennis, Managing Director of Toonz Animation India Private Limited.

Kerala also provides an enviable cost proposition to potential investors. With more and more software companies going to either Bangalore or Hyderabad, real estate and overheads prices have hit the roof in those cities by Indian standards. Real estate in Kerala is still almost 60% cheaper than comparable land in metropolitan cities. With such changes in place, the state named “God’s Own Country” looks set to resolve its conundrum.