By Ishita Mishra
India has been experiencing a rapid increase in the inflow of Foreign Direct Investment (FDI), with the FDI increasing by $15 billion in a short span of two years. However, there exists a great disparity in the FDI received by individual states. This is because 70% of the total FDI received between April 2000 and June 2012 was directed towards just 6 states.
In an effort to improve the business climate in individual states and make them more attractive for the investors, the National Council of Applied Economic Research (NCAER) has released a State Investment Potential Index (N-SIPI 2017). The N-SIPI 2017 is the second edition of an annual report that covers 20 states and the Union Territory of Delhi. It ranks the states based on competitiveness in business and the investment climate. For the second time in two years, the Index has ranked Gujarat as the most competitive state for business investment and potential.
N-SIPI What is it and how is it useful?
The N-SIPI determines the competitiveness of states based on six parameterslabour, infrastructure, economic climate, political stability, governance, and business perceptions. These can be further classified into four broad categories: factor driven (land and labour), growth driven (economic climate, political stability and governance), efficiency driven (infrastructure), and perceptions driven (ranking of business climate based on firm surveys).
The Index acts as a useful reference for the existing businesses, policy makers, and potential overseas and domestic investors to make informed decisions. Most importantly, as it gives a detailed account of how different states fare on individual parameters, it enables the policy makers to take decisions that allow each state to develop according to its strengths and weaknesses.
State rankings
According to the Index, the top 6 states areGujarat, Delhi, Andhra Pradesh, Haryana, Telangana and Tamil Nadu. Gujarat also grabbed the top slot on the parameters of economic climate and business perceptions, while Delhi was ranked the highest in terms of infrastructure. Haryana and Telangana have made rapid progress in the past one year, moving up on the Index by 12 and 8 ranks, respectively. Haryana improved its ranking by improving the quality of labour, governance, and business perception. Meanwhile, Telangana became more competitive due to the tremendous improvement in its business perception.
The lowest ranking states in the Index are Bihar, Uttar Pradesh, and West Bengal. Despite the low ranks, these states have made progress and have fared well on some parameters. While Bihar has seen a major improvement in the quality of labour, Uttar Pradesh is doing well on the land parameter. Even though West Bengal has made considerable improvements on the economic climate and governance front, the deterioration in its infrastructure and quality of labour have caused it to be the lowest ranking state.
Removing constraints and fostering business development
The biggest constraint faced by businesses, while investing in states, has been the perception of corruption. The other major constraint is getting approvals for starting a new business. However, the N-SIPI reports state that the percentage of people who cite corruption and difficulty in getting approvals as constraints have decreased from 79 per cent to 57 per cent and from 72 per cent to 53 per cent respectively since 2016. The other issues that continue to concern businesses are access to finance and tax policy, and availability, and quality of skilled labour.
FDI is essential for the development of the economy, and India is currently ranked 8th on the AT Kearney Foreign Direct Investment Confidence Index globally. In order to improve its ratings and promote more investment in the country, India needs to remove the constraints faced by businesses.
The government has taken some steps to remove these constraints. These include initiatives like the ‘National Skill Development Mission’ which will improve the quality and availability of labour and ‘Ease of Doing Business’ which will make it easier for businesses to get approvals. Successful implementation of these programs can substantially improve business and investment climate throughout the country, and increase the inflow of FDI.
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