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India's worth as an investment destination
October 8, 2018

The survey covered 1,049 units in 20 states and Delhi, ranking them on their investment potential based on the six major metrics. 

 

The efforts towards improving the business climate started some years ago and deepened when the government’s flagship initiatives, Make in India and Start-Up India, took centre stage. The department of industrial promotion and policy (DIPP) had rolled out the Business Reform Action Plan in 2015. India subsequently leapfrogged a commendable 30 places to get placed amongst the top 100 countries, according to the World Bank’s Doing Business 2018 report. But have we arrived where we should?

 

The National Council of Applied Economic Research designed an index in 2016 using six metrics—land, labour, infrastructure, economic climate, political stability and governance. This was intended to give a granular picture of the investment climate. This state investment potential index (N-SIPI) incorporated the perceptions of entrepreneurs, based on survey of industrial units. In the third edition, N-SIPI 2018, feedback on the goods and services tax (GST)—the most important initiative on unifying India into a massive common market—was added. The survey covered 1,049 units in 20 states and Delhi, ranking them on their investment potential based on the six major metrics. Interestingly, the rankings are broadly consistent with another study on the performance of states in terms of their service delivery performance . Such comparisons suggest that the N-SIPI rankings based on perceptions and secondary data are reasonably robust.

 

There is also merit in recognising the strength of the states on individual metrics. For example, land by itself is a critical issue and is perceived to be complex because of the maze of regulations. However, strikingly, most states found no difficulty in acquiring land for industrial use except five: Bihar, Jharkhand, Karnataka, Maharashtra and Odisha. In these states, the percentage of respondents facing difficulties ranged from a little less than 30% to a little over 70%.

 

Unlike land, perception on labour constraints had wide differences across the states. States like Jharkhand, Karnataka, Himachal Pradesh and Assam were at one extreme, with more than 40% of the respondents expressing concern regarding the availability of skilled labour. Meanwhile, companies located in Gujarat, Haryana, Uttar Pradesh and West Bengal had more favourable views. Respondents have also shown major variation in perception of labour quality. Haryana and Gujarat continue to be viewed as the best states in this regard.

 

In another surprise, labour relations are not seen to be a problem for nearly 66% of the respondents across the states. Very diverse states such as Haryana, West Bengal and Gujarat were the best performers here, while Karnataka, Telangana and Andhra Pradesh have noted moderate to severe constraints. Labour laws have been a constraining factor in Maharashtra, Karnataka, Madhya Pradesh and Chhattisgarh. And while Gujarat reported no problems, Chhattisgarh reported severe problema.

 

Power is a critical component of infrastructure that supports industrial advancement. The survey found that power availability was relatively good, with no significant difficulty faced by 78% of respondents on an average. States such as Chhattisgarh, Haryana, Punjab and Karnataka reported an excellent supply of power, while states that lagged behind included Uttarakhand, Jharkhand and West Bengal. With respect to water availability, the situation looked best in the case of Himachal Pradesh, Karnataka and Haryana. Surprisingly, despite being a coastal state, nearly one-fifth of the severely constrained firms belonged to Maharashtra, while Uttarakhand emerged as the most severely water-constrained state. The performance of states concerning road and rail connectivity was not an issue with over two-thirds of the surveyed firms while a little over one-fifth shared a moderate concern on the issue. Yet again, Haryana, Himachal Pradesh, Karnataka, Kerala and Rajasthan did very well, while a developed state like Telangana was ranked lowest in the perception of good road and rail connectivity in the state.

 

The perception on industrial policy is critically important to promote efficiency and productivity. A well-designed industrial policy percolates through different levers, such as special support to a select group of industries, establishment of special economic zones to attract foreign participation or investment, privatization of public sector units, and promoting public-private ventures. Here, a high proportion of positive responses came from Uttarakhand, Haryana, Gujarat and West Bengal. On the other hand, Karnataka, Chhattisgarh and Maharashtra appeared to be the poorest players in this regard.

 

GST was introduced in July 2017, and N-SIPI 2018 found that more than 40% of firms faced moderate to severe difficulty and 43% did not perceive any impact of the GST policy at all. This negatively impacted business operations severely, according to 17% of the firms. Unexpectedly, Bihar emerged as the most GST-friendly state followed by Gujarat, while firms from Madhya Pradesh, Kerala, Himachal Pradesh, Andhra Pradesh, Telangana, Uttarakhand and Tamil Nadu faced significantly negative impact. Of these, the worst hit was Andhra Pradesh, with 58% of respondents crying foul. On the related aspect of e-way bills, the majority of the respondents reported the impact being positive. The impact is remarkably good for Jharkhand (77%), followed by West Bengal and Bihar, while there is no perceived impact in Telangana, Maharashtra and Gujarat.

 

The findings demonstrate that states have to work hard to even remain where they are as the rankings are relative, competitive and in flux. They also show that learning lessons from other states is a good way forward.

 

Anushree Sinha and Saurabh Bandyopadhyay are, respectively, senior fellow and associate fellow, NCAER

 

Published in: Live Mint, October 8 2018