From ‘Happening Haryana’ to ‘Invest Karnataka’, television and radio advertisements today reflect a completely new facet of India’s federal structure. The year 2016 started with West Bengal’s global summit where “Come to Bengal, ride the growth” hit the right note with investors. The state managed to garner total investment commitments to the tune of R2.5 lakh crore. While West Bengal was riding high on the success of the two-day event, Karnataka—India’s silicon state—was not behind with total commitments of R1.3 lakh crore across sectors like energy, pharmaceuticals, tourism, etc. Amidst all the turmoil over Jat reservation in Haryana, ‘Happening Haryana’ took off successfully. These are all signs of a healthy and vibrant federal economy.
India continues to remain an attractive investment destination for foreign investors. FDI (equity) inflows in 2015 were around $40 billion—a 38% jump over 2014. However, not all states seem to be an equal partners in India’s growth story. A few states—Andhra Pradesh, Haryana, Delhi, Maharashtra, Tamil Nadu, Karnataka, Gujarat, Rajasthan and Telangana—have posted relatively stable and healthy economic growth over the years. The same states have accounted for over 60% of India’s economic growth.
While growth seems to be concentrated in the aforementioned states, FDI has been following a similar trend too. According to data released by Department Of Industrial Policy & Promotion (DIPP), India received cumulative FDI (equity) inflows of about $151 billion in the past five years. The above mentioned states accounted for almost 75% of the FDI inflows. It is intuitive that states undertaking business-friendly reforms are likely to grow faster and attract more FDI.
Even though the same set of states together still account for 75% of the total FDI, the share of each has changed in the last few years. Until 2010, Maharashtra accounted for almost 35% of total cumulative FDI inflows into the country. In the last five years, though, its share in FDI (2011-15) has dropped to 22%, as other states gained. Delhi, Karnataka, Tamil Nadu and West Bengal together accounted for 32% of FDI inflows until 2010, which increased to 42% in the post-2010 period.
The biggest gainers in 2015, since the Make-in-India campaign was launched, have been Gujarat, Karnataka, Tamil Nadu, West Bengal and Delhi NCR. In absolute terms, FDI inflows into Gujarat more than doubled from $0.9 billion in 2014 to $2.2 billion in 2015. Similarly Delhi NCR doubled its FDI inflows to $14 billion in 2015. Karnataka and Tamil Nadu received $4.8 billion and $5.2 billion FDI inflows, respectively.
A report by the World Bank on assessment of implementation of reforms by Indian states reveals the progress made by states under the ease of doing business initiative. Gujarat and Andhra Pradesh top the list with over 70% implementation on business reforms, followed by Jharkhand, Chhattisgarh, Madhya Pradesh and Rajasthan (over 60%). Most of the Northeast states are at the bottom of the list with less than 10% implementation status. The report also highlights the positive correlation between implementation status and the number of investment intentions in the state (0.61). Thus, states which garner more investment commitments are the ones which are more forthcoming in implementing reforms.
Andhra Pradesh provides all clearances required to start and operate an industry through a single point/authority, under the Single Window Clearance Act of 2002. The current government has further accelerated the pace of approvals to new industries to encourage investment in the state. They claim all approvals to set up a new business will be given in 21 days.
Telangana is not far behind. It formulated the Telangana State Industrial Project Approval and Self Certification System (TS-iPASS) Act, 2014, to provide for speedy approvals to industries wherein a single consolidated TS-iPASS consent is required to set up an industry.
Orissa Industries Facilitation Act (OIFA), 2004; Punjab’s One Stop Center; Rajasthan’s Single Window Act, 2011, are initiatives on similar lines. Some states have progressed well on the indirect tax front. Andhra Pradesh, Karnataka and Rajasthan encourage VAT registration, payments and return filing online.
The World Bank classifies some of the states as Aspiring Leaders (with an overall implementation status between 50% and 75%). These are: Andhra Pradesh, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Odisha and Rajasthan.
On the sectoral front, however, FDI inflows seem to be quite spread out. Services sector accounted for nearly 13% of the total FDI inflows during FY11-15. On the manufacturing side, the automobile sector accounted for nearly 5.2%, followed by drugs and pharmaceuticals. Other sectors that have been on the forefront of attracting FDI include telecommunications, wholesale cash and carry trading, metallurgical industries, hotel and tourism, construction, computer software and hardware, and chemicals and fertilisers. Further to attract more FDI across sectors, the government in November last year relaxed FDI norms for 15 sectors.
While the diversified trend on the sectoral front is encouraging, what is of concern is the fact that FDI inflows are still centralised and concentrated only in a few states in India. Other high growth states like Madhya Pradesh, Kerala and Rajasthan have still not managed to cut significantly into the FDI pie in a sustainable way.
In response to this, in the past few years, a healthy competition amongst Indian states to promote both foreign as well as domestic investment has emerged. This may lead to decentralisation of FDI. In order to prevent urban and industrial clusters from concentrating in a few areas, states must endeavour to upgrade industrial as well as physical infrastructure beyond their capital cities. Broad-based industrialisation, and development of smart cities and urban centres across the state will help in diversifying growth. It is in this spirit that the Make-in-India campaign should not be seen as a political stunt, but as a platform to promote competitive federalism.
Authors are corporate economists based in Mumbai. Views are personal