The government is no doubt concerned that foreign direct investments (FDI) are going only to a few states and would like to ensure a more equitable distribution. Towards this end, it is nudging state governments to compete for such investments by improving the ease of doing business, reform land and building norms, and improve power supply and other infrastructure, besides law and order. The official think tank, Niti Aayog, has been tasked with preparing an investment-friendly charter to monitor the various states on these parameters and rank them accordingly. This initiative should be welcomed as the states would be encouraged to target specific potential investors depending on the comparative advantages they have in various parameters. Foreign investors, for their part, would have an additional source of valuable information to decide where to locate their facilities. Tesla, for instance, clearly might prefer to locate in one of the states where the ecosystem in electric vehicles is developing.
However, it would be a tad unrealistic to expect Niti Aayog’s investment-friendly charter to help reduce disparities in FDI even if the various states race to the bottom to attract such inflows. For perspective, a lion’s share of foreign equity inflows of $233 billion from October 2019 to March 2024 have gone to the richer states that have had a head start in industrialisation. Maharashtra and Karnataka alone account for a half of these investments. If Gujarat, Delhi, and Tamil Nadu are included, these five states garnered close to 90% of cumulative inflows. The tendency of investments to be attracted to such states — rather than to the relatively poorer states in the Hindi-speaking heartland, for instance — only reinforces the biblical axiom, for whosoever hath, to him shall be given! This reflects the agglomeration factor as they offer significant advantages for potential investors with their manufacturing ecosystem in terms of availability of skilled labour, supplier base, and prospect of knowledge spillovers to collocate near existing units.
For such reasons, there is a fierce competition among the richer states to attract big-ticket FDI, exemplified by Maharashtra’s angst over losing out to Gujarat for a prized semiconductor facility. Or the southern states like Karnataka, Tamil Nadu, and Telangana rolling out the red carpet to attract Foxconn, the world’s largest contract manufacturer. The big losers in this milieu are bound to be the less prosperous states in the country. For all the advantages of the so-called double engine government — in which the state and the Centre are of the same political party — Uttar Pradesh secured only 0.7% of such inflows. Bihar got 0.09% although it received big-ticket FDI from GE and Alstom in 2015 — the first such instance in the history of the railways — to manufacture diesel and electric locomotives. These projects are up and running but there has been no subsequent momentum towards attracting more investments.
The dominance of a few states obviously has serious implications for inter-state disparities in FDI as they will pull apart from the poorer states. The policy imperative at the national level must be to create appropriate incentives for a dispersal of FDI. Rather than leave it to states, inflows must be incentivised towards the building of greenfield factories, industrial parks, and other infrastructure all over the country. Such investments depend on a stable policy and regulatory framework. Reforms are also needed to free up the land and labour markets.