A complicating factor for India’s drive to attract more foreign and domestic investments to achieve its ambitions on faster growth is that they are going to only a few states. These are mostly richer states that have a head start in industrialisation. On foreign direct investments (FDIs), Maharashtra, Karnataka, Gujarat, Delhi, and Tamil Nadu account for close to 90% of cumulative inflows from October 2019 onwards. These five states also account for half of the filed industrial entrepreneur memoranda and proposed investments. It is hardly surprising that many of these states are frontrunners in the electric vehicle (EV) manufacturing ecosystem as also the drive to assemble smartphones by foreign investors like Apple, who are shifting part of their production from China and benefitting from the government’s production-linked incentives. The tendency of investments to be attracted to such states only reinforces the Biblical axiom, “for whosoever hath, to him shall be given!” This reflects the agglomeration factor as these states offer significant advantages for investors with their manufacturing ecosystem in terms of availability of skilled labour, supplier base and prospect of knowledge spillovers to collocate near existing units.
While the dominance of only a few states on FDI is not good news for regional disparities, they do offer lessons for other states. Despite being richer, these five states are also attracting investments for labour-intensive manufacturing which the populous poorer states cannot. Tamil Nadu’s example in this regard deserves mention as factories employing tens of thousands of workers are able to tap pools of lower-wage workers such as migrants from other states and women, according to a Financial Times column written by former chief economic advisor Arvind Subramanian. A striking factoid is that 40% of all women employed in factories in the country are in Tamil Nadu.
A major advantage is also a business-friendly environment. Foreign investors face uncertainties and may choose to exit if their offerings do not find favour among consumers or they have concerns regarding the regulatory environment. US auto giant Ford was one such company but it chose to re-enter using its plant in Tamil Nadu for exports. This was due to the business-friendly stance of the state government which helped in resolving complex labour and land issues, convincing Ford that the risks of doing business are low. That example deserves emulation in the other states.
The disproportionate share of the richer states for investments does not imply that they do not compete among themselves. Not so long ago, there was considerable angst in Maharashtra over losing out to Gujarat for a big-ticket semiconductor facility. Karnataka and Tamil Nadu have aggressively wooed Foxconn, the contract manufacturer for Apple. The decision of investors to locate is also influenced by the state government’s policies being in alignment with those at the Centre. That said, it is a toss-up on which of these five states to establish operations as they offer similar advantages for investors with their manufacturing ecosystem and business-friendly environment. To roll-out the red carpet for investments, other states must improve the ease of doing business on the ground and enforce contracts. Investors would be deterred if there are concerns over law and order, poor infrastructure and extractive political institutions. The policy imperative at the national level, however, must be to create appropriate policy incentives for a dispersal of investments to the poorer states to check their growing divergence with the richer ones due to agglomeration economics.