A small group of states attracts a big share of new projects, while large parts of the country draw relatively little capital. Targeted public investment in lagging states, especially in power, logistics and infrastructure, is the most effective tool to correct this imbalance, explain KJ Joseph & Kiran Kumar Kakarlapudi
l Where India stands today on investment
AT CURRENT INVESTMENT rates, India can likely sustain growth of 6–7%. Achieving growth of 8% or more for the next two decades which is necessary for reaching developed-economy status would require both higher investment and a much wider spread of private capital across sectors and states. In recent years, capital expenditure has picked up, led by the central government’s infrastructure push and reinforced by measures to encourage states to raise their own capital spending, including nearly Rs 10 lakh crore in interest-free loans for state capital expenditure (capex).
As a result, public investment has become a key growth pillar. As per the Centre for Monitoring Indian Economy data, new project announcements have risen over the past two years, crossing Rs 26 lakh crore in the first nine months of FY26. Yet, despite this revival, a small group of states attracts a disproportionate share of new projects, while large parts of the country continue to draw relatively little capital. This investment divide is not merely a regional imbalance. It shapes national productivity, job creation, migration patterns, and the working of India’s federal system.
l How uneven is investment across states?
RECENT DATA ON project announcements indicate that the top four states account for 60% of investment flows in 2025, with Andhra Pradesh, Maharashtra and Telangana among the leading recipients. Adding one or two more states takes the share close to two-thirds. Foreign direct investment (FDI) follows a similar pattern. Official data show that a handful of states led by Maharashtra, Karnataka, Gujarat and Tamil Nadu consistently account for well over half of cumulative FDI. Even within states, investment is clustered in a few metropolitan regions such as Chennai, Mumbai-Pune, Bengaluru and Hyderabad, underscoring the power of urban agglomeration. Odisha’s rise as an investment destination, despite relatively low per capita income, shows how sectoral advantage combined with sustained public investment can attract large projects.
l A national problem, not just a state issue
THE CONCENTRATION OF investment in only a few states reflects structural and institutional advantages: reliable power, efficient logistics, access to ports and markets, deep labour pools, and predict-able governance. Once clusters form, agglomeration effects reinforce them, making it difficult for lagging regions to catch up quickly. When capital is concentrated in a few regions, income and employment growth diverge across states. High-investment states generate better jobs, higher incomes, and stronger fiscal capacity, while others remain stuck in low-productivity activities. Over the past three decades, these gaps have widened rather than narrowed.
For the national economy, this is costly. A large share of India’s workforce remains employed in regions with low capital intensity, holding back aggregate productivity. Migration from low-investment states to high-investment ones has increased, placing pressure on housing, transport, and public services in destination cities. Persistent regional disparities also carry further increasing regional income divergence, political economy risks, complicating federal relations and social cohesion.
l What this says about Indian federalism
THE INVESTMENT MAP closely reflects India’s federal political economy. States with stronger finances and administrative capacity are better able to invest in infrastructure, which in turn attracts private capital. Evidence suggests that public investment at the state level tends to crowd in, rather than crowd out, private investment. But this creates a feedback loop. States that are already ahead invest more, grow faster and earn more revenue, while fiscally weaker states struggle to make the initial investments needed to attract capital. Competitive federalism has encouraged reform and innovation, but it has also become asymmetric, reinforcing existing advantages and complicating convergence.
l Policy options to narrow the gap
LEFT ENTIRELY TO market forces, the concentration of investment is not surprising. Capital naturally flows to locations offering higher returns and lower risk. If India’s 2047 vision is to be realised, this market outcome must be complemented by proactive state action. Targeted public investment in lagging states especially in power, logistics, urban infrastructure and industrial land is the most effective tool. When well-executed, such spending has strong multiplier effects and can crowd in private capital.
Equally important is building state capacity: improving project execution, regulatory certainty, and contract enforcement. Place-based industrial strategies should reflect local strengths rather than rely on uniform subsidies. Addressing the investment divide is thus central to reducing regional disparities and making India’s 2047 development vision economically credible.
Joseph and Kakarlapudi are director and assistant professor, respectively, at Gulati Institute of Finance and Taxation, Thiruvananthapuram
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.