In the wake of the DIPP’s and WEF’s studies on ease of doing business, Mint and the Institute for Competitiveness examine what makes states competitive.
In mid-September, India’s Department of Industrial Policy and Promotion (DIPP) released a federal government-sponsored ranking of states in terms of the ease of doing business. Modelled on the World Bank’s Ease of Doing Business ranking—India ranked 130 among 189 countries in the 2016 edition—the state ranking was based on eight parameters ranging from the time and effort involved in setting up a business to the sanctity of contracts, the ease of acquiring land and construction permits to the tax regime, and the transparency of environmental approval processes to the broader labour context.
The objective of the exercise was to assess the progress of states in implementing key regulatory reforms—and, indeed, to motivate them to do this, especially in the area of land acquisition and labour rules where the Union government has not been able to make much legislative headway.
The move is a logical one. India’s states have, since the 1990s, and especially in the past decade or so, become hyper-competitive in wooing domestic and foreign investors. When one state does something that is considered investor-friendly, others immediately follow suit. For instance, soon after Rajasthan changed some of its labour laws, Haryana and Maharashtra said they were considering doing the same.
Gujarat topped the DIPP rankings. The next four spots were taken by Andhra Pradesh, Jharkhand, Chhattisgarh and Madhya Pradesh. Four of the five states are ruled by the Bharatiya Janata Party (BJP), which is also the dominant constituent of the National Democratic Alliance government at the centre. The fifth, Andhra Pradesh, is ruled by a BJP ally, the Telugu Desam Party. Andhra Pradesh chief minister N. Chandrababu Naidu made a name for himself in the 1990s as one of the most progressive and reform-minded chief ministers in the country in his earlier stint (he was chief minister of Andhra Pradesh between 1995 and 2004).
In September, the World Economic Forum released its own survey of competitiveness, the Global Competitiveness Report.
India moved up 16 places to 55 (out of 140 countries surveyed). China, the country with which India likes to compare itself, is ranked 28.
The Mint-Institute for Competitiveness study on India’s Most Competitive States should be seen in the context of the two reports mentioned above. The Global Competitiveness Report is based on an adaptation of Michael Porter’s methodology for assessing the competitiveness of nations. So is the Mint-Institute for Competitiveness study titled State Competitiveness Ranking (SCR), 2015.
The Institute for Competitiveness works closely with Porter’s Institute for Strategy and Competitiveness at the Harvard Business School.
What makes states competitive?
The answer looks straightforward at first—hard and soft infrastructure and the regulatory and policy framework. The first encompasses everything from the existence of and access to markets to the availability of power to the presence of a talent pool that can be tapped. The second deals with issues such as land (a sticky one in India), tax (stickier) and other aspects of doing business.
But there are other factors as well—such as clustering. Porter himself has written on the competitive logic of a geographical concentration of companies in the same business.
And there is also the intent of the state’s political leadership—difficult to measure, but crucial in convincing companies that they are making the right choice.
Foxconn’s announcement in August that it would invest $5 billion over five years in Maharashtra was preceded by seven meetings (including two over lunch and one over dinner) between chief minister Devendra Fadnavis and Foxconn CEO Terry Gou.
That probably points to the need for an investor survey to complement the data on which the state competitiveness ranking is currently based.
Goa
The state has good related and supporting industries with the presence of industrial clusters and good overall context for strategy resulting from sound financial and physical infrastructure.
Goa is one of the fastest-growing states in the country. It is also one of the few power surplus states in the country. The state achieved 100% rural electrification in 2011-12 and has a total installed capacity of 405.20MW as on 31 August. It also has one of the highest per-capita net state domestic product (NSDP) levels in India. Goa’s economic growth is driven by the strong performance of its industrial and service sectors such as mining, tourism and pharmaceuticals. The state is a prominent tourism hub with good airport and port connectivity.
Delhi
The national capital has performed well on the factor and demand conditions fronts. It has also done well in terms of administration and communication.
The city-state recorded an above 12% rate of growth in the period between 2004-05 and 2014-15. The key industries in the state include IT (information technology) and IT-enabled services, tourism, food processing and construction and engineering. Delhi has an attractive real estate market and is a preferred tourist destination. Delhi’s economy is primarily service driven. The state had an installed power-generation capacity of 8,346.72MW as on 31 August. Teledensity was recorded at an astounding 236 (236 connections per 100 persons), the highest in India.
Punjab
Punjab performs well in the overall context of strategy and in factor and demand conditions, which has resulted in a good overall environment for business.
Punjab is one of the most agriculturally fertile regions of the planet. Occupying only 1.5% of India’s geographical area, the state accounts for about 17% of the country’s wheat production and 11% of rice production. More than 80% of the state’s land is under cultivation compared with the national average of 40%. The major industries of the state include tractors and auto components, agro-based parts, bicycle and bicycle parts, chemical products, food products, light engineering goods, metal and alloys, pharmaceuticals, sports goods and textiles.
Punjab has emerged as a key hub for textile-based industries, including yarn, readymade garments and hosiery. The clusters around food and dairy products are the other major sectors of the state.
Karnataka
The state has strong demand conditions, factor conditions and has a considerable presence of related and supporting industries.
Karnataka is the IT hub of India and home to the fourth largest technology cluster in the world. The state also has seen solid infrastructure development with three domestic and two international airports. Similarly, the state is home to 12 minor and one major port. The highways (6,540km in May 2015 up from 4,688km in May 2014) and power sectors (approximately 15,000MW in June 2015) have similarly seen rapid growth in the recent past.
With respect to people, the state has around 5% of the country’s total population with a literacy rate of 75.6%, just above the Indian average of 73%. It has plenty of avenues for higher education with 44 universities, the fifth highest number in the country, as well as almost 300 polytechnics and 206 engineering colleges. As of 2014-15, exports from the state were worth $52.02 billion, around 13% of India’s total exports. Karnataka has close to 50 IT/ITeS SEZs, three software technology parks and dedicated IT investment regions. Bengaluru, the capital, has a very strong cluster of IT and biopharmaceutical companies.
Jammu and Kashmir
The state has a good administrative capacity and has shown good performance in building infrastructure for economic growth.
Horticulture is the mainstay of the rural economy, providing employment to a large number of locals. The state accounts for 66% of apples and 92% of walnuts produced in India. It is well-suited for adventure, pilgrimage, spiritual and health tourism.
The state government has an industrial policy that offers attractive incentives along with a single-window clearance. Land is allotted at concessional rates in industrial areas on lease for 90 years. To boost infrastructure, the government is planning to build two highways that will provide all-weather connectivity from Jammu to the Kashmir valley.
Chhattisgarh
The state shows tremendous performance on the fronts of strategy and related and supporting industries, resulting in overall competitiveness.
Chhattisgarh is often touted as the power capital of India and is one of the few states that are profitable in terms of utility-based electricity. The state is power surplus and has an installed capacity of 13,728.39MW as on 31 August. The state has rich mineral deposits and is very strong in the mining sector as a leading producer of coal, iron ore and dolomite, accounting for about 22.6%, 22.8% and 37.55% of India’s production, respectively. The state also accounts for 35.4% of tin ore reserves in India.
Madhya Pradesh
The state has performed exceptionally on factor conditions and demand conditions due to its strong human capacity, income distribution as well as innovation.
Madhya Pradesh is the second-largest state in India by area. It is centrally located and because of the access to various parts of the country, many companies have set up manufacturing bases here. It has a large forest cover and is competitive in tourism.
The state represents 8.3% of the country’s coal reserves and has 218.04 billion cubic metres (bcm) of estimated coal-bed methane reserves. The main industries include automobiles and auto components, textile, cement, agro-based, pharmaceuticals, mineral, manufacturing and tourism. There are several industry clusters located in the state, notably in Bhopal, Indore, Ujjain, Gwalior, Rewa and Jabalpur.
Uttar Pradesh
The state has strong demand and factor conditions, resulting from tremendous demographics and income distribution as well as strong supporting industries.
Uttar Pradesh has the largest population in the country (around 200 million), close to the population of Brazil. It is also a favoured tourist destination due to the location of the Taj Mahal, Buddhist destinations such as Sarnath and Kushinagar and important Hindu pilgrimage places such as Allahabad and Varanasi. In the year ended 31 March, the state was ranked second and third in terms of domestic and foreign tourists, respectively.
It has very fertile land and its economy is overwhelmingly driven by agriculture with industry clusters also emerging now. The prominent industries in the state include information technology, agro-processing, tourism, mineral-based industries, textiles, handlooms and handicrafts, food processing, leather-based and sports goods industries. Uttar Pradesh is the largest milk-producing state, accounting for nearly 17% of the total milk produced in India in the last fiscal year.
Andhra Pradesh
The state performs well on all the pillars of competitiveness, namely factor conditions, demands conditions, context for strategy and related and supporting industries. The NSDP of the state has grown at close to 11% for the period between 2004-05 and 2014-15.
The state has a large coastline and a good number of ports that enable marine exports. It has industries around agriculture, biotechnology, bulk drugs and pharmaceuticals, IT and ITeS, textile and leather, tourism, automotive and auto components and gems and jewellery.
Andhra Pradesh is the first state in the country to have pioneered and enacted the concept of industrial single-window clearance. The Act made it compulsory for new industries to register with the single-window to obtain clearances quickly. It also simplified procedures for getting industrial clearances. Most of the power projects are near the ports with a total installed capacity of 11,562MW.
Rajasthan
The state performs well on physical infrastructure, communications and human capacity.
Rajasthan is the largest state in India (area wise). The state has good resource endowments such as limestone, silver, gold, copper, marble, sandstone, rock phosphate and lignite. Rajasthan is the largest producer of rapeseed, bajra and mustard. It is the second-largest producer of oilseeds and spices and the third-largest producer of soybean and coarse cereals in India. The state is the largest producer of cement and wool and the second-largest producer of milk in India. The roads and railways are well developed. The economy also shows good performance in the tourism sector. The state has a considerable pool of skilled and technically qualified human resources with more than 200,000 students enrolled in technical institutions.
Bihar
The state provides good incentives for businesses and has an exceptional human capacity.
Bihar is one of the fastest growing states in India. At current prices, per capita net state domestic product of Bihar grew at a compound annual growth rate of 12.9% between 2004-05 and 2014-15. Bihar is one of the strongest agricultural states. The percentage of its population employed in agricultural production is around 80%. It has a massive population base and is the largest producer of vegetables and the second largest producer of fruits in India. Food processing, dairy, sugar, manufacturing and healthcare are some of the fast growing industries.
The state has a large base of cost-effective industrial labour, making it an ideal destination for a wide range of industries. The Bihar government is also preparing a 20-year master plan for the promotion and development of tourism.
Sikkim
The state does well on parameters such as factor conditions, the context for strategy and related and supporting industries.
The state is richly endowed with exotic flora and fauna. Sikkim has several snow-capped peaks, including the Kanchenjunga, the world’s third-highest peak that attracts a large number of tourists from across the world. It is also developing its adventure tourism potential.
The state’s gross state domestic product expanded at a compound annual growth rate of 18.3% between 2004-05 and 2014-15. Sikkim has also done well on the sanitation front. It has a suitable climate for agricultural and horticultural products. It supports multiple crops such as rice, wheat, maize, millet, barley, urad, pea, soybean, mustard and black cardamom. Sikkim is the top producer of black cardamoms, contributing more than 80% of India’s total production. It has also performed well on the electricity front and has huge potential to develop hydroelectricity.
Haryana
The state does well owing to its performance in administration, innovation and diversity of firms.
Haryana has one of India’s largest automobile hubs and accounts for two-thirds of passenger cars, 50% of tractors and 60% of motorcycles made in the country. The state has also emerged as a base for the knowledge industry, including IT and biotechnology. Haryana is the third-largest exporter of software among Indian states and is a preferred destination for technology companies. The state also has taken steps for development of some industrial estates, industrial model townships and specialized parks for cluster development.
Maharashtra
The state displays exceptional performance on factor conditions, demand conditions and related and supporting industries pillars, which reflects in its great overall microeconomic competitiveness score.
Maharashtra has a good presence of industrial cluster, especially automobile, petrochemicals, chemical and textile sectors. The state also has strong IT and education hubs developing in Pune. Mumbai is India’s financial hub. The state also has a strong exports sector (with more than $70 billion of exports in 2014-15), owing to its strategic location and the presence of a large number (more than 50) of minor ports and two major ports. Mumbai accounted for the greatest amount of foreign direct investment (FDI) in the April 2000-May 2015 period. It is also well connected through airports located in various parts of the state. The state also had an installed power capacity of 38,521.72MW as on 31 August.
Tamil Nadu
The state displays strong performance in related and supporting industries and in innovation. It also has good demand and factor conditions.
Tamil Nadu has a diversified manufacturing sector and features among the leaders in several industries such as automobiles and auto components, engineering, pharmaceuticals, garments and textile products, leather products, chemicals, plastics, etc. The state has an excellent road and rail network with three major ports and 23 minor ports and also has seven airports across the state providing good connectivity. Tamil Nadu has an installed power capacity of 23,104MW as on 31 August. The automotive belt near Chennai is home to well-known brands, and Tirupur and Coimbatore are known as textile centres.
Gujarat
The state has an exceptional diversity of firms resulting in an exceptional context for strategy and providing for strong institutional support.
The state is one of the fastest growing in the country despite its high base effect. Its overall growth was above 12% between 2004-05 and 2014-15. Gujarat is one of the most industrially developed states in the country. It is a leader in several sectors such as petrochemicals, chemicals, dairy, drugs and pharmaceuticals, cement and ceramics, gems and jewellery, textiles and engineering. The industrial sector comprises more than 800 large industries and over 453,339 micro, small and medium industries. Gujarat is the world’s largest producer of processed diamonds, accounting for 72% of the world’s processed diamonds share and 80% of India’s diamond exports. Gujarat accounts for 65-70% of India’s denim production—it is the largest manufacturer of the fabric in the country and the third largest in the world. The state has very good infrastructure, and part of it has to do with the involvement of the private sector in development. The state has shown remarkable achievement in the exports sector due to the strong performance of its minor ports sector.
Meghalaya
The state has good human capacity and has shown good performance in the context for strategy.
At current prices, Meghalaya’s gross state domestic product (GSDP) was $4.2 billion in 2014-15. The state’s GSDP has expanded at a compound annual growth rate of 10.8% between 2004-05 and 2014-15. In 2014-15, there were 112 higher secondary schools, with the East Khasi Hills district accounting for 44 higher secondary schools. Shillong also has a National Institute of Fashion Technology and an Indian Institute of Management. The state has rich forest resources—about 14% (3,108 sq. km) of Meghalaya is covered by bamboo forests. Meghalaya’s turmeric is considered to be among the best in the world as it contains 7.5% of curcumin. Meghalaya is one of the leading states in the North-East in terms of production and supply of flowers to the main markets. It also has a vast potential for hydroelectricity, which is not well utilized but presents a vast scope for the future.
