Ever since business today kicked off its states survey in 1996, two states-as if driven by some immutable, albeit mischievous, law-have tenaciously clung on to their positions. Maharashtra at the very top and Bihar at the very bottom. Otherwise the survey, which is into its fourth year, has faithfully reflected the changing fortunes of all the Union's constituents, who numbered 27 when we started, but now stand at 32 (Andaman & Nicobar, though, is not considered for the survey). It has, for instance, captured the rise of two aggressive southern states, Andhra Pradesh and Karnataka, lamented on the consistent neglect of north-eastern states, wondered at the laboured march of some of the biggest and most populous states in central India, and marvelled at the dogged entrepreneurship of western states such as Maharashtra and Gujarat. In doing that it has also tried to spot trends and question why some states do well and most others don't. But its single-biggest preoccupation has been to answer just one question: What are the hottest states for business and why?

Before we dive into the findings of the survey and tell you what they reveal about the vastly dissimilar performance of the members of the Union, a caveat is in order. This year's survey, once again conducted in partnership with research agency Gallup, includes for the first time a factual dimension to the overall rankings of the states. It takes into account factors such as the quality of infrastructure, labour, and banking and credit. However, since data for most north-eastern states and some union territories are hard to come by, the survey maintains its bias to perceptual scores of the states (for more details see The Methodology, page 67). Also for that reason, as the statistically inclined among you may point out, the previous years' ranks, which were based purely on respondent perceptions, are not strictly comparable, although as a barometer of investor sentiment they are impeccable.

So, what does this year's survey reveal? First off, plenty of movement within the top states. Nine of the top 15 states have moved at least one notch up in the rankings; the rest, except Tamil Nadu and Maharashtra, have dipped. Then, there seems to be a tremendous maturing of the investor. While some aspects of infrastructure such as cost and quality of power and labour continue to be crucially important in decision-making, other "soft" qualities like a government's ability to woo investors, carry through its promises and be flexible in policy-making seem to exert a make or break influence on the choice. At the same time, hard incentives such as tax reliefs and subsidies continue to be important considerations. That probably explains why middle-of-the-list states like Madhya Pradesh, Himachal Pradesh, and Rajasthan are among the biggest gainers in this year's survey.

The rankings-especially when broken up into perceptual and factual-offer significant insights into the mind of the investor. Take the top two states, for example. Numero Uno Maharashtra has a clear edge on all infrastructural metrics such as power and proximity to markets, but it is Andhra Pradesh that is perceived to be more industry-friendly in terms of policy-making, implementation, and quality of administration. A similar perception has propelled another state that boasts of a CEO-Chief Minister (cm), Karnataka, from number six in the previous year's survey to number three. The parameters where Karnataka scores high are labour availability, infrastructure like telecommunications, and advanced banking facilities.

While on most counts the investor perception is bang on, there are glaring examples of disconnect, too. Himachal and Haryana, which figure among the top 10 states, enjoy better perceptions than factual data should allow. In stark contrast, West Bengal and Kerala come low down on investor perception, although in terms of factual rank, they are among the top 10. Even in the case of Bihar, the quality of infrastructure (factual rank 13) demands a better perception, but the fact is investors are simply unwilling to change their mind about the state-not entirely a folly, to be sure.

TAMIL NADU: RAW DEAL The state's perception suffers because of an undying political squabble.

As an industrial state, Tamil Nadu is one that any chief minister should be willing to give his or her right arm for to govern. It has the country's best auto ancillary industry, the best-known centre of hosiery and garment exports, and a fast-growing it industry that's beginning to rival Karnataka's. In fact, in terms of the factual rank, which is based on the quality of infrastructure, Tamil Nadu is second only to Maharashtra. So why does its perceptual rank lag at No. 6, forcing its overall score to stagnate at No. 5? Blame it on the state's politics of vendetta. Ruling AIADMK, led by Chief Minister J. Jayalalithaa, and rival DMK, steered by M. Karunanidhi, are the bitterest of rivals, often fighting political battles at a personal level. In themselves, the two parties are far from the best. Chief Minister Jayalalithaa is well known for her high-handed style of governance, while Karunanidhi-much milder than his rival-does not seem to have any clear economic vision. Still, and fortunately for the state, investors come to Tamil Nadu because of its large pool of educated and relatively disciplined workforce. Not surprisingly, then, all the top 10 it companies in India have operations in the state; for some technology companies such as Scope, Xansa, and iNautix, Chennai houses their biggest operations; and for some others such as Hewlett-Packard and Syntel, the city is home to their most promising growth centre in India. Say Arun Jain, Chairman of CII-Tamil Nadu, and CEO of Polaris Software: ''Look at the (Rs 200 crore) expansion of the international airport or the development of the it corridor. It has happened almost unnoticed. (The state) delivers more than (it) promises.'' The big promise: Chennai's Tidel Park is symbolic of the state's aggressive IT focus The state is relatively comfortable on the power front, but roads and water continue to be major issues. But late August this year, a World Bank loan of Rs 2,118 crore was sanctioned for building and repairing roads in the state, which should improve things over the next five years. As for water, Jayalalithaa has personally started an ambitious drive for rainwater harvesting. Therefore, the water situation should also improve. Not all's well with the state's manufacturing sector, though. Many industrial estates are ailing. Even in the Madras Export Processing Zone only a third of the units are functioning. "Things will improve when there is a greater transparency at the government level," says A.K. Padmanabhan, National Secretary, CITU. Others like Lakshmi Narayanan, coo, Cognizant Technologies, feel that the state, and in particular Chennai, can emerge as a hub for engineering services, given the abundance of quality graduates. Fortunately, that's something the state's squabbling parties won't affect. -Nitya Varadarajan

Vote For Governance

From that stems a crucial point for the CMs of the Union. While it is important to offer good infrastructure, it is even more important to be seen as willing to help industry; to tell the investor that you, as the cm, are not just willing to wait for her at the airport, but also happy to turn the government machinery around to serve her interests. (Doubtful CMs can call up a certain gentleman in Hyderabad to check whether such a strategy works.) Naidu, for example, has repeatedly beaten rival states at the investment game by wooing companies such as Microsoft and McKinsey (for the Indian School of Business) into Hyderabad, and putting his bureaucracy online. Any surprise, then, that Andhra Pradesh has leap-frogged from 22 in 1996 to two this year?

If a state does not have a super-charged cm, then it's next best option-as the survey reveals-is to have superlative infrastructure and workforce. Example: Maharashtra. CMs don't get any more low key than Sushil Kumar Shinde. Yet, his state draws the most investment, both from within India and outside. Maharashtra has got efficient ports, good road connectivity, probably the best power situation, the biggest financial centre, but most of all people who are both industrious and enterprising (See No. 1, But For How Long?, page 44). And intangible as the last quality may seem, it undoubtedly is at the centre of everything else.

In fact, if the hoary tradition of development planning through the Five Year Plans has not led to a balanced growth in the country, it's because of poor governance at the state level. The future for Indian states is going to be difficult still because the past 10 years have raised the bar on the very concept of governance. While in the pre-90s it only entailed efficient management of resources and implementation of policies, today its scope extends to courting investors and creating a positive environment for business.

Good governance, however, needs a strong financial foundation. At present, most Indian states are broke. The only way they can improve their lot is by increasing their revenue collections. That in turn is dependent on their ability to attract investment. They would be playing a losing game if, like in the past, they doled out financial sops to attract investors. A better alternative would be to ensure more effective utilisation of public spend on infrastructure, education and health, and to create a governmental machinery that instead of setting up barriers to enterprise, actually helps it flourish.

Doing so would require greater decentralisation of power from the Centre, transparency in its usage and, indeed, a "corporate mindset". Greater accountability and faster turnaround at the local level will remove many of the problems that investors today have to deal with. Like Naidu says elsewhere in the issue, "Good politics is good business." It's high time the states of the Union realised it.

HP, MP, RAJASTHAN: GAINING GROUND Investor-friendly policies are luring investors, but the three have a long way to go in terms of infrastructure.

Catching up fas: (From left) A Gyandoot centre in MP A textile firm in Kota, Rajasthan An auto ancillary unit in Himachal Pradesh They don't top the charts in terms of factual ranks, and neither do investors harbour any unrealistic expectations of them. Yet, the states of Himachal Pradesh, Madhya Pradesh and Rajasthan-incidentally all ruled by Congress governments-emerge as big gainers in this year's survey. MP has jumped seven places to No. 8, HP's moved up from 14 to 10, and Rajasthan from 11 to 9. What's notable is that their gains have been consistent. In the 1997 survey, for example, MP came in at 16 and Rajasthan, 13. Obviously, the states are revving up. Consider Himachal Pradesh. Its new industrial policy, unveiled early this year, is a big hit with investors. The state government has offered a 10-year excise exemption and five-year income tax exemption to select industries, including pharma and floriculture, among others. That's got investors queuing up. Dr. Reddy's Labs and Alembic are scouting for land to set up manufacturing units. Even Colgate-Palmolive is looking at an investment in Baddi. Says Ranjit Kohli, Director (Finance) for Global Manufacturing at Ranbaxy: "Himachal Pradesh offers cheaper power than most other states and since ours is a power-intensive unit, we stand to gain." MP is also getting its act together. It has the highest number of projects under implementation as a percentage of total investment-80 per cent of all proposed investment-and it also opened the country's first special economic zone (SEZ) at Indore last year. Spread over 1,000 acres, the SEZ-eight of the proposed 14 will be in MP-will be developed at a cost of Rs 1,050 crore and completed in another six years. A big setback for the state, however, has been the loss of Chhattisgarh. With it went not just 1.35 lakh sq km of land, but a lot of mineral resources (particularly diamonds), water, and tourist destinations. MP is still licking its wounds. Rajasthan, best known for its tourist destinations, is attracting unlikely industries. GE, for example, set up a 200-seat BPO centre in Jaipur after considering some 20 different cities. Says Ashok Tyagi, Business Leader, GECIS: "Jaipur has a large pool of well-educated English-speaking graduates (50,000 of them graduate every year), and easy access to Delhi. All these are critical to the success of an ITeS business." That's not to say everything is hunky-dory with the trio. In Rajasthan, companies like Gillette have to put up with rampant power cuts and poor communication links; in Madhya Pradesh, Kinetic Motors' Chairman Arun Firodia makes similar complaints, while others like S.S. Lamba of Lupin fret over labour problems, saying "it's not forward looking". Apparently, the availability of skilled workers is a problem in Himachal, too. However, what the three states have going for them is their desire to improve. In the Union of India, that's saying a lot. -Moinak Mitra