By Rukmini Parthasarathy & Rohit Saran

India, that is Bharat, shall be a Union of States.
Constitution Of India, Article I

There are two Indias for investors--and the distance between them is still growing. That is the stark message of the second BT research project on the best states to invest in. The winner-states in this round are the same as those in December, 1995: Maharashtra, Gujarat, Tamil Nadu, and Karnataka remain the most attractive destinations in India for investment. Except for West Bengal, the loser-states too display the same degree of consistency: Bihar, Assam, and the rest of the North East continue to bring up the rear. For the 26 states of the Union, liberalisation, and the competition that it has unleashed for investment, has only resulted in increased polarisation.

Competition is also an enabler. The stability at the top and the bottom of the BT rankings quietly masks the great churning in the middle. Andhra Pradesh's rank has shot up from 22nd to 5th while that of West Bengal has vaulted from 24th to 10th between 1995 and 1997. Less spectacular, but equally noteworthy, has been Orissa's climb from 20th to 15th place. States that want to attract investment will attract investment.

All over the world, federal structures are based on competition. Over the course of 220 years, the federal structure of the United States of America has evolved to empower not just the 50 states, but also the cities, the towns--and even the municipalities. There, as the postcards from BT's Rohit Saran--who spent the last six months traversing 27 states in the US in a Ford Van on a World Press Institute Fellowship--attest, devolution has progressed to such an extent that it is the new city-state, rather than the state, that vies for investment.

Back home, the policy of "balanced regional development"--and the government's licence-permit raj--precluded competition among our 26 states for almost 50 years after independence. Yet, even the limited progress that has been made since 1991 has wrought profound change. For, the greater economic empowerment of the states, as a result of the central government's diminishing role in directing the quantum, and the composition, of investment, is redefining our polity. True, the coalition of regional political parties that constituted the United Front has unravelled. But its 18-month stint in power has established the role of such parties in national governance in future.

At a micro level, this born-again federal covenant is altering the way CEOs evaluate their investment decisions. As location has an impact on almost every corporate activity, it is a basic cost driver. And since cost advantages translate into competitive advantage, location becomes a powerful tool in the new competitive economy.

There were, thus, two objectives of the biennial BT-Gallup MBA research project on the states. First, to identify the new parameters vital for corporates to assess the cost advantages--and disadvantages--of locating in a state. And then, to employ these parameters to rank the 26 states and the Union Territory of Pondicherry in terms of their investment attractiveness.

This survey, however, expands on our first in 1996 by buttressing subjective scores with objective data. Perception plays a big role in dictating investment inflows, but impressionistic ideas, shaped by piecemeal experiences, can yield generalised assessments. Moreover, survey-based ranks do have an inherent bias towards the existing industrial hubs since most respondents are located there.

To create a fair calibration system, therefore, BT collected data for each state on a basket of parameters belonging to four broad genres: physical infrastructure, governance, labour, and social infrastructure. Every state's score on each of these parameters was computed using a customised scoring system. These scores were combined with the survey scores to arrive at composite scores, which formed the basis for the ranking of the states.

This methodology does much more than providing a state-wise scoreboard of investment attractiveness. Changes in the hierarchy of investment parameters are an indicator of how the locational paradigms of business in post-liberalisation India are adapting to the evolution of a more federal structure. And allow a look at how the perception mapping of each state corresponds to the objective parameters, which provides a pointer to the emerging investment clusters in the country.

THE CHANGING CLUSTERS OF CHOICE

Physical infrastructure, especially power, continues to top the list of factors critical to investment--a damning indictment of the inadequacy and inefficiency of five decades of planning. In chronically power-strapped states--such as Karnataka, Kerala, and Rajasthan--exemptions from frequent power-cuts are even dangled as investment incentives. Contrast that with the developed world, where factors like uninterrupted power supply, telephones, and road and rail networks do not even figure in the list of investment criteria simply because they are uniformly available everywhere.

Yet, there has been a significant shift in business perceptions about the role of the state governments. In the previous survey, CEOs ranked state governmental support in the form of tax-breaks, subsidies, and other concessions as the second-most important factor for determining the best states for investment. Given the traditional thrust on backward area development, the dominance of incentives in the investment decision was, perhaps, logical.

What is surprising--indeed, heartening--is the declining emphasis on such monetary incentives. Sure, sops are still considered important, but CEOs are increasingly placing greater value on the quality of the local administration, the law-and-order situation, and policy implementation, indicating a clear shift in emphasis from the state government's role as a subsidiser to a facilitator of investment. The low weightage accorded to the presence of industrial zones--and hence, to the battery of concessions they offer--only reinforces this shift.

Savvy state governments are taking the cue. For instance, the chief ministers of the Bharatiya Janata Party (BJP)-ruled states have, deliberately, refrained from indulging in incentive wars. Maharashtra, Gujarat, and Rajasthan have trimmed the size, and scope, of the subsidies on offer. Instead, these states are wisely focusing on ironing out the irritants that disrupt investment flows: anomalies in the tax-structure, inter-state barriers to trade, and the multiplicity of clearances required. Maharashtra, for instance, has streamlined its tax structure by replacing an old multi-point sales tax with a single-point Value-Added Tax (VAT).

Besides, as a study by the National Council of Applied Economic Research (NCAER) shows, fiscal incentives influence investment inflows only if other factors remain constant. With wide inter-state disparities in the level of the basic infrastructure provided, all other factors cannot remain constant. And a multiplicity of grants, subsidies, tax-waivers, and concessional loans cannot, by itself, pull in the investment rupees for states on different development curves.

However, as the recent rise of states like Andhra Pradesh and West Bengal proves, a responsive, industry-friendly state administration can go a long way in plugging these gaps. Last year, the governments of both these states bombarded BT with a barrage of letters and telephone calls in response to our rankings--a small, but highly-revealing, indicator of their eagerness to attract investment.

THE NEW CLUSTERS OF INVESTMENT

Comparing the objective score of a state with its survey score provides the ceo with a handy tool for assessing the relative strengths, and weaknesses, of the state as an investment destination. Using numerous sources of information, BT also compiled a dossier on each state, listing its priority industries, the investment incentives given to the various industries, and the largest investment projects. Not only does this mapping of perception, fact, and investment growth create a database for prospective investors, it also helped us identify five distinct investment clusters in this country.

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