Driven by their stellar performance on infrastructure-related parameters, states like Maharashtra, Gujarat, Tamil Nadu, and Karnataka take the pole position. They scored highly on both the survey as well as the objective parameters. Maharashtra, for example, is the only state that does not place any restriction on the consumption of power for either agricultural or industrial use. Gujarat, Tamil Nadu, and Karnataka do fare worse in terms of power availability, but the first two offer well-connected multi-modal telecom networks.

The 41 ports that stretch along Gujarat's coastline handle one-fifth of the nation's cargo. One of the first fast-track power projects to go on stream was Cogentrix in Karnataka, and the state has already made considerable progress in privatising power transmission even as the bill amending the Electricity (Supply) Act, 1948, to permit private companies to function as transmission operators is yet to be cleared by Parliament.

While the availability, and the quality, of their physical infrastructural facilities will continue to clearly differentiate this quartet from the rest, competition between these states will be increasingly governed by the same factors that shape competition in better-developed federal structures. CEOs will pay more attention tomorrow to a state's social infrastructure, its pool of skilled manpower, its work-culture, the habitability of its major cities, and the cost of real estate. In short, to the state's ability to offer la dolce vita.

Expect private-public partnerships to play a larger role in facilitating investment. Already, Maharashtra has privatised its nodal agency, the State Industrial & Investment Corporation, for negotiating clearances for non-resident Indian investments. And Tamil Nadu plans to empower the CEOs of industrial estates to obtain the clearances for industries planning to locate their plants there. It is the first state to pass a law to set up a single-window clearance system for new units.

INVESTOR SUMMARY: Although still the hottest investment destinations, their overburdened infrastructure is beginning to blunt the competitive edge of these states.

The Potential Growth Centres
Andhra Pradesh, Orissa, West Bengal, Goa & Pondicherry

The band of states constituting Andhra Pradesh, Orissa, West Bengal, and Pondicherry, which runs down the eastern seaboard (except for Goa, of course) could emerge as the new loci for investment. Barring West Bengal, each notched up a survey rank higher than its objective rank, thus providing a valuable lesson in how committed state governments can woo investors despite infrastructural deficiencies.

Given their accessible, and relatively-clean, administrations, Goa and Pondicherry have overcome the disadvantages of their size to ride up a rising graph of investor interest. Andhra Pradesh has, literally, exploded onto the investment radar screen thanks to the crusade for industrialisation launched by its chief minister, Chandra Babu Naidu. An ambitious Vision 2020 Plan for the state--which has been drafted in consultation with, among others, management guru Krishna Palepu--aims at doubling industrial output every five years. In preparation for the boom, the state administration is being streamlined. Nearly 250 posts in the industries department have been abolished, and the $75.94-billion IBM is assisting the Andhra Pradesh government in implementing an automated administrative system.

Orissa is fast emerging as a favourite state for investment. In terms of total investment--both proposed and under implementation--this remote and backward eastern state has overtaken even Maharashtra. As of October, 1997, investments in Orissa totalled Rs 1,30,000 crore--higher than the Rs 1,28,739 crore in Maharashtra. The trigger has been bold infrastructural reforms, especially in the power sector. The Orissa State Electricity Board has unbundled the activities of generation, transmission, and distribution, and, accordingly, cleaved itself into three separate entities. As part of the restructuring, distribution networks are being offered to private parties. Not surprisingly, infrastructure-related investment accounts for 42 per cent of the total investment in Orissa.

West Bengal appears to be the odd one out in this collection of fast-growing states. Yet, it deserves inclusion as it fares well on objective parameters, and the Jyoti Basu Administration has worked hard to cultivate industry. That seems to be finally paying off since the state has risen in terms of the perception rankings. It will continue to rise further if the Left Front can improve the state's poor work-culture, and halt the exodus of intellectual capital from West Bengal.

INVESTOR SUMMARY: So far, these five states have made the most of competition, but do not expect the infrastructural and administrative support of the star performers.

The Middle-Rung Middlers
Delhi, Haryana, Punjab, Himachal Pradesh, Rajasthan & Kerala

For states like Delhi, Haryana, Punjab, Himachal Pradesh, Rajasthan, and Kerala, a middling-to-good objective rank tallies with the survey rank, the exception being Kerala. Despite this, their share in total investment has been contracting, making it unlikely that these states will emerge as industrial hubs in future. Consequently, it makes sense for investors, and state governments, to focus on a few industries. For instance, Kerala could capitalise on its strong showing on the objective indicators, and circumvent the problems associated with a poor industrial relations climate by promoting investments in the service sector, like tourism.

Delhi too ranks well on the objective indicators, but investors have to deal with the limitations imposed by its dual role of a city-state and the capital of the country. The setting up of new manufacturing units within the city limits has been expressly forbidden by the Supreme Court, limiting Delhi's ability to attract investment. However, given its infrastructure, Delhi will remain a natural choice for service-based industries and head-offices.

Investors in Himachal Pradesh have to grapple with a severe set of restrictions, notably on land acquisition. Despite an array of generous incentives, investment there is largely confined to state-identified priority sectors like agro-processing, food-processing, hydro-power, and tourism. There are no such restrictions in Punjab, but its thriving rural economy will ensure that fresh investments will have much the same profile, with the odd sprinkling of engineering and electronics units. One of the first to allow farmers to lease out land to corporates, Punjab's draft industrial policy re-emphasises this thrust by offering a gamut of incentives to agro-based industries--including a seven-year waiver of electricity duties.

Unlike the Punjab government, which has to convince industry that the scars inflicted by years of militancy have healed, the industry-friendly credentials of both Haryana and Rajasthan are not in doubt. Indeed, these state governments have rolled out the red carpet for investors: while Rajasthan has done away with an inter-state sales tax and transport checkposts, and has launched bold reforms in the power sector, well-developed industrial zones have boosted Haryana's ratings.

If investors are still not flocking to these states, fault poor follow-through and implementation. Haryana's grandiose plans for a mega-industrial park for Japanese investors has been stalled for a year. And Rajasthan's bid to invite private participation in the management of four power distribution blocks has run into stiff opposition from both the state legislature as well as the employees of the state electricity board.

INVESTOR SUMMARY: While these are, potentially, good states to do business in, the realisation of this potential will require better state administrations.

The Large Laggards
Uttar Pradesh, Bihar & Madhya Pradesh

This belt of states--Uttar Pradesh, Bihar, and Madhya Pradesh form the heartland of the nation--will attract investment simply because it is too large to be ignored. Apart from a large market, and rich mineral resources, there is precious little to recommend such states to investors. Sure, Uttar Pradesh has industrial pockets which could compete with the industrialised zones in Gujarat and Maharashtra. And yes, a fair performance on indicators like road, rail, and telecom connections enables the state to score well on the objective parameters.

But these advantages are more than nullified by a total absence of governance. Over the last decade, not a single elected government has managed to serve out its full term in the state, resulting in prolonged spells of Central rule there. Investors may have learnt to discount political uncertainty, but they cannot discount a combination of political instability, corruption, and a deteriorating law-and-order situation.

Bihar may offer greater political stability, but the quality of governance is equally abysmal. Worse, investors have to contend with the additional disadvantage of a shabby infrastructure. Not surprisingly, the government's efforts to attract investment have not been particularly fruitful as it is still deemed to be the worst state to invest in.

Madhya Pradesh presents a less extreme version of the same scenario. There, determined efforts by a relatively-stable state government have not been able to outweigh the backwardness of its physical and social infrastructure. Accordingly, the state has slipped in the perception rankings, dropping from 5th place in 1995 to 12th place in 1997.

INVESTOR SUMMARY. This is a region of extreme contrasts that does, however, offer pockets of opportunity for investors prepared to deal with ineffective, and unstable, administrations.

The Fringe States
Assam, Arunachal Pradesh, Meghalaya, Mizoram, Manipur, Tripura, Nagaland, Sikkim & Jammu & Kashmir

The border is, perhaps, an apt metaphor of ceo perceptions of these northern and eastern border states, which barely figure on investor maps in the country. If these states seem remote, blame a general lack of awareness, their geographical location, and an acute lack of infrastructure. After all, the absence of a rail network ensures that most of the North East remains cut off from the rest of the nation for much of the monsoon months.

Insurgency remains the biggest disincentive to investment in these states. It destroyed the tourism business in the mono-industry state of Jammu & Kashmir. And it is hampering the efforts of the North-Eastern states to turn their natural beauty to their advantage. Clearly, Assam's precipitous slide down the ranks from the 19th to the 26th place is a fall-out of the law-and-order problems in the state. Although it enjoys the best infrastructural facilities in the North East, it is regarded as the second-worst state in the country to do business in precisely because of the state government's inability to protect industry.

INVESTOR SUMMARY. Far removed from the country's heartland and investors, these states are suitable for only a few industries.

Regional disparities in India have widened, and will widen in future, as the states battle it out for more investment rupees, more jobs, and more growth. But that does not constitute a case for central intervention to balance regional inequalities. There is nothing permanent about a state's membership in a cluster. As the US' experience demonstrates, backward states do not always remain backward. They can overtake even well-developed states with long histories of industrialisation. For, in a liberalised marketplace, the Union is no longer responsible for the economic destinies of the States.

--Research by Rajesh Sharma & Vijayalakshmi Vardan
Project coordinated by Rukmini Parthasarathy

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