Insights into Editorial: The growth outlook and the investment potential of states
Context:
The NCAER State Investment Potential Index (N-SIPI) report recently released by the National Council of Applied Economic Research is quite revealing.
The N-SIPI has ranked 20 major states and the Union territory of Delhi for their investment potential based on indicators for six major pillars—land, labour, infrastructure, economic climate, political stability and governance.
Apart from other information, the N-SIPI also incorporates the perceptions of entrepreneurs, based on a survey of 1,049 industrial establishments.
Present Growth of Indian Economy:
The Indian economy is now growing at over 7% per year despite an uncertain external environment and mixed domestic conditions. Provisional estimates indicate that the economy grew at 6.7% during fiscal year 2017-18 (FY18).
Despite robust growth in the US and other advanced economies, the external outlook remains grim with gradual monetary tightening in these countries, elevated oil prices, and the Donald Trump-triggered tariff war.
This return to 7% plus growth is quite remarkable given the mixed growth environment.
That growth has remained high despite this mixed environment has much to do with the fact that a large part of the economy, particularly relating to agriculture and the public services segment, is supply-driven and independent of demand-side market sentiments.
Revive the Private Investment cycle: Need of the hour
- Economy excluding agriculture and public services—investment is perhaps the single most important driver, especially when the export outlook is bleak.
- Revival of the private investment cycle is key in this context as private investment is the main component of real capital formation.
- Macroeconomic factors like the aggregate fiscal and monetary policy stance are clearly critical for revival of the private investment cycle.
- So are structural policy reforms such as the GST and the Insolvency and Bankruptcy Code (IBC), though the recent reversal of reforms in trade and tariff policy has been disappointing.
Apart from strengthening indirect tax compliance, GST is unifying India into a vast common market.
Similarly, the IBC should help break the banking sector gridlock, which is perhaps the most important macro-level roadblock to reviving the private investment cycle.
State specific performance of growth rates:
Apart from these macro or countrywide factors, investment conditions in individual states are also critical for private investment.
These state-specific conditions on the ground ultimately determine the success or failure of investment projects and, therefore, affect aggregate trends. They also determine the geography of growth, whether growth is likely to converge or diverge across states going forward.
- The land pillar is based on factors: land availability, land policy, transaction efficiency, and price.
- The six states ranked as the best performers according to this pillar are, respectively, Telangana, Madhya Pradesh, Tamil Nadu, Kerala, Andhra Pradesh, and Maharashtra.
- The states ranked as the worst performers on this count are Chhattisgarh, Odisha and Uttarakhand.
- The availability of an educated and appropriately skilled workforce and competitive wages are central to the labour pillar.
- Tamil Nadu, Andhra Pradesh, Karnataka, Uttar Pradesh, Kerala and Maharashtra are ranked as the best performers on this count, while Assam, Madhya Pradesh and Jharkhand are ranked at the bottom.
- The infrastructure pillar includes road density, road and rail connectivity, and availability of power relative to demand. It also includes availability of credit, which is unusual. In terms of this pillar, Delhi, Punjab, Maharashtra, Haryana, Kerala and Tamil Nadu are ranked at the top.
- The economic climate pillar combines a broad spectrum of parameters like government policy, market demand, resource endowments as well as levels of per capita income. There are also feedback loops between the growth rate and the investment potential of a state.
On the other hand, high dynamism and concentration of industries can generate negative externalities of congestion, including high rental values and wages, overload on the infrastructure, and pollution.
Incorporating all these factors, the economic climate pillar ranks Delhi, Telangana, Gujarat, Maharashtra, Karnataka, and Andhra Pradesh as the top 6 states, while Uttar Pradesh, Punjab and Bihar are ranked at the bottom.
The governance and political stability pillar: Components like the maintenance of law and order, crime, corruption, efficiency of government processes and political equity as reflected in the proportion of legislators in assemblies with criminal records.
Tamil Nadu, Haryana, Punjab, Gujarat, Madhya Pradesh and Karnataka are ranked as the top 6 by this pillar, while Telangana, Bihar and Himachal Pradesh are placed at the bottom.
Conclusion:
Questions can be raised about specific methods of compiling individual indicators or about the nature of the data.
- However, some differences notwithstanding, the classification of best- and worst-performing states is consistent with other ranking exercises relating to the business environment in states, such as the “Ease of Doing Business” rankings of the Department of Industrial Policy and Promotion.
- This robustness across different exercises suggests that the N-SIPI rankings are reasonably objective.
- Although, the N-SIPI report confirms an emerging pattern of divergence, with some states are not able to perform this pattern of divergence, which is a cause for serious concern.
Lacklustre productivity growth is the most consequential of these risks because it affects not only short-term economic performance, but also long-term economic growth potential.
As the world’s productivity slumps both cyclical and structural drivers, government policymakers and business executives cannot wait for a cyclical upswing.
Therefore, leaders across the states must take actions to improve productivity in order to sustain the global economic expansion for the medium term.
There is, however, no one-size-fits-all solution to kickstart productivity growth. The challenges vary across markets, and the policy responses need to be addressed as well.
