India’s States Must Work to Realize Return on Investment

By Sarah Watson —

Ongoing construction projects in the capital city Agartala in Tripura, India. The Tripura state government has achieved a surprisingly high yield on promised investment projects. Source: Dbphotoz’s flickr photostream, used under a creative commons license.

What enables a company — foreign or domestic — to break ground on a new investment in India? While macroeconomic factors such as the health of world trade and the growth of India’s economy undoubtedly affect the decision, the effectiveness and efficiency of the government in the state where the investment is planned undoubtedly plays a role in the process. The Wadhwani Chair’s analysis of data on investment intentions from India’s Department of Industrial Policy & Promotion (DIPP) show that some states have a record of success in converting intentions into actual investment, while others fail spectacularly. And while companies seem to propose investment without regard for the party in power, the data suggest some Indian state administrations are far better than others at turning plans into reality. The data show that the hardest part of economic development may not be convincing a company to invest in your state but instead ensuring that the company is able to follow through on its plans: find land, procure power, and build a plant, all while keeping costs reasonable and risk manageable.

All large-scale industries planning new investments or significant expansion are required to file an Industrial Entrepreneurs Memorandum (IEM) with DIPP. IEMs are not exhaustive, but they do call for some detail, and there is little reason for a company to file one unless it is seriously considering an investment. Because IEMs are divided into two parts, with the second part only filed when operations at the new or expanded plant have commenced, they also offer an excellent opportunity to track whether a planned investment has actually come to fruition. Using DIPP records, we can thus measure which states are best at converting investment intentions into reality.

It is widely known that India has a problem with stalled projects, and the DIPP data shows a sobering top-line picture: between 2006 and 2015 companies filed just over 35,000 IEMs describing investment worth $1.397 trillion in today’s dollars. Between 2007 and 2016, however (allowing a year for work on the project to be completed), companies filed only 5,540 Part B’s (indicating that they had commenced operations), a drop-off of over 84 percent. Figures for investment were even worse: actual money invested was only $78 billion, or 5.6 percent of intentions. On the plus side, however, figures for the entire ten-year period obscure a sharp up-tick starting in 2012-13; investments in 2013-16 reached 20 percent of the value of proposals made in 2012-15.

Furthermore, individual states vary dramatically in their ability to turn plans into reality. Surprisingly, the top five states in terms of yield (the percentage of promised investment that actually materializes) are all in India’s northeast or hill districts. This may be because businesses would not plan investments in India’s remote northeast unless they had a very good reason to be there and were aware of the challenges they would face. But except for Uttarakhand, these states generally had so few investment proposals — Mizoram, for instance, had only three  — that their performance could be a statistical fluke.

States with Best Yields on Promised Investment 2007-2016
Tripura 41.1%
Mizoram 37.3%
Sikkim 30.6%
Uttarakhand 22.6%
Meghalaya 17.1%

Differences in yield are more significant when we look just at the big players — the top 10 states in terms of promised investment. These states received proposals ranging in value from $225 billion (Odisha) to $62 billion, but no state topped $22 billion in actual investment. Realization was particularly poor in the mining economies of Odisha, Chhattisgarh, and Jharkhand; Odisha, for instance, had twice the proposed investment of Madhya Pradesh but ended up with less than a quarter of the latter state’s actual investment. If we take IEMs as a reliable sign of investment intentions, Odisha alone has lost out on $224 billion in investment over the past 10 years. Maharashtra, the best-performing state, still lost out on over $100 billion.

State Proposed Investment

(in $ billions)

Actual Investment

(in $ billions)

Orissa 223.8 1.5 0.7%
Chhattisgarh 204.5 1.2 0.6%
Gujarat 160.9 21.2 13.2%
Maharashtra 121.9 17.9 14.7%
Andhra Pradesh 116.0 6.5 5.6%
Madhya Pradesh 112.6 6.2 5.5%
Karnataka 109.4 5.5 5.1%
West Bengal 92.0 2.3 2.5%
Jharkhand 61.8 0.4 0.6%
Tamil Nadu 51.4 2.5 4.9%

Does the party in power have an impact on yield, or are investment decisions governed by larger factors? Although the unpredictable lag between submitting the IEM and commencing operations makes it difficult to assess party performance with great certainty, the data do suggest that government policy can make a significant difference in a company’s decision to go forward with an investment. Each of the 11 states governed by more than one party between 2007 and 2016 saw significantly different investment depending on the party in power.

Take the case of Goa. Under the Indian National Congress government that led the state from 2007 to 2012 Goa performed very poorly when it came to realizing investment dollars, with an average yield of 1 percent (a little over half the All-India average for this period). Beginning in 2013, however, a year after the Bharatiya Janata Party (BJP) government came to power, investment picked up even when compared to the rising national average. Goa’s average yield for this period was an amazing 140 percent, indicating that it was clearing its backlog of stalled projects from previous years. The all-India average for the same period was 17 percent; much better than in 2007-12 but still far short of Goa’s exceptional performance.

Uttar Pradesh exhibits a similar split; under the Samajwadi Party, which governed the state from 2012 to 2017, its yield of both implemented projects and investment lagged the national average. But under the Bahujan Samaj Party (2007-2012) its investment yield was nearly four times the national average. Karnataka under Congress has comfortably beat national averages; under the BJP its yields were as little as half the national average.

Party 1 is the first party to rule the state for at least three years during the period 2007-16, Party 2 is the second. Source: DIPP data, graphic compiled by CSIS Wadhwani Chair staff.

India’s states are in an intense competition for investment dollars, leading to the spectacle of investment summits producing pledges worth hundreds of billions. Some of India’s states have in-built advantages — strong industrial bases, sea connectivity, wealthy populations — that make them more attractive to investment. But comparative data on different state governments show that government actions can make a difference in an investor’s decision to go forward. Identifying exactly what interventions are most effective is beyond the scope of this post, but previous studies suggest that helping companies to acquire land is the single most crucial action states can take. The evidence demonstrates that some of India’s states have a long way to go.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @SWatson_CSIS.

Sarah Watson

Sarah Watson

Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.


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