Rating the Indian Investment Climate

It is not news that economic and investment conditions vary immensely from one Indian state to another in India. But plotting changes in position can make interesting reading, particularly at a time when more liberal economics is supposed to be the driving force in India’s rapid progress – or at least some parts of India.

So a study by Indian free market-devotee economists just published internationally makes interesting reading, as well as comparing different states’ relative levels of economic freedom and opportunity in 2009 compared with 2005. The study is likely to have an impact on where future investment is made, particularly by foreigners often in need of such guidance.

The economists are Bibek Debroy, Laveesh Bhandhari and Swaminathan S. Anklesaria Aiyar. The work is published jointly by Indicus Analytics, an Indian economics research institute, the libertarian Cato Institute in Washington, DC and the conservative Friedrich Naumann Stiftung in Germany.

The rankings take into account the size of the state government’s role as well as two qualitative measures of governance – the legal system and business/labor regulation.

Top overall in 2009 is Tamil Nadu, retaining its position despite ranking only 11th in size. It ranks first for its legal system and third for business/labor regulation. It also stands out very favorably compared with its immediate neighbors – Karnataka stuck at a lowly 13th (despite Bangalore) and Kerala at 10th despite its high ranking on educational and other social measures.

Gujarat comes in at second overall, up from 5th, thanks both to its small role for government and light business regulation. But the state of its legal system ranks only 5th, though that is a big improvement on 2005.

The biggest improvement over the period was shown by Andhra Pradesh, which has moved from 7th to 3rd overall thanks to strong performance on both legal and regulation benchmarks. Its capital Hyderabad also scores strongly as a city.

But some states which are often assumed to be improving still fare very poorly according to these researchers. Thus Bihar remains stuck at the bottom of the list at 20th and West Bengal has managed on a modest improvement from 18th to 15th.

Haryana remains a strong contender, helped by its proximity to Delhi, maintaining its 4th position overall but neighboring Punjab has sunk from 6th to a poor 12th and Maharashtra from 9th to 11th. The relatively newly created states of Uttarakhand and Chhattisgarh are well down the list but Jharkand, carved out of Bihar and despite tribal issues and the Naxalite presence, comes in at 8th

Surveys such as these are naturally biased by the prejudices of the authors and their institutes, however hard they try to find neutral benchmarks. The relative positions of Indian states must be placed against India’s overall low ranking – 87th out of 141 in the world according to the Cato Institute. But then Cato has a way of failing to see what lies underneath official data hence credits Singapore with one of the highest degrees of freedom despite the extent of government ownership and control and reliance on a singularly un-free imported labor force and fails to note the oligopolies with their cozy relations with government which dominate the Hong Kong domestic economy, supposedly the freest of all.

Despite such failings, however, such lists are likely to remain influential and perhaps particularly for India because the reforms of the past two decades have reduced central authority and hence increased the potential as well as actual differences between the states.