Competitive Federalism, States Attracting FDI: Key to India’s Inclusive Growth Story

The India growth story — which has gained momentum over the past two decades – propelled by the economic reforms of 1991, has been largely driven by a few states (mostly coastal). The point about regional disparities — within India — and the need to reduce them has been repeatedly flagged, but more tangible steps need to be taken in this direction. If India wants to achieve consistently high growth rates over the next decade, it is important to ensure that regional disparities are addressed and steps are taken towards ensuring that states, currently left behind can emerge as engines of economic growth in the future.

Distribution of FDI

The disparity between states is evident when one looks at FDI (Foreign Direct Investment) figures. This year Maharashtra, which received the highest FDI, accounted for over 50% of the total FDI that India received. Deputy Chief Minister, Devendra Fadnavis, while commenting on the same in a post on X, said: 52.46 per cent of the total foreign investment in the country is done only in Maharashtra!!

The other states in the top 5 are – Karnataka (number 2), Delhi (3), Telangana (4) and Gujarat (5). In previous years too, a few states have been drawing the bulk of FDI.

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It is true that a few states are more successful in drawing more FDI because they are endowed with geographical and logistical advantages, and they are more proactive in reaching out to potential investors (both domestic and foreign). A few points need to be borne in mind. First, most of these states have benefitted significantly from their geographical location. Second, they benefit from the investment which one or two cities, especially the capital city or the key commercial centres, in the state draw. These states also face a problem of skewed growth and are attempting to address the issue.

It would be important to point out that economic disparities and a few regions benefitting more than others is a global phenomenon. In China, the coastal provinces benefitted more from what was dubbed as ‘China’s open door policy’ in 1978. While attempts were made to address these issues, China still faces the challenge of unequal growth.

How other states are trying to woo investors: The case of West Bengal

In recent years, states which were dubbed as non-performers have begun to make more efforts towards drawing Investments (from within India and overseas). One such example is West Bengal. The state organised an Investor’s Summit in 2023, the seventh edition and received commitments worth Rs 3,76,288 crore. West Bengal has been trying to highlight its geographical location as a gateway to North-East India as well as to South-East Asia. Chief Minister Mamata Banerjee flagged this point during her address at the 2023 Investment Summit.

Apart from prominent dignitaries from India — including top corporate honchos — foreign dignitaries who attended the event included the Bhutan PM — Tshering Tobgay, First Deputy Energy Minister, Government of Poland — Grzegorz Tobiszowski . It would be pertinent to point out that before the down-turn in India-China ties – in 2020 — efforts were being made to strengthen ties between West Bengal and Yunnan Province (Kolkata, the capital of West Bengal and Kunming, the capital of Yunnan had been declared sister cities in 2013).

More recently, during PM Narendra Modi’s US visit a Semi-conductor Manufacturing Plant – to be set up by Global Foundries, the third largest chip maker in West Bengal was announced. The plant will be focused on advanced sensing, communications and power electronics for national security, next-generation telecommunications and green energy applications.

In this context, US Consul General Kathy Giles-Diaz met with Mamata Banerjee. Commenting on the steps being taken in this direction: “We have already identified and readied the land. They (the US) also have seen one land. Once this Centre gets ready, it will be a global phenomenon. They will be able to use our talents here. The infrastructure will help in boosting our talents, Banerjee also said: “..Bengal will make its mark on the world map once again”

Several other states such as Rajasthan, Madhya Pradesh, Odisha have also become more pro-active in reaching out to investors. Only recently (September 2024), the Rajasthan Chief Minister visited South Korea and Japan

In conclusion, it is important that, like West Bengal, other states which have been left behind in recent decades also draw important investments and emerge as drivers of India’s growth. For this, greater coordination between New Delhi and the states is important.

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