Variation in Economic Performance Across Indian States

The Indian economy has demonstrated resilience in growth despite global and local uncertainties. However, there is significant variation in economic performance across different states.

• Per capita income and economic activities vary widely among states.
• For India to achieve its aspiration of becoming a developed nation by 2047, it is crucial for economic growth to be broad-based.
• Economic gains should benefit a larger range of economic actors.

Importance of Investment in Economic Growth

Investment is a critical driver of growth in a developing economy, supporting demand and supply by creating capacity and employment.

• The Centre for Monitoring Indian Economy (CMIE) provides insights into capital expenditure projects across states, although it excludes north-eastern and hilly states.
• This database covers both government and private sector projects in manufacturing, services, and infrastructure.
• Large-scale investments can encourage the micro, small, and medium enterprises (MSME) sector through forward and backward linkages.

Investment Trends Across Indian States

Analysis of investment announcements over a 10-year period (2015-2024) provides insights into state-wise investment trends.

• Maharashtra accounts for over 15% of total investment.
• Gujarat, Andhra Pradesh, and Odisha together account for 42% of total new investment, illustrating diverse economic dynamics.
• New investments are not solely concentrated in high per capita income states.

Drivers of Investment Decisions

Government Investment and Private Investment

Government investment can significantly influence private investment, demonstrating a "crowding in" effect.

• Public investment in public and merit goods creates positive externalities, reducing costs or increasing returns for private investments.
• There is a strong correlation (0.82) between government and private investment announcements.

Impact of Governance and Business Environment

Governance quality and the business environment play crucial roles in attracting investments.

• The size of completed investments is an indicator of good governance and the ease of doing business.
• Completed investments have a strong correlation (0.89) with new investments, both public and private.

Strategies to Improve Investment Levels

States can improve investment levels through two main strategies:

• Enhancing public investment to support better infrastructure and create positive externalities for private investment.
• Institutionalizing mechanisms to support the completion of announced projects, reducing impediments to translating intentions into augmented capacities.

Improving the overall economic environment and fostering backward and forward linkages with the corporate sector can also support MSME growth.