States in India's remote northeast are lagging.

Photographer: Biju Boro/AFP/Getty Images

Where Things Are Working in India

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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It's only natural for investors to think of India as a whole: The sheer size and unity of its market is a large part of the country's appeal. And on those terms, there's reason to be gloomy about the prospects for sweeping, national-level reforms, which have run aground in India's gridlocked Parliament.

In reality, though, what matters most to companies are conditions in the individual states where they run their businesses. And here, when one looks at the policies being promoted by India's 29 state governments, one can discern more reason for optimism -- and a better sense of what still needs to improve.

Last week, for the first time, a study conducted by the World Bank in cooperation with KPMG and the government's Make in India initiative ranked Indian states in terms of the ease of doing business -- improving which is one of Prime Minister Narendra Modi's highest priorities. Each state was asked to report how many of the 98 reforms suggested by Modi's government they had adopted, in eight broad categories: setting up a business; allotment of land and obtaining a construction permit; complying with environmental procedures; complying with labor regulations; obtaining infrastructure-related utilities; registering and complying with tax procedures; carrying out inspections; enforcing contracts.

The best news is that setting goals seems to have had an effect. The study notes that most of the reforms it registered were implemented in just the first half of this year. That suggests, contrary to perception, that there’s new momentum behind reform, at least in the realm of processes.                                                         

Not surprisingly, the survey also revealed striking differences between states. Gujarat, Modi's home state and a longtime pace-setter in reforms, came out on top with a 71 percent compliance rate. Indeed, Modi's Bharatiya Janata Party or its allies, who presumably have more of an incentive to fulfill the prime minister's priorities, rule seven out of the top eight states.

QuickTake India's Aspirations

Those parties are traditionally pro-business, especially compared to the opposition Congress Party and the sundry socialist parties who rule several states, including the large states of Uttar Pradesh, Bihar and West Bengal. Interestingly though, there’s little correlation between a state’s per capita income and its reformist credentials. Rich states like Punjab, Haryana and even Delhi appear in the middle of the rankings, while relatively poor states such as Madhya Pradesh, Chattisgarh and Odisha score much better. If their laggard status is pushing them to reform faster, that’s good news for India.

The rankings also give a clear indication of what works. Areas where state governments have been able to shift procedures online -- most notably, in tax collection -- have improved the most. By switching to transparent, Web-based systems, the best-performing states have streamlined procedures for winning construction permits, approving building plans and allotting land. 

Conversely, those areas where bureaucrats still wield great influence -- and which have the greatest potential for bribery and cronyism -- are the slowest to change. India’s notorious inspectors continue to harass companies to check for violations of regulations covering everything from paying wages to chopping down trees. Decisive reform in this sphere would require taking on powerful vested interests, something India’s political parties across the board seem unwilling to risk.

Clearly, there remains much work to be done: As many as 16 states had compliance rates of below 25 percent. Some of these are constrained by difficult geographies which would make attracting investment difficult. Seven of those 16 states are in India’s somewhat isolated and land-locked northeast; three are mountainous Himalayan states.

Significantly, Congress rules many of the 16 trailing states, including some of the largest in the group -- Kerala, Assam, Himachal Pradesh and Uttarakhand. That should be a signal for India’s grand old party to reinvent itself. Indeed, one hope is that rankings such as this one will spur competition among states. In one of the most heartening developments in recent years, voters have much more consistently rewarded state governments that have delivered jobs and development and voted out those that have not. Eventually, as some states race ahead and attract projects and investment, the laggards will feel pressure to follow suit. 

Obviously, if India’s states grow quickly, so will the country. Yet none of this absolves Modi’s government of its responsibility. Exporters such as Foxconn may only need to find one or two efficient states in order to set up factories in India. But companies catering to the domestic market will struggle unless broader reforms -- in particular, a goods-and-services tax that would knit the country together into a true single market -- are implemented. Modi’s task remains as daunting as ever.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor responsible for this story:
Nisid Hajari at nhajari@bloomberg.net