As Indian Prime Minister Narendra Modi implements economic reforms, he continues to call on individual states to enact change and drive investment. Will they respond?
In the past year, Indian Prime Minister Narendra Modi has drawn attention over his foreign policy, which has placed a strong focus on subnational participation in foreign policy, particularly in forging economic ties with outside governments and investors.
Most analysts point to the fact that Modi’s own experience as Chief Minister, where he left no stone unturned in extending a hand to the outside world, was reasonably successful both through his overseas visits, as well as through the bi-annual Gujarat Summit.
In fact, through his visits to China and Japan, Modi was able to strike a chord with important political leaders in both countries. During his visits to Japan in 2007 and 2012, Modi met Shinzo Abe, and during his visit to China in 2011, he received a warm welcome and met with senior leaders of the Communist Party.
In spite of foreign policy resting firmly with the central government under the Indian Constitution, the idea that states should become more crucial actors in Indian foreign policy has been recognized by successive administrations. This is a consequence of a number of factors, including economic liberalization, the rise of strong regional leaders, as well as the large diasporas of certain states.
For example, in the 1990’s, the Chief Ministers of the southern states Karnataka (SM Krishna) and Andhra Pradesh (Chandrababu Naidu) emerged as India’s IT powerhouses and began to compete with one another. They were successful not only in drawing in investment, but also in their ability to attract foreign attention and dignitaries. As a result, subsequent Investor Summits took place, of which Gujarat was one of the largest. Now other states, which have lagged behind, are also seeking to attract investors.
Modi has sought to flag this issue at the national level, not just in the election campaign, but also during domestic investor summits as well as international forums. He has urged individual state governments to compete for foreign investment, and while on the international stage, he has spoken in favor of greater direct contact between individual states and foreign governments. For example, during his recent visit to China, he brought both the Chief Ministers of Gujarat and Maharashtra with him.
Modi has further encouraged states to develop their own export promotion councils, a measure which has been very successful and was recently adopted by over twenty states who have decided to elect their own Export Commissioners.
This is increasingly important because one of India’s major challenges continues to be regional growth disparities. Only a handful of states attract the vast majority of FDI inflows. For example, between 2000 and 2014 Maharashtra and the National Capital Region (NCR) accounted for 49 percent of FDI into India
Conversely, while states like Bihar and Madhya Pradesh have delivered stellar growth rates in recent years, they have not been successful in attracting FDI, even though they have been promoting investors summits and have made significant efforts to reach out to foreign investors.
Modi, too, has grown concerned that growth in India is only being driven by a few states, and has emphasized the need for promoting economic growth in the eastern and north-eastern regions of India.
Modi realizes that schemes like “Make in India” can only be successful if states are stakeholders and have a reasonable degree of autonomy. While the state establishment of export commissioners is an important first step, there are a number of other issues that should to be addressed in order to ensure that Indian states are able to attract FDI.
The first is greater coordination at the central level between important ministries, such as the Ministry of External Affairs and the Ministiry of Commerce and Finance. Second, there needs to be better coordination between states and the central government and, where possible, greater decentralization of power to states, especially in the context of attracting Foreign Direct Investment FDI.
Third, states must continue to implement pro-reform policies and address red-tape to improve the business environment. While all state governments make grandiose claims while trying to woo investors, actual reports of investment levels demonstrate the real lack of deal conversions in many states.
In this sense, while economically progressive states have no problem in attracting investors, the real challenge will be for those states which have been left behind to change their policies and image in order to woo investors.
