Don’t bet your money on India, bet on its states

Gopal Vittal, (executive director for home and personal care at Hindustan Unilever) writes this nice article.

He says instead of thinking about India as a whole for investment, we should be thinking about investing in states that deliver:

Last week, I met a business head who told me that endemic corruption and lack of good governance in the country was a huge risk to his business performance. His expectations of growth going forward were muted. The same day, I met another CEO who was more optimistic. While he also saw India as a volatile market, he felt that there were pockets of tremendous opportunity within the country. He went on to say that his biggest challenge was in creating a more flexible and smart organisation capable of exploiting these pockets as they emerge. What was surprising to me was their completely contrasting views. Digging deep, it became clear that the difference in their perspectives was in the way they saw India — specifically the volatility associated with the Indian market. 

One saw the country as a single market, inconsistent in its governance and uncertain in the overall outlook, while the other saw the country as a portfolio of several markets, unpredictable and exciting. Is the idea of India as a portfolio of markets just one isolated point of view or does this point to a broader issue? As the India story evolves, this could indeed be an increasingly important theme for businesses to keep in mind. The data over the last 15 years suggests that the Indian states — many of which are larger than most countries — have grown at differential rates both compared to each other and over time. Take Gujarat, for example, the fastest-growing state in the last 15 years. It has grown at almost two times that of the slowest-growing state, Uttar Pradesh. This has led to a per-capita income in Gujarat that is triple that of Uttar Pradesh.

Hmmm… He says we need to look at states. Points to research from Montek and IMF which says:

Only those states that excel in the quality of human capital and infrastructure,rate of private investment and have a smaller government will attract more business.

The same factors apply to country-wise comparison as well. So nothing different really.

I would go a step further and suggest we should bet on cities. Again in a state you don’t really invest in a state but in a city. Cities are the engines of growth and states and countries are just more macro structures. However, to bet on cities you need to make changes in the functioning of city governments. The city officials should be made incharge to make policies that welcome investment in their cities. Cities should compete with each other to provide best services and environment for business, people etc.

We already have a structure where there is city administration with really capable people at the helm. But they are mostly involved in administration activities. Separate cells should be made which involves private sector to get more private investment in cities. Like we see in the US where there is so much attention on cities and its government.

But then to ask state governments to lt go off this activity is going to be really tough. We usually see state governments competing for investments (like seen in Tata Motors). But as state governments are more macro and have to look at the whole state, the policies are not as focused…Cities is the way it should be…

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