Which Indian States are best for business?

By UK India Business Council (UKIBC)

Himanshu Godara, Senior Consultant, Business Advisory at SKP Group provides another guide on doing business in India - this time analysing the top states for setting up and trading in

Businesses looking to set-up a manufacturing facility in India, need to identify which state or location is the most suitable option for the proposed set-up to ensure the success of the venture. The required parameters need to be well considered right from the planning phase. However, due to the immense Indian landscape, dynamic business scenario and cultural diversity, determining a location is not simple.

As a first step, businesses should prepare a comprehensive plan for the proposed set-up. The terms of the investment commitment (short or long), business requirement (supplier base/infrastructure), target market (domestic/export), skill sets and capabilities needed in the workforce, etc. should be clear. The next step is to identify suitable cities that meet the requirements and offer the best economic and institutional facilities that help leverage their core competencies in the most efficient manner.

In most cases, the initial list of selected states feature Maharashtra, Delhi, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh. These states receive the most benefits from the initial influx of Foreign Direct Investment (FDI) when the Indian economy was liberalised in 1991, mainly due to superior physical, institutional and social infrastructure, compared to the other states at that time. The initial inflow of FDI led to further investments in the same regions which culminated into today’s major industrial clusters in these respective states.

However, many of these industrial clusters are occupied presently with limited land available. They are also competing with upcoming clusters (in the same state or other states) in terms of operational costs and state sponsored incentives. In the last 15-20 years, the parameters for location selection have also changed substantially. It isn’t just the presence of a metropolitan city in the state that could be the location of the headquarters of the new Indian entity anymore. It is more important to be closer to your customers, suppliers, raw material sources and get benefits from the state government’s policies and incentive schemes. Technology and better connectivity between various cities has created more options for selecting a location.

Traditionally, manufacturing bases from developed countries move to a developing country to get economic advantages. Businesses based in developed countries are considering setting up in Indian states like Madhya Pradesh, Uttar Pradesh, Punjab, etc. which accomodate upcoming industrial clusters. Additionally, businesses experience cost advantages in terms of low wages, cheaper land, and in some cases, proximity to raw material sources. The states which did not receive all the benefits of the initial FDI inflow in India are now gearing up to attract foreign and domestic investments by setting up the required physical infrastructure with the state given subsidy.

For new industrial clusters where foreign investment is minimal, companies can get an indication about the potential of the location from local business activities. Local businesses are aware of the market dynamics and government policies that could impact businesses positively or negatively. They are the first occupants and could be important stakeholders for the success of new industrial hubs. It is equally crucial to consider local business activities. while evaluating set-up locations. where foreign investment is negligible or there are no success stories of foreign companies.

In essence, businesses should:

  • Conduct a detailed analysis, from an internal and external perspective, to shortlist the most suitable options for the proposed set-up;
  • Consider setting up in the upcoming industrial clusters in developing states and not limit their choices to the established industrial clusters/states.
  • Look at key evaluating factors such as a stable government, proactive industrial policies, ease of doing business and transparent decision-making processes while considering setting up in new industrial clusters.
  • Deliberate with state industrial bodies to get a better understanding of their incentives.
  • For large projects, negotiate the terms and nature of incentives with respective states.

All states have certain pros and cons based on the nature of the business and operational/commercial activities. It is important that businesses map their requirements with the state governments’ incentives in terms of social, physical and institutional infrastructure and how they can leverage these incentives to gain competitive advantage to succeed in India and other global markets.

This guide was written by SKP Group. To find out more about what they do please follow this link

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