Indicus Analytics: Wanted - The finishing touch

States must ensure that industrial investment proposals are brought to fruition

Industrial de-licensing was one of the major liberalisation policies in the nineties, unshackling the constraints placed on industrial investment earlier. Currently, compulsory licensing is required for five industries dealing with manufacture of alcoholic drinks, tobacco and tobacco substitutes, electronic aerospace and defence equipment, industrial explosives and hazardous chemicals.Just 21 items are reserved exclusively for small-scale industry (SSI); a non-SSI unit wishing to manufacture these items requires an industrial licence, which is issued with an obligation to export half of its annual production. In these cases, the government issues Direct Industrial Licences (DIL) and Letters of Intent (LoI), which form a very small share of the total investment proposed in the country.

Though licences are not required for industrial investment in almost all cases now, it is mandatory for firms to file an Industrial Entrepreneur Memorandum (IEM) that notes the intent of the proposed investment, and to inform the government once commercial production begins.

According to the Department of Industrial Policy and Promotion (DIPP) data, while the late nineties saw a decline in investment intentions, industrial investment proposals grew significantly in the five year period 2003-2008, before being hit by the global financial crisis. The three states with the highest amount of investment interest through IEMs over August 1991 to October 2010 are Chhattisgarh, Orissa and Gujarat, followed by Maharashtra, Andhra Pradesh and Karnataka. (Click here for graph)  

INVESTMENT DIARY   Year-wise investment proposals
	Number of investment proposals (IEMs, LOIs and DILs)	Proposed investment value in Rs cr (IEMs, LOIs and DILs)
1992	5,480	1,29,866
1993	4,984	76,821
1994	5,210	1,06,708
1995	6,857	1,39,774
1996	5,347	1,03,210
1997	4,194	61,907
1998	3,034	60,663
1999	3,080	1,29,719
2000	3,261	73,374
2001	3,098	92,575
2002	3,261	91,940
2003	3,991	1,20,007
2004	5,218	2,72,334
2005	6,338	3,56,946
2006	6,371	5,93,380
2007	3,818	8,34,249
2008	4,085	15,23,852
2009	3,475	10,40,259
2010 Jan-Oct	3,641	14,65,624
Source: DIPP

Interestingly, till 2000, Madhya Pradesh, which included Chhattisgarh, ranked seventh in the country in attracting investment proposals. Chhattisgarh shot ahead of its parent state with its own industrial policy leveraging the state’s resources to the maximum.

However, when it comes to implementing these proposals, at the all-India level, just 10 per cent of the total industrial proposals were implemented till October 2010; a mere 4 per cent of the total value of investment proposed.

Smaller states have a significantly higher rate of the proposed investment seeing the light of the day. Gujarat stands out as the state with the best implementation ratio amongst the top three, converting 10 per cent of the proposed investment value into commercial production in the state, almost double the Maharashtra’s implementation ratio. On the other hand, the top two, Chhattisgarh and Orissa, implemented less than 1 per cent of the total proposed investment value till October 2010.

At the other extreme is Bihar, which ranks 14th among the states in value of investment proposals and has the lowest implementation ratio. Haryana, which has marginally lower investment intentions than Bihar, has the highest implementation ratio of 21 per cent among the large states.

Over the years, though the DIPP data show a near-constant implementation ratio of 10 per cent in the number of IEMs, when it comes to the value of proposed investment, there has been a drop in the implementation ratio from 18.7 per cent for the period 1991-2001 to 5 per cent for the period 1991-2009. The decline could be due to a variety of reasons — reporting inadequacies, more high-value projects with long gestation periods, hitches in project implementation due to red tape, land issues and so on. However, one fact is clear, with states vying with each other for investment, it is also important for state governments to work towards an environment that allows for speedy implementation of proposed projects.

Indian States Development Scorecard is a weekly feature by Indicus Analytics that focuses on the progress in India and the states across various socio-economic parameters sumita@indicus.net