Improving investment climate: Reforms at the state level can drive growth

NITI Aayog's investment index highlights wide disparities among states, underscoring the need for governance reforms, stronger institutions and balanced regional growth

The NITI Aayog last week released its first investment friendliness index (IFI), 2026, evaluating the overall quality of state-level investment ecosystems through a comprehensive framework of 84 indicators across eight pillars — infrastructure, business climate, resources, government policy, regulatory ease, institutional environment, financial health, and environment resilience. Gujarat, Maharashtra and Tamil Nadu emerged as the top three performers among large states, with Gujarat scoring 56.6 out of 100, followed by Maharashtra (53.7) and Tamil Nadu (53.3). No state performed consistently across all eight pillars. Some states perform strongly in specific areas such as infrastructure, regulatory ease or environmental resilience, but weaker institutional capacity or business facilitation often offsets these gains. Even the best-performing states have scores that are only a little over the halfway mark. This suggests that even India’s leading investment destinations have substantial distance to cover. 

The report notes that four states and a Union Territory — Maharashtra, Karnataka, Gujarat, Tamil Nadu and Delhi — together attract nearly 85 per cent of India’s foreign direct investment (FDI), while the Northeastern states together receive less than 1 per cent, highlighting the widening regional divergence. The timing of the report is important. According to the World Bank, India must sustain an average real gross domestic product (GDP) growth rate of 7.8 per cent over the next two decades to achieve “high-income status” by 2047. Investment will remain central to this ambition. Capital formation has contributed more than half of India’s growth since the economic reforms of 1991. While investment as a percentage of GDP reached about 30 per cent in 2024-25, marginally above the previous decade’s average, it remains much lower than the levels achieved during the high-growth years of the 2000s. 

India has made notable progress over the past few years by expanding highways, ports, airports, digital public infrastructure, and industrial corridors, which has helped improve logistics and connectivity. Yet investors continue to cite delays in land acquisition, environmental clearances, utility connections, project approvals, and the availability of skilled labour in high-value sectors as major bottlenecks. States with digital single-window clearance systems, dedicated investor grievance-redress mechanisms, and plug-and-play industrial infrastructure enjoy greater investor confidence. They also report higher capital commitments and faster project execution. This shows that institutional responsiveness is just as important as industrial capacity. 

Since investment decisions are ultimately made at state level, continuous benchmarking and evidence-based governance reforms will be crucial in boosting private investment, strengthening manufacturing, expanding exports, and creating quality employment. The central government must also support lagging states through greater technical assistance, capacity building, and dissemination of best practices. Equally important is institutionalising regular monitoring of reform outcomes, strengthening coordination across departments, improving regulatory predictability, and ensuring time-bound implementation. As global competition for investment intensifies, states must compete on the quality of governance, policy stability, and ease of doing business. A more balanced and resilient investment ecosystem, supported by cooperative and competitive federalism, will help spread economic opportunities beyond a few leading states and place India on a firmer path to achieve sustained long-term growth.