In a recent report, the World Bank said India’s economy needs to grow by 7.8 per cent on average over the next two decades to achieve the country’s aspirations of reaching high-income status by 2047, the 100th year of Independence.
While India’s pace of growth, averaging 6.3 per cent between 2000 and 2024, provides the foundation for its future ambitions, getting there would require reforms and its implementation to be as ambitious as the target itself.
Capital formation as a share of GDP was 27.3 per cent pre-Covid because of balance sheet issues in the private sector. Now, it has increased to 30.8 per cent, largely because of the central government-driven public investment. Capital formation ratio should reach over 35 per cent by 2030 to sustain the high economic growth rate.
However, India would require reforms in the three key factors of production – land, labour and capital—to increase investment pace.
Except capital, the other two fall in the domain of states, which also account for more than two-thirds of general government expenditure in the country.
In order to foster competition among states and attract foreign investment, the Centre should nudge states to ease access, minimise compliances, reform land and building norms, and improve power supply and law and order. Better governance is seen as vital for attracting investors.
With the Centre’s capital expenditure reaching the zenith at over 3 per cent of GDP, the Centre is vigorously pursuing the private sector to step up investment and the states to create a conducive environment to attract foreign investment.
Land and building regulations in India have locked up substantial factory land and restricted the ability of enterprises to allocate capital to the most productive use. Changes in land and building regulations can lead to a significant reduction in cost of doing business and an increase in job opportunities.
Similarly, modernisation of land records and land parcel-based property cards would also reduce litigation.
It is estimated that a standalone factory loses approximately 50 per cent of its land to building standards like setbacks, ground coverage and parking requirements. Generally, a factory building in different states cannot cover more than 40 to 60 per cent of the plot. Liberalizing building standards for factory plots can help States unlock productive land and enhance job opportunities.
States also need to notify changes to building regulations to increase the base Floor Area Ratio (FAR) for all commercial buildings in municipal and development areas to at least 5 and increase the base FAR for all commercial buildings in Central Business Districts and transit-oriented development corridors to 5+2.
States would also be incentivised to carry out some of these reforms under relevant schemes.
The four labour codes are a judicious combination of reforms aimed at easing labour market rigidities, and reinforcing workers’ rights and welfare. Hence, the long-delayed roll-out of the four codes passed by Parliament in 2019 and 2020, should see the light of the day before it is too late.
As many as 44 labour laws were consolidated into the four codes with the objective of reinforcing trade and investment, facilitating ease of doing business and easing compliance. Several minor offences were decriminalised via the codes, while skill development and dispute resolution have been accorded due priority.
While 25 out of the country’s 28 states and all eight union territories have finalised the draft rules under these laws, the remaining states should join this as soon as possible. With the global uncertainties and supply chain disruptions, Indian industry can’t remain a mute spectator. They should be facilitated to invest more to take advantage of the situation to be a reliable partner in the global supply chain.
In what could be a good omen, the states have taken the cue from the Centre. In just the first three months, December 2024 to February 2025, eight states including Rajasthan, Karnataka, West Bengal, Kerala and Assam have organised mega investor summits and witnessed aggregate investment proposals worth a staggering Rs 100 lakh crore.
Such events are nothing new, but the size and pomp have grown manifold in recent years.
What is remarkable about the latest season is the heightened focus on newer areas of manufacturing like solar modules, wind turbines, hydrogen electrolysers, lithium ion storage and semiconductor wafers. The start-up ecosystem is being given a big push, and patient capital is wooed as vigorously as the global tech giants and domestic conglomerates.
Besides, the states have also become more responsible, as is evident from the fact that the assorted incentives being offered to investors are less of fiscal nature. Instead, easier approvals are being offered, with the promise of a cordial frontline bureaucracy. Commitments are being made to make land and skilled manpower available.
Interestingly, traditional manufacturing states are being given a tough competition by the states with largely consumption-driven or services-dominated ones.
Odisha, a mineral-rich and agrarian state, got investment intent of Rs 12.89 lakh crore, which is 1.4 times its economy after its Utkarsh Odisha conclave in January. Most of it in its emerging manufacturing sector.
Similarly, Madhya Pradesh’s global investors’ summit saw investment pledges worth Rs 26.61 lakh crore, double the size of the state’s gross domestic product (GDP).
Competition among states to attract investment to become a developed nation. India will have to aim to become a leading global economy, a driver of global economic growth, a magnet of global talent, trade and capital.
While the focus always has been on the Centre’s policies, it is time to take along policies of the states in equal measure for shared prosperity and growth.