Only a handful of India's 28 states are powering the country's high rates of economic growth and these offer investors some of the worst regulatory environments, a study by an Oxford-based research company has shown.
Tamil Nadu, Karnataka, Maharashtra, Delhi and Gujarat came out top in a ranking of the most attractive Indian states for foreign companies by Oxford Analytica, a consulting firm that draws on the academic expertise of leading universities.
In spite of their success in attracting foreign investment, these states also emerged as some of the costliest places to do business, with choked legal systems, high taxes and power shortages.
"The cost of land and labour, particularly skilled labour, is considerably higher than in the rest of India. States with extensive business operations, such as Gujarat, Delhi and Maharashtra, have the most backlogged courts in the country," the study said.
Maharashtra, home of Mumbai, India's financial capital, recorded the worst score for its regulatory environment.
"When it comes to setting up a new business, clearly it's not the most friendly place," said Daniel Russell, Oxford Analytica's project manager.
The study, called "India Deconstructed" and measuring the performance of 28 states and two union territories, showed the clear advantage of the industrialised, export-orientated southern and western states.
While the top five industrialised states propelled the economy, more numerous rural states were seeing scant benefit from India's growing prosperity.
The study's authors expressed concern about a vast rural hinterland characterised by low income, low growth and little investment. Most of India's 1.2bn population lives in the countryside and derives its livelihood from the land.
"India's economic development is being driven by a handful of the large industrial states, with the benefits being slow to filter through to the rural states," they said.
Reaching economic growth rates of 9 per cent had been one of the ruling Congress party's greatest achievements before the global financial crisis scythed it down to about 6 per cent this year. But the country's policymakers are worried about growing inequalities across the country between the booming urban centres and the tens of millions of rural poor.
A state such as Bihar, with a population of 90m people, mostly employed in an agrarian economy, has seen almost no large private-sector investments over the past five years and suffers some of the worst social and health indicators in the world.
Manmohan Singh, India's prime minister, and his new finance minister Pranab Mukherjee, have both been careful to prioritise "inclusive growth" alongside proposed economic reforms to modernise the economy, eagerly awaited by foreign investors.
India's southernmost state, Tamil Nadu, emerged at the top of Oxford Analytica's ranking as the best place to do business for a foreign company.
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