Indian State Competitiveness Studies – 2004 Analysis

State Competitiveness Studies

Experimental studies on competitiveness of Indian states have been pioneered by National Productivity Council (NPC) as early as in 1992 when fifteen major Indian states were ranked by it based on their performance in Human Development (HDI) (Productivity 1992 a). The four variables considered while ranking the states were life expectancy, literacy rate, per capita state domestic product (SDP) and population below poverty line. The study ranked Punjab at the top in terms of HDI followed by Kerala and Haryana. NPC followed this study with yet another study on the competitiveness of Indian States based on Infrastructure Development Index (IDI) (Productivity 1992 b).� In this study also NPC considered the same list of fifteen major states for ranking purposes. Six variables related to infrastructure were taken in to account viz. road length, navigable waterways, railway route length, tele-density, electricity consumption and number of commercial bank branches. Based IDI Punjab was ranked at number one followed by Gujarat and Haryana. Bihar ranked last in both the studies.

In its third study (National Productivity Council 1994) a state level Competitiveness Index was developed by the NPC covering a total of eleven variables including all those already considered in the HDI and IDI studies. The additional factors covered by the Competitiveness Index were the man days lost, political stability and state government taxes. Here again the UNDP’s methodology had been followed in order to construct the Competitiveness Index for ranking the states. Punjab emerged as the most competitive Indian state followed by Kerala and Haryana. As in the case of earlier studies Bihar emerged as the lowest in terms of competitiveness. �

In 1995, Business Today (BT), June 7- 21, carried out a survey on competitive advantage of Indian states. The main objective of the BT survey was three-fold viz. (i) identify, in order of importance, the parameters used by the corporate locating their projects (ii) rate the states on each of these parameters and (iii) combine the ratings into a composite rank for each state. In 1997, the BT (Dec 22, 1997 -Jan 6, 1998) conducted a second survey on best states to invest in. Besides relying purely on perceptions, an objective index was also constructed, which was used to rank 26 Indian states. The objective index was arrived at based on 28 parameters belonging to four broad categories viz. physical infrastructure (18 parameters), government (3 parameters), labour (4 parameters) and social infrastructure (3 parameters). A state was thus evaluated on two dimensions viz. objective score, which comprised 28 parameters and a survey or perception score consisting of 19 parameters. To obtain a summary statistic for the state these two scores were averaged. BT’s third study in the series published in 1999 (December 22, 1999 to January 6, 2000) introduced a marketing index besides the objective and the perception (survey) indices. The weights assigned to various factors while computing the objective rank of the states are as follows: physical infrastructure – 40%, quality of governance – 30%, financial infrastructure, labour and social infrastructure 10% each. The overall rank of a state was arrived at by averaging the scores in three different factors (objective, perception and marketing) with the objective score receiving 40% weight. The subjective score also received 40% weight while the marketing score was given a 20% weight. Maharashtra topped the list followed by Gujarat, Delhi, Tamil Nadu etc.

National Council of Applied Economic Research ( 2000) undertook a study to find out the policy competitiveness of Indian states in attracting direct investment and the effects of this competition on economic development. The study found infrastructure as the most critical variable influencing the investors’ decisions as compared to incentives offered by the state governments.

In 2000 Confederation of Indian Industries (CII) commissioned the Rajiv Gandhi Institute for Contemporary Studies (RGICS) to carry out a detailed study on the performance of the Indian states. The study was based on a detailed analysis of the physical, legal and capital market infrastructure as well as the level of human resource development in each state. Other factors included by the study are: economic and financial performance of the state, investment climate, labor force, law & order and consumer demographics. Based on the state’s performance in terms of these criteria, an overall ranking was worked out using Principal Components Analysis. The study covered 18 states of India. Delhi was rated the best performing state, followed by Goa (2nd rank), Kerala (3rd rank), Punjab (4th rank) and Maharashtra (5th rank). Bihar was once again at the bottom of the list.

In 2003 India Today (May 19) carried out a study to rank 19 Indian states according to what it called ‘to live and work in’. The study noted that small states enjoyed inherent advantages over their big brother counterparts. Goa was found as the number one Indian state with Delhi and Punjab in second and third positions respectively.� Bigger states like Madhya Pradesh and UP received lower ranks of 17 and 15 respectively.

In their recent study on the state competitiveness by the India Today 2004 (August 16), 35 Indian States and Union Territories have been considered in three different categories such as Big States (20), Small States (10) and Union Territories (5). The bigger states are identified as the ones having more than 35000 sq.kms and with a population of over five million.� Among the bigger states Punjab was ranked first, while Kerala got second rank and Himachal Pradesh got third rank while Bihar was ranked the last. Among the smaller states category Pondicherry was ranked first followed by Delhi while Meghalaya got the last rank. Among the Union Territories, Chandigarh was ranked first and Dadar & N.Haveli got the last rank. One major finding of the study is that the smaller states are relatively more competitive as compared to their bigger counter parts. This study considered 49 measures across eight broad macro economic performance parameters. Principal Components Analysis was used to generate weights for each of the measure.

Competitiveness Measurement

Innumerably a large number of micro and macro level aspects govern the competitiveness dynamics of anyone economy. It was found almost impossible to track all of them in a single study especially because of the non-availability of reliable indicators in the case of a developing country like India with inadequate data infrastructure. More so at the disaggregated levels of the states. The present study by the NPC identified about 95 socio-economic and technological criteria through extensive research of economic literature and feedback from the business community, government agencies and academia. The 95 criteria were grouped under the following five competitiveness factors:

1. Economic Strength�� �11 Criteria�� �Macro-economic evaluation of the state economy:
Economy, Investment & Prices
2. Business Efficiency�� �12 Criteria�� �Extent to which enterprises are performing in an innovative, profitable and responsible manner:
Productivity, Labor costs, management practices and entrepreneurial resources
3. Governance�� Quality�� �18 Criteria�� �Extent to which government policies are conducive to competitiveness:
Fiscal Policy and health, transparency and outlook of the government towards business
4. Human Resources�� �32 Criteria�� �Extent to which human resources meet the needs of business:
Quality of manpower, employment scenario and work culture
5. Infrastructure�� �22 Criteria�� �Extent to which basic infrastructure meets the needs of business:
Basic infrastructure – Physical and Social

The study focuses on the impact of interaction by these five factors on the state’s local environment. The methodology assumes that healthy performance in these dimensions creates the environment that sustains the state’s competitiveness.
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The study arrives at the Overall Competitiveness Index of the 29 Indian states based on the respective computed values by taking into account the identified socio-economic and technological criteria. For presentation of the ranks the states are grouped in to two broad categories based on the size of their population: bigger states and smaller states.� In the construction of the competitiveness indices, two types of data are combined. First are the quantitative indicators related to the state’s economy, performance and policies of the state government, efficiency of the business units operating within the state’s borders, characteristic features of the state’s human resources and finally its state of the infrastructure. Referred to as hard data, these are obtained from various published sources at national and local levels. Out of the list of 95 identified criteria (Appendix 1) 75 are based on hard data sources (Appendix 2) to determine the overall ranking. These 75 criteria represent a weight of approximately eighty percent in the overall rankings.

Second, the survey data comes from an opinion survey specifically undertaken for purposes of the present study across all the states in India. The survey was conducted with a view to quantify aspects related to competitiveness for which there is no statistics, or statistics available with significant time lags. A survey schedule that incorporated 20 such aspects relating to competitiveness (Appendix 3) was mailed to about 3000 top and middle level executives from all the sectors, opinion leaders and policy makers in the country. The respondents were solicited to evaluate the prevailing and expected competitiveness conditions in the state in which they resided or operated during the year preceding the survey. The respondents’ assessment of the competitiveness issues was sought on a 6 point scale with response 1 indicating a positive, highest perception and 6 indicating the negative, lowest perception.� Based on the responses the average value for each state was calculated.� The data is then converted from a 1-6 scale to a 1-10 scale. Finally, the survey responses are transformed into their Standard Values, from which the rankings are calculated. In all 172 respondents participated in the opinion survey. Results reflected prevailing views about the conditions in each state and draw on the wealth of the respondents’ experience. The survey data help quantify aspects that otherwise would not have been measurable, but are nonetheless crucial to a state’s competitiveness. Each survey question is treated as separate criterion and used to calculate the rankings. In the overall rankings the survey data represent a weight of one-fifth.

With a view to avoid serious volatility in the case of hard data due to seasonal and cyclical factors we have used the averages of the previous five years values wherever available.� In most of the cases, a higher value is found better. For example, for Gross Domestic Product (GDP) the state with the highest Standard Values is ranked first while the one with the lowest the last. However, in some cases, the lowest value is the most competitive, e.g. Consumer Price Inflation or number of Cognizable Offences. In such cases a reverse ranking is used, the state with the highest Standard Values receiving the last rank and the one with the lowest Standard Values receiving the first.

Standard Value

As the criteria are scaled differently, a comparable standard scale is used to compute the overall factor results. The relative performance of each state in the final rankings is measured through the Standard Deviation Method (SDM). First, for each criterion, we compute the average value for all the states. Then the standard deviation is calculated using the following formula:
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������������������������������������������������� S�� =������ (x – x)
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Finally, we compute each of the 29 states Standard Values (STD) for the 95 ranked criteria by subtracting the average value of each criterion from the state’s original value and then dividing the result by the standard deviation.
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��� Standard Value =�� x – x
������������������������������������� S

Where:
x�� = original value
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x� = average value of for all the states
N = number of states
S = Standard Deviation