Favourable note on State’s investment scene

K. Venkiteswaran

World Bank study rates Kerala as the second most optimistic State

State average is better in most indicators

Firms suffer losses due to international transport

KOCHI: A just-released World Bank study ranks Kerala, upped only by Karnataka, as the most optimistic State for investment.

While it is not surprising to see Karnataka as one of the States with the best investment climate in India, the ranking of Kerala within the top tier appears a bit unexpected. A closer examination of the data shows that Kerala consistently scores better than average on most objective and perception indicators, although it appears that Kerala manufacturers and retailers perceive their State as having a better business climate than those in the other 15 States (those selected for the study) in almost all categories of perception questions.

Nevertheless perception and objective questions do not contradict themselves in almost all dimensions of the investment climate. Hence, although Kerala appears among the most optimistic Indian States, its high ranking does not appear to be driven solely by their perception rankings.

Kerala performs very well on all the three categories of indicators; infrastructure, institutions and inputs. For both objective and perception measures of infrastructure, Kerala performs better than average. In objective measures only Karnataka and West Bengal perform better than Kerala in all the five indicators.


The analysis shows that infrastructure and institutions remain the main bottlenecks in the country’s private sector development. More specifically, power, transportation, corruption, tax regulations and theft are the major factors explaining the poor business environment in some States. Infrastructure appears to be the single most important constraint, as it is particularly binding on States that show low levels of domestic investment and GDP growth as much as Kerala. Within the perception variables, Kerala performs above average for all indicators as does Karnataka, Andhra Pradesh, Tamil Nadu, and Orissa.


If we compare objective and perception data on the same investment climate dimensions in Kerala, we notice a relative overlap from what the objective and the perception measures indicate. Only in one of the indicators, objective and perception data contradict themselves - transport.

The reason for such apparent contradiction is in the fact that 40 per cent of the firms in Kerala have their own transport - compared to 11 per cent in the rest of India, so they perceive it less of a problem simply because they are not relying on outside transport.

On the other hand, objective data show that firms in Kerala suffer losses due to international transport that are three times higher than the other firms in India. So, in the objective rating Kerala rightly performs worse. On institutions, the picture is the same.

Investment climate

In a number of indicators (e.g. corruption, crime) both perception and objective measures show that Kerala performs much better than average. In conclusion, it seems that firms in Kerala tend to complain less about constraints than in other countries. However, Kerala is not the only State with above average perception on all indicators. Furthermore, the perception and objective data do not contradict themselves. So, it is both perception and objective data that make Kerala second in the ranking.

This study has shown that by building a composite indicator of the investment climate in 16 Indian States, it is possible to identify an order of priority among the most important bottlenecks to a better business climate in India. The analysis of 46 investment climate variables shows that power, transportation, corruption, tax regulations and theft remain the major bottlenecks policymakers need to address in order to improve the business environment in India.

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