EMERGING MARKETS

You Don’t Need an “India Strategy” — You

Need a Strategy for Each State in India
 Pratima Singh
December 15, 2017
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The Indian economy has long been an attractive investment destination for multinational
corporations. Already a large domestic market, Frontier Strategy Group’s estimates suggest
the country will average growth rates between 7.4% and 7.6% over the next three years.

However, India remains a difficult market for multinational firms to enter. My conversations
with executives, particularly those from western multinationals, often focus on the high cost
and difficulty of doing business in India as one of the biggest disincentives for them to invest
in the country.

In one illustration of these difficulties, consider that India currently ranks 100 out of 190
countries in the World Bank’s Ease of Doing Business rankings, 22 places behind China, 39
places behind Indonesia, and just nine places above Papua New Guinea. The country’s
ranking in dealing with construction permits (181) and enforcing contracts (164) is
particularly bad.

The main reason for the poor performance is a complex and unpredictable regulatory
landscape. Inconsistent policymaking and subjective interpretations of legislation on the
ground are major obstacles to business. Moreover, regulations can change from state to state,
just as they do in other large nations.

If multinationals want to succeed in India, they need to understand the country’s individual
states and their business environments in a lot more detail. Most companies, including the
ones mentioned above, approach India as one market when they should be thinking of the
different states as individual markets. After all, what works in Gujarat will not necessarily
work in West Bengal.
India is a large, fragmented, and heterogeneous market. Within the country, there are large
— and often underestimated — regional differences in language, culture, talent,
infrastructure, and wealth, all of which lead to wide variations in business landscapes.

Indian states are often compared to individual countries. For instance, India’s most populous
state, Uttar Pradesh, has a population equal to that of Brazil, and India’s most prosperous
state, Maharashtra, has an economy roughly the size of Iraq’s.

Cultural variations are important. Other than the well-documented differences in language
and development, demographic differences are also significant. For instance, South India is
older, with higher spending capabilities and a more skilled population, while North India is
younger and relatively poor. North Indians prefer speaking in Hindi, while South Indians
prefer communicating in English or their respective state language. These cultural
differences have a significant impact on multinationals’ talent and organizational decisions.
India’s federal structure also leaves certain key policy decisions to the states. Policies relating
to infrastructure development, land and labor, healthcare, and transport fall under the
purview of the states—as do most licensing and permitting.
This decentralized policymaking, as well as differing priorities among state governments—
from rural development to improving infrastructure to attracting investment—have resulted
in wide variations in the business landscape across Indian states.

For instance, a recent survey of more than 3,000 Indian companies, by government think
tank NITI Aayog, reports that it takes an average of 156 days to get land allotted from the
government in India. However, companies in Himachal Pradesh report that it takes 28 days
for them, while those in Chhattisgarh take 213 days. Similarly, the time it takes to get an
electricity connection varies. Firms across the country report it takes 52 days on average to
get an electricity connection; but if you break it down by state, it takes 31 days in Karnataka,
32 days in Gujarat, and 95 days in Odisha.

We expect state policy to become even more prominent in determining the overall
investment potential of the country. Competitive federalism—an approach used by the
central government to encourage states to compete for investments based on economic
policy and ease of procedures—is fast gaining traction. The central government is devolving
power to state governments, encouraging them to make their own economic policies.

Aside from understanding how India’s states differ, companies must also create a well-
thought-out plan for allocating resources across states. Most firms find it difficult to
effectively compare markets and develop a structured prioritization process. Based on our
experience of working with numerous companies operating in India across different
industries, we find that a simple yet powerful four-step framework helps companies
effectively prioritize markets in the country:

Step 1: Measure risk-adjusted opportunity

We recommend companies first measure the risk-adjusted opportunity in each state by

analyzing leading indicators of the market’s size, growth, industry clusters, and stability.
(Industry cluster metrics measure the size of the pool of potential customers for B2B or B2C
companies, and market stability metrics measure institutional, business, and social stability.)
Example indicators include size (population, for instance, or state gross domestic product),
expected growth, industry clusters, and market stability (including factors from workplace
injury rates to crime).

This first step allows companies to measure not only the potential in a market (size, growth,
and industry clusters) but also the associated risk (market stability). This is important to get
an assessment of the realistic potential of a state.

Step 2: Measure operating environment

Companies should measure the operating environment of each state by analyzing indicators
related to infrastructure, talent, finance, and the business and tax environment. This data is
publicly available on each state’s website. Example indicators include infrastructure (such as
the number of major ports), access to talent (the number of people enrolled in higher
education), access to finance, and the business and tax environment and the ease of doing
business.

The business and operating environment varies remarkably across states. Focusing on those
that have a strong operating environment — for instance, a high ease of doing business score
(Andhra Pradesh) or well-developed infrastructure (Gujarat) — can help multinationals
lower the cost of doing business in the country.

Step 3: Evaluate results

If you plot the risk-adjusted opportunity and operating environment of the different states
on a graph, you can clearly see which states offer the highest return on investment and
represent the greatest opportunity for business. States in the top right corner represent the
largest opportunity and the strongest operating environment, while those in lower left
corner represent small opportunity and a weak operating environment. Companies should
focus on states in the top right corner. These provide the largest opportunity and the
strongest operating environment, increasing the return on companies’ investment.

Here is an example of how this graph might look, based on the analysis done by our company
using the measures above to determine each Indian state’s opportunity and operating
environment. While this may vary according to what individual companies are most
interested in measuring, this is how we have categorized the states, and this is what most
companies would likely find.
Step 4: Prioritize states

Multinationals need to align their India focus and strategy to the outcome. Companies can do
this by categorizing the states into four groups in order of priority.

The first group of states—those with high opportunity and a strong operating
environment—are category 1 states where multinationals should focus on enhancing
performance. Most MNCs already have a presence in these states and executives should
undertake a strategic approach to improving operations and capturing opportunity in these
high performing states. For many companies, category 1 states include Maharashtra, Gujarat,
Delhi, Tamil Nadu, and Karnataka. We recommend examining areas of geographical
expansion within the states and conducting internal reviews to identify areas of operational
inefficiencies.

The second category of states – those with moderate opportunity and a good regulatory
environment – are states in which companies should consider expanding their
presence. There are benefits in expanding to states that are geographically close to category
1 states, so we suggest a ‘hubbing’ strategy for expansion, i.e. executives should prioritize
expanding to category 2 states that are relatively close to the high performing states to
capitalize on cultural similarities and capture economies of scale.

The third category of states – those with moderate opportunity but a weak regulatory
environment – are those where executives should monitor growth rates and explore
potential as the state governments continue to improve the regulatory environment by
implementing reform. Examining details of various policy initiatives aimed at attracting
investment is critical for companies to determine the right time to enter these markets.
Several central and eastern states fall into this category.

And finally, the fourth category – those with small risk-adjusted opportunity and a weak
operating environment – are likely to be costly investment destinations for multinationals
with low returns. Executives should deprioritize these states.

Often considered a country of countries, India can be a difficult yet rewarding market for
multinationals. Companies that have a structured approach to prioritize India’s states can
navigate the complex market effectively and make strategic decisions backed by quantitative
insights. This approach also helps executives prioritize those states that are business-
friendly, thereby lowering their operating costs and helping them get the highest return on
their investment. Adopting a state-wise approach is key to getting it right in India.

Editors’ note: Every ranking or index is just one way to analyze and compare companies or
places, based on a specific methodology and data set. At HBR, we believe that a well-designed
index can provide useful insights, even though by definition it is a snapshot of a bigger picture.
We always urge you to read the methodology carefully.