Investment Friendliness Index 2026: A New Benchmark For Competitive Federalism In India – IMPRI Impact And Policy Research Institute

Policy Update
Aditya Chavan

Background

India’s ability to sustain high economic growth increasingly depends on its capacity to attract, facilitate and retain investment. While the Union Government sets the broader macroeconomic and policy framework, many of the conditions that actually shape an investor’s decision play out at the State and Union Territory level, infrastructure, regulatory efficiency, institutional capacity, resource availability, financial stability and policy predictability all affect how easy or risky it is to invest in a given jurisdiction. NITI Aayog introduced the Investment Friendliness Index (IFI) 2026 as a framework to assess and benchmark the investment environment across States and Union Territories.

The initiative traces back to the 9th Governing Council Meeting of NITI Aayog in July 2024, where the Prime Minister called for an Investment-Friendly Charter covering the policies, programmes and processes needed to attract investment. The subsequent Union Budget 2025–26 then announced the launch of an Investment Friendliness Index for States, explicitly tying the initiative to the goal of strengthening competitive and cooperative federalism (NITI Aayog, 2025).

NITI Aayog released the first edition of the IFI on 17 July 2026 (NITI Aayog, 2026a). The Index evaluates all 28 States and 8 Union Territories, assessing their readiness to attract, facilitate and sustain investment. Rather than measuring investment inflows alone, the framework looks at the broader ecosystem in which investment decisions get made.

The Index is built around eight pillars, infrastructure, business climate, resources, government policy, regulatory ease, financial health, institutional environment and environmental resilience, comprising 84 indicators in total. These were developed following consultations with 165 stakeholders drawn from industry associations, regulatory bodies, government institutions, multilateral organisations, investment banks, private equity and other relevant sectors (CRISIL, 2026).

The IFI combines publicly available data with investor perceptions, letting the framework capture both measurable conditions and the lived experience of those actually making investment decisions. Scores run on a 100-point scale, after which States and Union Territories are sorted into four categories: Top Performers, Frontrunners, Emerging Performers and Aspiring States (CRISIL, 2026).

The first edition placed Gujarat, Maharashtra, Tamil Nadu, Goa and Odisha among the five Top Performers (CRISIL, 2026). But the Index’s significance goes beyond the ranking itself. NITI Aayog describes the IFI as a strategic reform instrument that lets governments benchmark their performance, spot policy gaps, learn from best practices and pursue continuous institutional improvement (NITI Aayog, 2026b).

This is what makes the IFI relevant to India’s model of competitive federalism. States already compete to attract investment, but a shared benchmarking framework can turn that competition into a mechanism for policy learning. Instead of simply asking which State receives the most investment, the Index pushes policymakers to ask why certain investment ecosystems attract and sustain capital more effectively than others.

The distinction matters. Investment inflows are an outcome, while investment friendliness is about the institutional, infrastructural, regulatory and economic conditions that help produce that outcome. By building a common framework for evaluating those conditions, the IFI tries to shift the conversation away from rankings alone and toward continuous improvement in State-level investment ecosystems.

Functioning and Methodology

The Investment Friendliness Index is designed to assess the investment ecosystem of States and Union Territories, not investment inflows on their own. Its methodology blends quantitative indicators with investor perceptions to capture both measurable economic conditions and how businesses actually experience operating within a jurisdiction. NITI Aayog describes the framework as a data-driven mechanism for gauging how effectively States enable, attract and sustain investment (NITI Aayog, 2026a).

The Index evaluates jurisdictions across eight pillars, Infrastructure, Business Climate, Resources, Government Policy, Regulatory Ease, Institutional Environment, Financial Health and Environmental Resilience, spanning 84 indicators in total. That range lets the assessment cover physical infrastructure, regulatory conditions, institutional capacity, fiscal health and the broader factors that shape investment decisions (CRISIL, 2026).

A defining feature of the framework is how it combines secondary data with perception-based measures. Rather than relying solely on administrative statistics, the Index also draws on information gathered directly from investors, capturing dimensions of the investment environment that conventional economic indicators may miss, including how investors actually experience regulatory and institutional conditions on the ground.

The framework took shape through an extensive consultation process involving central ministries, State Governments, industry associations, multilateral institutions, regulatory bodies, investors, financial institutions, consulting organisations, export promotion councils and subject-matter experts. NITI Aayog states that these consultations were meant to ensure the indicators reflected both policy intent and the practical experience of investors across sectors and regions (NITI Aayog, 2026a).

The Index also takes a comparative approach. Rather than assuming every State and Union Territory operates under identical economic and structural conditions, the framework lets jurisdictions benchmark themselves against relevant peers. The resulting classification, Top Performers, Frontrunners, Emerging Performers and Aspiring States, gives a more structured read on each jurisdiction’s relative investment ecosystem.

This methodology gives the IFI a purpose beyond ranking. NITI Aayog intends the Index to work as a reform and benchmarking instrument, helping governments spot where improvement is needed, learn from better-performing peers and prioritise reforms. For investors, it’s meant to offer a comparable reference point for weighing the strengths and gaps of different jurisdictions.

 Table 1. Investment Friendliness Index 2026: Key Features

(Source: CRISIL. (2026). Investment Friendliness Index 2026. NITI Aayog.)

Key Findings and What the Index Reveals

The first edition of the Investment Friendliness Index paints a more differentiated picture of India’s State-level investment landscape than a simple split between “investment-friendly” and “investment-unfriendly” jurisdictions would suggest. Based on composite scores, States and Union Territories fall into four categories: Top Performers, Frontrunners, Emerging Performers and Aspiring States, giving policymakers a basis for benchmarking against peers and identifying where to improve.

The Top Performer category comprises Goa, Gujarat, Maharashtra, Odisha and Tamil Nadu (CRISIL, 2026). Their presence at the top reflects consistently strong performance across the Index’s dimensions. Notably, the composition of this group also shows that investment attractiveness isn’t confined to one geographical region or economic model, the five States differ substantially in size, economic structure and resource base, yet each has built an investment ecosystem that performs well across the assessment framework.

Figure 1. Investment Friendliness Index 2026: Top 10 States/UTs

(Source: CRISIL (2026), Investment Friendliness Index 2026, NITI Aayog.)

The remaining States and Union Territories are spread across the other three categories, which gives a more nuanced sense of relative performance. The report also includes individual State profiles identifying strengths and areas needing improvement, which lets the Index function as more than a league table, these profiles are meant to help governments pinpoint targeted reform priorities and benchmark themselves against relevant peers.

That matters a great deal for the idea of competitive federalism. Competition between States becomes more productive once it comes with information about what’s actually driving better performance. A State ranked below a peer can look at that peer’s performance on infrastructure, regulatory ease, institutional environment or another pillar and identify reforms it might be able to adapt.

That said, the Index shouldn’t be read as establishing a direct causal link between a State’s IFI score and how much investment it actually receives. What the Index measures is the conditions and ecosystem surrounding investment; actual investment decisions are shaped by additional factors like sector-specific opportunities, market size, geography, firm strategy and global economic conditions. The IFI is better understood as a benchmark for investment readiness and institutional conditions than as a predictor of investment inflows.

The Index’s broader significance lies in its attempt to make State-level reform more measurable and comparable. By setting up a common framework, NITI Aayog can nudge States away from broad claims about being “investment friendly” and toward demonstrating concrete improvements in specific areas of policy and institutional performance. The Index is explicitly meant to support continuous reform, peer learning and the spread of best practices across jurisdictions.

Competitive Federalism and Policy Significance

The Investment Friendliness Index has the potential to deepen competitive federalism by giving States and Union Territories a shared framework for assessing their investment ecosystems. Rather than competing mainly on headline investment announcements or fiscal incentives, States are pushed to compete on the quality of the underlying conditions investors actually encounter.

One clear advantage here is benchmarking. States can see where they’re doing well and where they lag behind comparable jurisdictions, which opens room for peer learning, successful reforms in one State can be studied and adapted elsewhere instead of being reinvented from scratch. NITI Aayog’s State profiles are especially useful here, since they offer a more detailed picture of individual strengths and gaps.

The Index can also help shift the terms of competition, from competing for investment to competing through better governance. States may increasingly focus on improving infrastructure, cutting regulatory friction, strengthening institutions and building predictable policy environments. Reforms like these tend to benefit the broader business environment, not just investment inflows.

At the same time, the Index reinforces the Centre’s role as a facilitator rather than simply a regulator of State-level investment competition. By producing comparable evidence across jurisdictions, NITI Aayog can flag common bottlenecks and identify where States might need institutional or technical support, consistent with the broader idea of cooperative federalism, where the Centre and States work together even as States retain the incentive to improve on their own.

Rankings alone, though, cannot guarantee better investment outcomes. States differ considerably in geography, natural-resource endowments, industrial structure, market access and administrative capacity, so a lower-ranked State may face structural constraints that can’t be solved just by copying a higher-ranked State’s policies. The Index is best treated as a diagnostic and benchmarking tool, not a verdict on a State’s overall economic performance.

The real test for the IFI will be whether it drives sustained reform between editions. If States use their results to identify weaknesses, learn from peers and make measurable improvements, the Index could become a genuinely important instrument of competitive federalism. If it ends up as just an annual ranking, though, much of its policy value will be lost.

Emerging Issues

The Investment Friendliness Index gives States a common benchmark for their investment ecosystems, but how useful it proves to be will depend on how its results are read and acted on. A few challenges need to be worked through before the Index can become a reliable long-term instrument of competitive federalism.

1. Composite Scores May Conceal State-Level Differences

A single composite score makes comparison easy, but States differ significantly in economic structure, geography, resource endowments and development level, so one State’s investment constraints can look very different from another’s. A lower overall score doesn’t necessarily mean poor governance across every dimension, just as a high score doesn’t mean every part of a State’s investment ecosystem is equally strong.

The Index will be more useful, then, when policymakers look at individual pillars and indicators alongside the overall score, rather than treating the ranking as a complete verdict on investment attractiveness.

2. Balancing Objective Indicators and Investor Perceptions

Including investor perceptions is a strength, since administrative data can’t capture every dimension of the business environment. But perceptions can also be shaped by recent experiences, expectations or sector-specific interests, two investors in different sectors might rate the same regulatory environment quite differently.

Striking the right balance between measurable indicators and stakeholder perceptions will matter for keeping the Index credible and comparable across future editions.

3. Risk of Optimising for the Ranking

A benchmark can create incentives to improve, but it can just as easily create incentives to optimise for the metric itself. States might end up focusing disproportionately on indicators that move their ranking, while overlooking reforms that are harder to measure but matter more in the long run.

The Index should stay a tool for diagnosis and reform, not become an end in itself.

4. From Investment Friendliness to Actual Investment

Perhaps the most important limitation is that investment friendliness doesn’t automatically translate into investment. Actual investment decisions are also shaped by market size, global economic conditions, sectoral opportunities, firm-specific strategy and geography.

The IFI should accordingly be read as a measure of the enabling environment for investment, not a direct predictor of future investment inflows.

Way Forward

The Investment Friendliness Index can become a meaningful instrument of competitive federalism if its rankings translate into sustained, inclusive reform rather than becoming an end in themselves.

First, States facing persistent geographical, climatic or resource constraints should get targeted policy support to strengthen their investment ecosystems. Differences in natural-resource availability, exposure to natural calamities and other structural factors can all affect a State’s ability to attract investment; infrastructure assistance, capacity building and well-designed incentives can help ensure competitive federalism doesn’t penalise States for constraints outside their control.

Second, the focus should stay on effective, inclusive reform rather than chasing rankings for their own sake. A higher position in the Index should be a consequence of better governance, infrastructure and institutional performance, not the goal itself. Periodic assessments should check whether rising scores are actually translating into a better investment environment on the ground.

Third, the Index should strengthen its investor-feedback component. Regular engagement with investors can help policymakers understand shifting expectations, spot regulatory bottlenecks and identify sectors where investment opportunities remain underdeveloped, making the Index more responsive to changing conditions over time.

Finally, States could consider targeted, fiscally sustainable incentives to draw investment into emerging or underdeveloped sectors. Rather than leaning on broad-based tax concessions, incentives could be tied to measurable outcomes such as investment generation, employment, technology adoption and sectoral diversification, letting States attract investment without triggering an unsustainable race on concessions.

In the end, the value of the Investment Friendliness Index won’t come down to which State tops the list, but to whether the benchmarking process drives better governance, wider investment opportunities and continuous improvement across States and Union Territories. Used that way, the IFI can grow from a ranking exercise into a lasting instrument of India’s competitive and cooperative federalism.

References

CRISIL. (2026, July 3). Investment friendliness index 2026. NITI Aayog. https://www.niti.gov.in/sites/default/files/2026-07/Investment-Friendliness-Index.pdf

Ministry Of Finance, Government Of India. (2025). Economic Survey 2024–25. Ministry Of Finance ,Government of India.  https://www.indiabudget.gov.in/economicsurvey/

NITI Aayog. (2026a, July 17). Investment Friendliness Index 2026. Government of India. https://www.niti.gov.in/whats-new/investment-friendliness-index-2026

NITI Aayog. (2026b, July 17). NITI Aayog released a report on “Investment Friendliness Index”. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2285847&lang=2&reg=48

About the Contributor

Aditya Chavan is an Economics undergraduate student at Symbiosis School of Economics, Pune, with research interests spanning public policy, MSME development, financial inclusion, and economic governance. His work focuses on analysing government policies and institutional reforms aimed at fostering inclusive and sustainable economic development.

Acknowledgement

The author is grateful to IMPRI – Impact and Policy Research Institute for the opportunity to prepare this policy update, and acknowledges the guidance and feedback received during the review process, which helped strengthen the quality of this article.

Disclaimer

The views expressed in this article are solely those of the author and do not necessarily reflect the views of IMPRI or any affiliated institution.

Reviewers:  Arya Gupta and Nivedya Murali

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