Policy Update
R Sonali Devi
Introduction:
India’s largest public policy think tank, Niti Aayog, will be releasing the Investment Friendliness Index in July 2025 in association with the Department for Promotion of Industry and Internal Trade (DPIIT) and the Finance Ministry. Finance Minister Nirmala Sitharaman officially introduced the proposal in the Union Budget for the 2025–2026 fiscal year. In India’s attempt to monitor and promote investment across the nation, this index symbolises an important milestone.In a market that has been evolving swiftly, states have to compete more and more to draw in investors and encourage economic growth. States are striving for improvements in their governance, infrastructure, and overall business climate with the objective to attract investment, generate employment, and accelerate development. As the Indian economy continues to grow and evolve, state governments are beginning to realise just how crucial it is for them to make their municipalities more desirable to both domestic and foreign investors. The objective of this Investment Friendliness Index is to evaluate and compare each state’s capacity to draw investments from corporations. It is designed to evaluate a variety of factors, such as the resources available, policies, creativity, the economic climate, and facilities. In addition to recognising each state’s advantages, the index will also provide an approach for highlighting areas in need of reform. Through the observation and assessment of these parameters, the Investment Friendliness Index will support state governments in making educated decisions to enhance their policies and set up favourable conditions for businesses. Finally, it will motivate states to incorporate the most effective methods and align itself with the broader goals of national economic development through fostering competitiveness among them.
Background:
The index will assess states based on two key dimensions: risk and opportunity. These include several sub-indicators such as infrastructure, business climate, innovation, state government policies, and the resources available. Additionally, it will also consider institutional effectiveness and risks which includes financial, natural, and regulatory concerns into account.
The Investment Friendliness Index is an integral part of the government’s broader initiative aimed at strengthening competitive cooperative federalism. By providing a structure for comparison, it seeks to encourage states to improve their investment climate by taking note of the best practices of states that are functioning effectively. This initiative aligns with the government’s efforts to simplify regulations and encourage states into implementing measures that will facilitate conducting business more conveniently.This is also consistent with other initiatives, such as lending capital to states who execute proposed modifications without paying interest. The index’s launch signals the growing realization that business-friendly policies and regulatory initiatives are essential for India’s economic growth. In addition to facilitating investors in making well-informed decisions, the Investment Friendliness Index will also motivate governments to boost their competitiveness and attract more investment.
Benefits of the Investment Friendliness Index of States initiative:
- Promotes states to foster transparency, streamline rules, and ultimately render the state more desirable to both foreign and domestic investors.
- Increased investments which boost economic growth, increase the generation of jobs, and accelerate regional development are the results of economic expansion and employment creation.
- States strive to make their policies smoother with the goal to draw in cutting-edge businesses and stimulate competitiveness that improves regional economies and their status globally.
- Enables small and medium-sized businesses (SMEs) and improves economic diversification and sustainability through facilitating investments across a variety of industries.
- Encourages more efficient utilisation of resources and improves investor confidence in state programs by establishing ties between the public and private sectors.
Limitations of the Investment Friendliness Index of States initiative:
- Instead of addressing deeper economic issues, states might place an excessive emphasis on ranking advancement, which might result in superficial, short-term improvements instead of long-term sustainable development.
- In the unlikely event if the index fails to particularly address regional needs, states that have currently favourable circumstances might attract even more investment, therefore intensifying regional inequality.
- Unreliable rankings or a focus on aspects that might not accurately represent the actual business environment might arise from the index’s criteria and indicators failing to accurately reflect the complex nature of a state’s investment climate.
- States may relax crucial limitations or implement unrealistic financial incentives to boost rankings, which could be destructive to long-term financial stability, rights for labourers, or preservation of the environment.
- States might adopt interim measures to shore up their index rank or change policies repeatedly, which could eventually destroy investor confidence by establishing an unpredictable and uncertain economic climate.
Way forward:
- The index should take into account an extensive variety of factors, such as social justice, impact on the environment, long-term sustainability, and regional growth. This would stop authorities from concentrating solely on factors that boost their ranking without taking into consideration the overall wellness of their economies and citizens.
- To assure that rural or economically disadvantaged regions benefit from investments, states ought to tailor their investment-friendly policies. Incentives and initiatives customised to specific regions might encourage balanced growth and contribute to decreasing regional inequities.
- Revise the index periodically with credible and transparent data, providing certain that the evaluations are extensive and adequately represent the actual investment market. This will steer states towards substantial improvements and help avoid misleading rankings.
- To establish stable, consistent policies that are profitable to both parties involved, develop a stronger relationship between the public and private sectors. integrating small businesses, entrepreneurs, and civil society under the policy-making process will provide assurance that the demands of all stakeholders are taken into consideration.
Conclusion:
The Investment Friendliness Index will serve as an innovative tool which assists states establish attractive and business-friendly environments. By taking into consideration both risk and opportunity factors, the index will motivate nations to examine their policies, make the necessary modifications, and implement improvements that will enhance their ability to compete. The index will promote a culture of perpetual growth and improvement as states acquire knowledge from other state’s successful models. In the long term, this initiative will have an instrumental part in enabling states to reach their true potential, facilitating sustainable economic growth, and reinforcing the status of India as an attractive investment choice.
References:
- Sitharaman, N. (2025, March 17). Investment Friendliness Index of states to be launched in 2025: FM Sitharaman. The Economic Times. https://economictimes.indiatimes.com/news/economy/policy/investment-friendliness-index-of-states-to-be-launched-in-2025-fm-sitharaman/articleshow/117825486.cms?from=mdr
- Business Standard. (2025, March 2). States’ investment friendliness index to be launched in 2 months: NITI. Business Standard. https://www.business-standard.com/india-news/states-investment-friendliness-index-to-be-launched-in-2-months-niti-125030200264_1.html
- Moneycontrol. (2025, March 2). NITI Aayog to launch investment friendliness index by July: Report. Moneycontrol. https://www.moneycontrol.com/news/india/niti-aayog-to-launch-investment-friendliness-index-by-july-report-12940875.html
About the Contributor
R Sonali Devi is a Research Intern at IMPRI and pursuing her Postgraduate degree in Loyola College, Chennai.
Acknowledgement:
The author expresses sincere gratitude to all those who provided guidance, with special thanks to Dr Arjun Kumar and Ma’am Aasthaba Jadeja.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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