Centre Calls On States To Compete And Reform Amid FDI Slowdown

To ignite competition among states for foreign investments, the Centre plans to encourage states to streamline access, cut compliance burdens, reform land and building regulations, and bolster key infrastructure like power supply and law enforcement, writes The Financial Express (FE).

These initiatives are expected to be part of an “investment-friendly charter” currently being developed by NITI Aayog, which will likely rank states on their performance in meeting these criteria.

An official told FE the charter will push states to leverage unique strengths to attract specific companies and ensure that current investors expand their operations locally rather than relocating to other states.

For example, if Tesla enters the Indian manufacturing scene, it may prioritise states where the electric vehicle ecosystem is already thriving.

Last month, Prime Minister Narendra Modi also urged states to adapt their policies to meet global standards if necessary. He noted that states that are proactive in governance and focus on a single-point strategy are more likely to retain investors for the long term.

Additionally, he suggested that states should establish land banks and implement necessary reforms to meet land requirements.

The timing is crucial as foreign direct investment (FDI) inflows to India have dropped from $42 billion in FY23 to $26.5 billion in FY24. The Centre is engaging globally to reverse this trend.

Historically, stringent land and building regulations in India have limited the effective use of factory land, driving up business costs and stifling job creation. Reforming these rules could unlock more productive land and spur employment opportunities.

It is estimated that a standalone factory loses around 50 per cent of its land to standards like setbacks, ground coverage, and parking requirements. In most states, factory buildings can only occupy 40 to 60 per cent of a plot. Liberalising building standards could help states unlock productive land and generate more employment.

Updating building regulations to increase the base floor area ratio (FAR) in commercial and development areas is also encouraged, potentially raising it to at least 5, and even 5+2 in central business districts and transit-oriented zones.

States that embrace these reforms may receive incentives under various government schemes, further fuelling their drive for foreign investment.