Investment Friendliness Index 2026 Explained for UPSC

Why in News?

NITI Aayog has released the report titled “Investment Friendliness Index”, a structured and data-driven framework to assess how effectively States and Union Territories create, enable and sustain an environment conducive to investments. The Index aims to benchmark State-level investment ecosystems, promote reforms, strengthen competitive and cooperative federalism, and support the vision of Viksit Bharat @2047 through stronger Viksit Rajya @2047 pathways.

Background of the Investment Friendliness Index

• During the 9th Governing Council Meeting of NITI Aayog held in July 2024, the Prime Minister tasked NITI Aayog with preparing an Investment-Friendly Charter comprising key policies, programmes and processes required to attract investments.
• Subsequently, the Union Budget 2025–26 announced the development of an Investment Friendliness Index to promote reforms and build a conducive investment ecosystem across States.
• The Index has been designed as a homegrown, evidence-based reform instrument that moves beyond one-time ease-of-doing-business rankings and focuses on continuous improvement in State-level investment conditions.

What is the Investment Friendliness Index?

• The Investment Friendliness Index is a composite assessment tool developed by NITI Aayog to evaluate the investment readiness of all 28 States and 8 Union Territories.
• It examines the quality of the investment ecosystem across policy, institutional, regulatory, infrastructure and sustainability-related parameters.
• The Index seeks to answer a core governance question: How prepared is a State or Union Territory to attract, facilitate and sustain domestic and foreign investment?

It is not merely a ranking exercise. It is designed to:

• Identify strengths of each State and UT
• Highlight reform gaps
• Promote adoption of best practices
• Encourage peer learning
• Support investor confidence
• Strengthen India’s global investment competitiveness

Framework and Methodology

The Investment Friendliness Index has been developed through a rigorous and consultative process involving a review of global and domestic investment benchmarking methodologies.

It uses 84 indicators, combining:

• Secondary data
• Primary investor perception surveys

The Index evaluates investment attractiveness across eight pillars.

This makes the IFI a more comprehensive tool than narrow regulatory rankings because it combines hard infrastructure, governance quality, fiscal strength, investor perception and environmental sustainability.

Key Results and State Categorisation

Based on overall scores, States and Union Territories have been classified into four categories:

Overall Top Performers

The top-performing States in the Investment Friendliness Index are:

1. Gujarat – 56.6
2. Maharashtra – 53.7
3. Tamil Nadu – 53.3
4. Goa – 53.1
5. Odisha – 52.4

In addition, 15 States have been classified as Frontrunners, while eight States/UTs each have been placed in the Emerging Performers and Aspiring States categories.

Peer Group Assessment

Recognising India’s diverse federal structure, the Index also compares States and UTs within peer groups.

Large States

• Gujarat secured the first rank, followed by Maharashtra and Tamil Nadu. These are also the top three performers in the overall Index.

Hilly and North-Eastern States

• Uttarakhand emerged as the highest-ranked State, followed by Assam and Himachal Pradesh.

Union Territories and City States

• Goa secured the top position, followed by Delhi and Chandigarh.
• This peer-group approach allows more meaningful comparison by considering differences in geography, economic scale and administrative capacity.

Why the Investment Friendliness Index Matters

1. Advancing Viksit Bharat @2047

• India aims to become a developed economy by 2047. Achieving this goal will require higher investment rates, deeper industrialisation, innovation, employment generation and stronger private sector participation.
• India’s real GDP grew at an average annual rate of around 6.1% between FY1992 and FY2025, but long-term development ambitions require faster and sustained growth. The investment rate stood at around 29.9% of GDP in FY25, lower than the 40% plus investment rates achieved by economies such as Japan, South Korea and China during their rapid industrialisation phases.
• Thus, investment acceleration is central to the vision of Viksit Bharat @2047.

2. States are Central to Investment Decisions

While the Union Government provides the national policy and macroeconomic framework, actual investment decisions are strongly shaped by State-level conditions.

Investors consider factors such as:

• Availability of industrial land
• Quality of roads, power and digital connectivity
• Regulatory efficiency
• Single-window clearance systems
• Skilled labour availability
• Policy predictability
• Law and order
• Fiscal stability
• Environmental clearance processes

Therefore, stronger State investment ecosystems are essential for India’s competitiveness.

3. Addressing Regional Investment Imbalances

• Investment in India remains regionally concentrated. Nearly 85% of FDI inflows are concentrated in Maharashtra, Karnataka, Gujarat, Delhi and Tamil Nadu, while the North-Eastern States receive less than 1%.
• The difference between the highest score, Gujarat at 56.6, and the lowest score, Lakshadweep at 24.5, reflects deep structural disparities in infrastructure, institutions and economic base.
• The IFI can help weaker States identify gaps and adopt targeted reforms.

4. Moving Beyond Incentive-Based Competition

• Many States compete through fiscal incentives, subsidies and tax concessions. However, the report underlines that investors value transparent, predictable and stable regulatory environments more than incentives alone.
• This makes policy certainty, faster approvals and institutional responsiveness central to investment competitiveness.

Insights from State Profiles

The report provides detailed State Profiles for each State and Union Territory.

These profiles:

• Benchmark States against comparable peers
• Identify key enabling factors
• Highlight weak indicators
• Include investor perception survey insights
• Capture on-ground business experience
• Help policymakers frame targeted reforms
• Enable investors to understand jurisdiction-wise strengths and opportunities

Some important insights include:

Gujarat

• Gujarat leads due to efficient port turnaround times, reliable power supply, strong manufacturing exports and better fiscal indicators. It accounts for around 31% of India’s merchandise exports and had a low fiscal deficit-to-GSDP ratio of 2.81% in FY2024.

Maharashtra

• Maharashtra performs strongly in business climate. It has the highest share of private equity and venture capital investment, around 35% of the national total, and a large number of Atal Tinkering Labs.

Tamil Nadu

• Tamil Nadu performs well in infrastructure and business climate. It is supported by strong export performance and near-100% MoU conversion.

Goa

• Goa performs strongly in resources and regulatory ease among city States and UTs, aided by high spending on skilling and healthcare and a high renewable share in its power mix.

Challenges in Attracting Investments Across States

1. Regional Investment Disparities

• Investment remains concentrated in a few advanced States. States with weaker infrastructure, smaller markets or difficult geography struggle to attract large-scale private investment.

2. Long Approval Timelines

• Investors continue to face delays in approvals, clearances and project permissions. In many cases, the approval process may take several months, affecting investment decisions.

3. Land Access Issues

• Availability of clear, litigation-free and well-connected industrial land remains a key investor concern.

4. Skill Shortages

• Shortage of skilled labour and talent migration affect several States, including Jammu and Kashmir, Chhattisgarh, Rajasthan, Tripura, Nagaland and Uttar Pradesh.

5. Weak Single-Window Systems

• Some States still face weak implementation of digital single-window clearance systems. In Jammu and Kashmir, for example, the digital system is reportedly bypassed, with manual complaint registration continuing despite online provisions.

6. Law and Order Concerns

• Investor confidence can be affected by perceived security issues. In Bihar, safety concerns and limited air connectivity to Tier-II and Tier-III cities have been identified as constraints.

7. Fiscal Stress

• High debt and interest burden reduce the capacity of States to invest in infrastructure and incentives. Bihar’s outstanding liabilities-to-GSDP ratio is nearly 500 basis points above the national average, while Jammu and Kashmir’s gross fiscal deficit is around 9% of GSDP.

8. Digital Infrastructure Gaps

• Weak last-mile digital connectivity affects business operations. Jammu and Kashmir’s 4G/5G penetration remains low, with a Base Transceiver Station density of 0.82 per sq. km.

9. Environmental and Climate Risks

• Industrial clusters in parts of Uttar Pradesh such as Noida, Ghaziabad and Muzaffarnagar face high AQI levels of 200–600 for much of the year. Several States also face flood risks requiring better drainage and water-management systems.

10. Logistics Bottlenecks

• Poor road quality, weak last-mile connectivity, inadequate warehousing and cold-storage infrastructure continue to affect investment. Airport-related constraints are visible in Bihar, Sikkim, Odisha, Chandigarh and Chennai.

11. Slow Incentive Disbursement

• Delays in incentive payments and weak inter-departmental coordination have been highlighted in States such as Andhra Pradesh and Telangana.

Region-Specific Structural Challenges

Hilly and North-Eastern States

Difficult terrain increases the cost of infrastructure development and restricts access to resources. Ladakh recorded one of the lowest overall scores at 27.0.

Large States

Large States face complex administrative structures and intra-State regional disparities, affecting policy implementation efficiency.

Union Territories and City States

Compact geography limits land and natural resource availability, although better urban infrastructure partly offsets this disadvantage.

Measures Needed to Improve Investment Competitiveness

1. Land and Labour Reforms

States should simplify land allotment, improve land banks and strengthen labour flexibility while protecting worker welfare.

2. Genuine Single-Window Clearance

Digital clearance systems under the National Single Window System should be fully integrated. Manual approvals should be reduced, and project approval timelines should move from 6–18 months to around 30–60 days.

3. Targeted Industrial Policies

States should adopt sector-specific policies supported by national initiatives such as the Production Linked Incentive Scheme. Examples include Gujarat’s Semiconductor Policy and Tamil Nadu’s EV Policy.

4. Infrastructure-First Strategy

Industrial growth must be supported through PM Gati Shakti National Master Plan, National Industrial Corridor Development Programme, GIFT City, Samruddhi Corridor and Chennai–Bengaluru Industrial Corridor.

5. Strengthening Business Climate

States should reduce regulatory compliance, simplify approvals, provide grievance redressal and improve investor facilitation.

6. Fiscal Sustainability

States need to reduce debt burdens, diversify revenue sources and create fiscal space for infrastructure and industrial incentives.

7. Bridging Infrastructure Gaps

Power supply should be strengthened through the Revamped Distribution Sector Scheme, digital connectivity through BharatNet, and logistics infrastructure through the PM Gati Shakti framework.

8. Institutional Governance

Policy stability, transparent land allotment, faster environmental clearances and accountable institutions are essential to build investor confidence.

9. Human Capital Development

States must strengthen Skill India Mission, PM Kaushal Vikas Yojana and National Apprenticeship Promotion Scheme to address skilled labour shortages.

10. Climate-Resilient Infrastructure

Investment ecosystems should integrate environmental resilience through National Action Plan on Climate Change and climate-resilient industrial planning.

11. Recurring Benchmarking

The IFI should be institutionalised as a recurring benchmarking tool so that States can track progress over successive editions.

Significance of the Index

Competitive and Cooperative Federalism

The Index encourages States to compete on reform quality while learning from each other’s best practices.

Evidence-Based Policymaking

It provides data-backed insights instead of anecdotal claims about investment climate.

Private Investment Mobilisation

It helps identify reforms needed to attract domestic and foreign private investment.

Regional Balance

It can guide lagging States in improving infrastructure, regulation and institutions.

Investor Confidence

Transparent rankings and State profiles can help investors compare opportunities across jurisdictions.

Viksit Rajya to Viksit Bharat

The Index connects State-level reform performance with the national goal of Viksit Bharat @2047.

Conclusion

The Investment Friendliness Index 2026 marks an important shift from narrow ease-of-doing-business rankings to a broader, continuous and evidence-based reform framework. By assessing States and Union Territories across infrastructure, business climate, resources, policy, regulatory ease, institutional environment, financial health and environmental resilience, it provides a practical roadmap for improving India’s investment ecosystem. Its success will depend on whether States use the Index not merely as a ranking, but as a reform guide to improve investor confidence, reduce regional disparities and accelerate India’s journey towards Viksit Bharat @2047.