26 April 2017
Doing Business with India: Contrasting Business Environments of Eastern and Western States (1)
Western India is the best gateway to this market of 1.3 billion people
- Map: Eastern and Western India
- Chart: Indian States and ASEAN Countries: GDP, GSDP and Population
- Table: Per Capita Income of Selected Indian States, 2014-2015
- Photo: Maharashtra is home to consumers ready for quality imports as these shops in Mumbai attest (1
- Photo: Maharashtra is home to consumers ready for quality imports as these shops in Mumbai attest 2.
- Table: Manufacturing Factors in Selected Indian States
India is a vast federation made up of 29 states and seven union territories, each of which has its own unique socio-economic environment and each of which adopts different sets of governing policies, especially in regard to business and the economy. To examine the trade and investment opportunities in different regions of India, HKTDC Research has visited more than 10 major states across India.
This article attempts to examine the contrasting business environments of eastern and western India. The business opportunities in southern India will be examined in forthcoming articles. The main focus is placed on the two larger western states of Gujarat and Maharashtra, and the two eastern coastal states of Odisha and West Bengal. It is worth noting that West Bengal was once an important global business hub in the period of British colonial rule – the state capital Kolkata was founded as a trading post by the East India Company, which for more than a century accounted for a sizeable share of the world’s trade. The figure below shows the population size and Gross State Domestic Product (GSDP) for the four selected states.
Markets with Different Paces of Economic Development
The figure below shows how the four states compare in terms of population and GSDP size, alongside some ASEAN countries with comparable populations to provide an easy reference. It is worth noting that Maharashtra’s population is greater than that of the Philippines, ASEAN’s second most populous country after Indonesia. If it were a country, Maharashtra would be the 12th most populated in the world and the seventh most populated in Asia, just behind Japan.
Under the British Raj, East India thrived as the country’s most important trade and economic hub, but its economic significance quickly faded after India gained its independence from the UK in 1947. Nowadays East India is regarded as a poorer part of the country. In contrast Western India is far more economically developed. The table below shows the per capita income levels of our selected states – both Maharashtra and Gujarat surpass the national average, whereas West Bengal and Odisha underperform it.
East India Development Hindered by Deep-Rooted Legacy Issues
During our fieldwork in West Bengal, HKTDC Research was repeatedly told that the state’s economic development had stagnated due to decades of state politicking and deep-rooted bureaucracy dating back to the colonial years. The neighbouring state of Odisha, meanwhile, has historically been regarded as economically backward, a perception reflected in part by its low position in the per capita income rankings. The Odisha state government, however, has been more active than West Bengal’s in driving economic reform in recent years. However, some time is needed for the state to further develop.
Western India is the more prosperous region of India. Maharashtra’s per capita income (which is similar to Vietnam’s) is roughly twice that of Odisha (which is similar to that of Cambodia, the lowest among the 10 ASEAN countries). Its state capital Mumbai is modern India’s business and financial hub. It is the leading Indian state in terms of GSDP, accounting for 14% of India’s total GDP. With a per capita state income more than 50% higher than the national average, Maharashtra is home to a large number of middle-class professionals working in IT, financial services and commercial sectors. The numbers of middle-class consumers are also rapidly expanding in fast-developing urban areas such as Navi-Mumbai and Pune, thereby offering huge market potential over the medium term.
Gujarat is another relatively better-off region in India, among the top five Indian states ranked by GSDP size. The state has undergone rapid economic development in the past 15 years, particularly during current Prime Minister Narendra Modi’s tenure as the state’s chief minister from 2001 to 2014. Gujarat is now one of the country’s major industrial states with per capita state income about 50% higher than the national average.
Production Deficit in East India and Traders from Western India
As industries and businesses are comparatively under-developed in West Bengal and Odisha, a considerable shortage of goods and services has arisen. To capitalise on this, many Marathi and Gujarati business people have settled in the eastern states to engage in trade. This has allowed West Bengal in particular to thrive as a key trading outlet in eastern India and the surrounding states, despite the shortage of domestically produced products to meet local demand.
The lower income level of eastern India is also reflected in softer purchasing power. Although there is a large demand for basic items at lower prices consumers in eastern India are not in general able to upgrade to goods in the higher price ranges. For example, a mobile phones distributor based in Kolkata informed HKTDC Research that feature phones  still comprise one-third of the company’s phone sales, while budget smartphones from China such as Gionee and Oppo take up the lion’s share of the smartphone sales market.
Modern retail outlets, including stand-alone brand stores, are uncommon in eastern India, even in relatively well-developed cities like Kolkata. In contrast, large-scale shopping malls selling branded products and quality imports can easily be found in large cities in Western India.
While eastern India may in theory represent a large consumer market, its relative lack of development means that it is a challenging market for foreign retail companies – not just because of its weaker purchasing power, but also because of the difficulties involved in doing business. In contrast, Western India offers foreign businesses better market prospects and greater certainty, as consumers there are ready to embrace imported products of higher quality and more expense than local products.
Lower Factor Costs to Manufacture in Eastern India
Many foreign businesses are eyeing India’s cheap and abundant labour for labour-intensive manufacturing relocation. The table below outlines the costs of key manufacturing factors in our four selected Indian states, alongside Vietnam as a benchmark, as the latter has emerged as an industrial relocation hotspot in South-east Asia.
Being the more developed part of India, manufacturing factor costs in Western India are naturally higher. While Maharashtra can offer some very low land prices within the state, these may not be indicative of the true cost of land useful to manufacturers, as these areas tend to be rather remote with little or backward infrastructure support. Land prices in industrial hubs such as Pune, Navi Mumbai and Thane are at the higher end of the price spectrum, and among the highest in India. Admittedly, it is difficult to truly compare land prices without comparing locations and utility conditions, especially in when ranking them alongside prices for places outside India. Comparing labour wage levels is however more straightforward – and it is clear that in general India offers lower wages than Vietnam.
Generally speaking, the cost of manufacturing in eastern India appears to be lower. Odisha – which was late to realise the importance of creating manufacturing jobs, has and as such has only recently kick-started the promotion of its manufacturing sector – offers good medium-term potential for labour-intensive production. An abundance of cheap land and labour within the state can be tapped by prospective investors, especially over the medium term, and it is expected that the government there will continue to improve the infrastructure and investment environment for foreign companies.
However, in spite of the lower costs for labour, land and utilities costs, eastern India poses many challenges in the short term to manufacturers from overseas countries and other Indian states trying to set up and operate there. The different business environment in each state can be a critical factor (see second part of this article). In short, Western India may still prove to be an easier location for foreign businesses despite the relatively higher costs involved.
Please click to read the second part of this article Doing Business with India: Contrasting Business Environments of Eastern and Western States (2), which is focussed on comparing the respective performances of the states in the Ease of Doing Business reform.
 Unlike the states, which have their own elected governments, union territories in India are generally ruled directly by the country’s central government. The union territories of Puducherry and the National Capital Territory of Delhi, however, have their own elected legislatures and governments.
 Mobile phones which are able to access the internet and store music but do not have the advanced functionality of a smartphone.