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22 November, 2021

The secrets of Gujarat’s success

The past decade has seen Gujarat rise to become India’s leading state for FDI, thanks to its tech prowess and pro-business policy policies.

By Sebastian Shehadi

The state of Gujarat, located along India’s north-western coast, has been careering its way into major economic headlines for the better part of half a decade. Most of these headlines have been very positive. Several months ago, for example, the state was crowned as India’s top spot for foreign direct investment (FDI) for the fourth consecutive year. 

More specifically, in the 2020 to 2021 financial year, the state received a grand total of $30bn in FDI, thereby accounting for an impressive 37% of all FDI to India in that time period (followed by Maharashtra with 27% and Karnataka with 13%). 

Gujarat’s continued ability to lure foreign investors, even during Covid-19, is remarkable. Though India’s overall FDI figures in this time have been healthy, Gujarat has very much been the driving force behind this good news story. Indeed, despite the impact of the pandemic, 2020 saw India attract its highest ever inflow of FDI, valued at $64bn, according to data from the UN Conference on Trade and Development. Meanwhile, global FDI flows dropped by 42% in 2020

Gujarat builds on its natural advantages

Gujarat has made the most of the advantages that it holds. For one, it has an extensive coastline, making it a strategic export location. It is also closely connected to Delhi by road, and next-door neighbour with the thriving economy of Maharashtra, India’s most industrialised state. 

The past few decades have seen the creation of a sea of transportation infrastructure across Gujarat. Today, the state has 42 ports, including the major port of Kandla, as well as 17 operational airports, including one international airport. The number and quality of these facilities left Gujarat ranked first for logistics in India in the 2019 National Logistics Index, and then first in India for in the Export Preparedness Index 2020.

But the state is still hungry for a host of other infrastructure projects, as shown by the Indian government’s impressive FDI database that gives detailed information about all investment opportunities across the country, updated daily. Of the 932 projects currently listed across Gujarat, 228 (valued at $41bn) are needed for transportation, mainly in the form of roads, bridges and railway. This is by far Gujarat’s most in demand sector in the FDI database. 

Through the state’s already extensive network and nodes, Gujarat exports two of its key commodities: crude oil and natural gas. After all, it houses about 20% of India’s total estimated crude oil reserves, and is the second largest producer of the hydrocarbon in the country. Meanwhile in Jamnagar, one of the state’s key cities, sits the world’s largest petroleum refining hub. 

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Riding the wave of Gujarat’s enviable export environment is an impressive automobile cluster. The past decade has witnessed the rapid growth of this hub, with an emphasis on electric vehicles in more recent years (India’s pioneer in that department). 

“Thanks to Gujarat’s good port network and improved infrastructure facilities, large automotive companies such as Maruti and Tata moved in,” says Nitin Potdar, a mergers and acquisitions lawyer with JSA, a Mumbai-based practice, and author of the recently published book GPS Paradigm. “Maruti made a very critical investment some six years back, moving in from Delhi, and that has really attracted a lot of ancillary automobile companies who support it. Tata did a similar thing from Bengal.”

Subsequently, Gujarat attracted a slew of foreign automakers, such as Suzuki, Honda, Ford and MG. The region also manufacturers auto components, accounting for 9% of India’s output of transport equipment. On the other hand, 2017 saw General Motors close down its operations in Gujarat, while in September 2020, Ford announced that it would shut down its 3,000-person plant in the state as part of a wider India exit. Both moves have been a blow for Gujarat, which has made huge efforts to promote automotives. The impact of Covid-19, however, has made it even trickier for some foreign automakers to operate in India’s very competitive domestic car market. 

A growing tech and SME hub for India

Gujarat does not rest on the laurels of its oil and auto industry, boasting levels of economic diversity that speak to its large influx of foreign investment during Covid-19. 

The state accounts for roughly 90% of all diamond cutting and polishing globally, and is one of the world’s leading denim producers. Gujarat is also a key food processing hub (home to Amul, a behemoth in global milk production), as well as one of India’s leading pharmaceutical manufacturers, accounting for 33% of the country’s sector turnover. Lastly, Gujarat’s base metal industries have also taken off, with an emphasis on steel, iron, zinc, copper, aluminium and lithium.

It is, however, the state’s thriving, albeit fairly new, IT and business process management sector that is standing out in 2021. Of the $30bn in FDI inflows that Gujarat welcomed in the last financial year, almost 94% went to the computer hardware and software sector (according to official government statistics). 

Covid has, of course, been a boon for most digital segments, but the state’s success is driven by its 5000-plus small, medium or large companies across the industry. Thanks to a wave of money in recent years, they have attracted 16% of all investments made in India’s IT sector, not least thanks to a marked reduction in red tape for SMEs. 

While all of this is very exciting, Potdar thinks that the economic statistics must be taken with a pinch of salt. “Every prime minister or chief minister of the state will obviously want to exaggerate the numbers,” he says. 

He does understand why Gujarat is proving so popular with investors, however. “For one, Gujarat offers land at a comparatively very cheap price. Secondly, Prime Minister Narendra Modi has set up the Vibrant Summit, a biennial investment summit,” adds Potdar. Although the 2021 edition of the Vibrant Summit was called off because of the pandemic, the state wrote personal letters to the chairmen and CEOs of more than 700 global companies based in over 50 countries, inviting them to invest in Gujarat. 

Modi has also put wind in the sails of Gujarat International Financial Tec-City (Gift City) in Ahmedabad, the country’s first international financial services centre that caters to customers outside the jurisdiction of the domestic economy.

“Gift is a dream project," says Potdar. "It is moving slowly but it is definitely gaining momentum. Give it a decade and Gift City will be the pride of India.”

Modi’s special efforts should not detract from Gujarat’s vibrant and rapid growth. The state has created a very friendly business environment for innovation and investment, one that is commensurate with Gujarat’s natural advantages. From this has emerged a collection of thriving sectors that are likely to keep both the state and the country when it comes to FDI. 

This is the third article in our Indian Cities and Regions of the Future series. Other articles are:

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