Traditionally, the Union government has had a monopoly over economic diplomacy, which encompasses both structural and relational dimensions. This clear demarcation reflected India’s domestic political dynamics, in which the Central government played a greater role in policymaking and budget allocation. However, greater decentralisation has gradually expanded the role of states in economic diplomacy, particularly through industrial policymaking and business outreach, giving them greater opportunities to engage with foreign players. The growing role of Indian states in economic affairs warrants closer examination of their use of economic diplomacy, particularly in attracting investment and fostering cooperation with Northeast Asian countries.
The Rise of State-Level Economic Diplomacy
Economic diplomacy refers to how governments conduct economic affairs to pursue specific strategic and economic objectives. It has had a long history, particularly since India’s economic liberalisation in the mid-1990s. Since then, many changes have occurred. When it comes to structural economic diplomacy, such as trade negotiations, World Trade Organization (WTO) engagement, Free Trade Agreements (FTAs), and rulemaking, the Union government continues to play a prominent role. However, when it comes to relational economic diplomacy, such as business delegations, ministerial visits, investor summits, and trade fairs, states’ participation has expanded, especially in attracting industries and investment. This trend highlights growing interest among state governments in connecting directly with foreign industries and investors.
This shift has taken place in the context of two broader changes, one international and the other domestic. First, in a more fragmented global economic environment, where pressures on international trade have increased, governments are increasingly competing for investment, technology, and market access, creating space for subnational governments and other non-state actors to play a more prominent role. Second, the need to generate jobs and economic growth has incentivised states to reach out directly to foreign investors and industries. Furthermore, India’s growing attractiveness to foreign businesses has created opportunities for states to attract a larger share of investment and commercial engagement. The Union government has also supported this shift.
The Ministry of External Affairs (MEA) took the first step towards this in 2014, when it created a state division headed by a Joint Secretary. One of the objectives of the division was to ‘attract more overseas investment and expertise.’ This development was driven by the growing divergence between what the Union government promised industries and companies and what states were able to deliver. However, since 2014, many states have leveraged this opportunity to conduct economic diplomacy, presenting their initiatives, policies, and ideas directly to foreign players and investors and making a case for investment in their states.
From Outreach to Investment Competition
Since 2014, Economic Diplomacy has come a long way. What started with facilitating routine state delegation visits, passport issues, political clearances, and state-level tie-ups such as sister cities has now translated into more substantial outcomes. This has happened due to the constant efforts of the states and also the emergence of industrial policy. As a result, economic diplomacy has become comparatively more streamlined and institutionalised, with greater state ownership. However, the extent of state participation varies according to their ambition. Some states, such as Tamil Nadu, Uttar Pradesh, Andhra Pradesh, and Gujarat, have shown greater interest.
Economic diplomacy has become comparatively more streamlined and institutionalised, with greater state ownership.
Economic diplomacy has become more active in recent years as states have become increasingly eager to attract foreign investment, leading more states to join the contest with some instances of healthy competition. This trend is clearly visible in the outreach of Indian states to Northeast Asian countries such as Japan and South Korea.
Nara Lokesh, Minister for Human Resources Development (HRD), Information Technology (IT), and Electronics in the Government of Andhra Pradesh, recently visited South Korea to pitch for investments in his state across sectors such as semiconductors, renewable energy, digital infrastructure, advanced manufacturing, and the electric vehicle industry. During his visit, Lokesh launched Andhra Pradesh External Engagement-Korea (APEX-Korea), a platform to support Korean companies operating or looking to invest in the state. Such steps may seem small, but they go a long way for companies that are new to Indian business culture, bureaucracy, and regulations. These initiatives also help coordinate among different ministries and departments and, in some cases, liaise with the Union Government. Lokesh further proposed Korean-language and cultural centres, skill development academies, and improved air connectivity to promote the state.
Similarly, Tamil Nadu has also taken initiatives to remain competitive and attractive for Korean industries. To this end, Guidance Tamil Nadu—the state investment facilitation agency—announced the opening of a dedicated Korea desk early this year to provide seamless, single-window facilitation support for Korean companies. With the change in government, policy uncertainty became an issue for many investors. To address this, S. Keerthana, Tamil Nadu Minister for Industries, visited South Korea immediately after assuming office, taking forward pending projects and reiterating her government’s commitment. During her visit, she met the Hyundai delegation, assuring them of the state’s steadfast support for the proposed mega shipbuilding project in Thoothukudi, sending a “powerful signal of continuity, confidence and commitment to industry.”
Economic diplomacy has become more active in recent years as states have become increasingly eager to attract foreign investment, leading more states to join the contest with some instances of healthy competition.
In some common sectors, states are also competing to secure major investments from Korea. While Tamil Nadu has already secured Hyundai investment in the shipping sector, Andhra Pradesh continues to attract the micro, small and medium enterprises (MSMEs) associated with it. During his visit, Nara Lokesh met with the Korea Maritime Equipment Association (KOMEA), which comprises 304 enterprises across ship design, marine equipment, ship repair, and shipbuilding, and discussed the upcoming Durgarajapatnam Mega Shipbuilding cluster Project worth INR 30,000 crore with them. This competition has had positive effects, with states becoming more proactive and responsive to foreign investors’ issues. Additionally, it provides foreign investors with more options across Indian states and potentially better investment terms. This healthy competition sets a positive precedent for other states.
Uttar Pradesh (UP) is another example that has risen on the economic diplomacy chart in the last year. Yogi Adityanath, Chief Minister of the State, travelled to Japan in February this year and interacted with the Japanese business delegation. During his visit, he announced special incentives for Japanese industries and businesses, including the 500-acre Japan Industrial City at the Yamuna Expressway Industrial Development Authority (YEIDA) near the airport, with seamless connectivity, logistics, and export facilities. The proposed city aims to provide an integrated industrial environment for the electronics, semiconductor, and data centre industries. Recently, the UP government hosted the UP-Japan Investment Meet, building on the initiatives announced during his visit. The meet was attended by 200 Japanese delegates from industries and businesses. Two projects worth INR 3,191 crore were also announced, with the potential to generate 10,000 jobs.
For states, the rationale for economic diplomacy is not just about attracting investment and industry. It has become manifold—to join the global supply chain, create an industry-ready workforce through skilling and upskilling, absorb technology, and increase research and development (R&D) spending.
UP’s experience shows that the state is more interested in translating big-ticket MoUs into concrete projects than just headlines. It also shows that, for states, the rationale for economic diplomacy is not just about attracting investment and industry. It has become manifold—to join the global supply chain, create an industry-ready workforce through skilling and upskilling, absorb technology, and increase research and development (R&D) spending.
Amid these previous examples, other states have taken a different route in economic diplomacy. Gujarat, for example, has institutionalised economic diplomacy through its Vibrant Gujarat summit, conceptualised in 2003. For instance, in 2024, 34 partner countries participated, including Japan, South Korea, and the UAE. The event serves two specific purposes—attracting sectoral investments and promoting major industrial policies and projects to investors, such as GIFT City and the Dholera Special Investment Region.
Investment Needs More Than Diplomacy
Despite these improvements, challenges persist at the state level. Regulatory, governance, legal, and policy impediments remain widespread. Opaque policymaking continues to undermine investment and trust. Many announced policies still lack a primary source document, creating unnecessary confusion among investors. In terms of policy transparency, Uttar Pradesh, Tamil Nadu and Gujarat have a 100-percent rate of missing policy documents, followed by Andhra Pradesh at 97 percent. Another challenge is the bureaucratisation of the system, which makes the entire process of doing business cumbersome for foreign players. All of these challenges can be addressed by making the system more transparent and responsive and building a more industrialised bureaucracy.
While states engaging in Economic Diplomacy is definitely a welcome development, relying on it alone without undertaking process and structural reforms is like a cosmetic fix.
While states engaging in Economic Diplomacy is definitely a welcome development, relying on it alone without undertaking process and structural reforms is like a cosmetic fix. For states, the primary focus must remain on improving the ease of doing business—making legislation business-friendly, improving connectivity, reducing logistics costs, and providing easy access to land and electricity. For an investor weighing investment options, these things matter more. Therefore, an investor- and business-friendly environment, complemented by focused economic diplomacy, should be the way forward, rather than relying on economic diplomacy to compensate for structural shortcomings.
Abhishek Sharma is an Associate Fellow with the Strategic Studies Programme at the Observer Research Foundation.
The author acknowledges the use of Grammarly for language refinement.
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