Forget more well known cities like Chennai, Coimbatore and Madurai –– it's the really small towns like Namakkal and Kanyakumari that are the most conducive for industry. That's according to the economic environment index (EEI), which has been released by Chennai-based IFMR trust. CNBC-TV18’s Divya Rajagopal reports.

This is perhaps the first attempt of addressing the issue of de-centralization. The Centre for Development Finance, a cell belonging to the IFMR trust, has rated the districts of Tamil Nadu on the basis of governance and in the process, has thrown up some startling surprises. The report says that the three districts with the best economic environment are not the ones that the Tamil Nadu government is going all out to promote. Nilgiris, Namakal and Kanyakumari figure at the top of of Tamil Nadu's EGI index.

The study used a sample size of 3,000 households and 1,500 business units across the state's 28 districts and rates districts based on governance standards that prevail in each.

L Somasundaram, Program Head, IFMR said, “We find lot of within the state, variation in various parameters. So, we thought of looking at the district as focus and measuring the intra state variants in governance."

Social infrastructure, Physical infrastructure, Law and Order, Governance, Business establishment cost, Cost of doing business, and Environment.

Namakal, Kanyakumari and Nagapattinam, which have not figured in the state's list of investment towns, have made it in the top 5.

Madurai, Trichy and Tirunenveili, which are being hard-sold by the government as investment destinations, lag behind in most of the given criteria.

The study funded by the British High Commission is trying to promote the entrepreneurship and strengthen the local governance in the state. But looking at the results it has thrown, experts say Tamil Nadu government might be too skeptical to accept it.