June 17, 2011 was a red-letter day at Mahindra World City in Jaipur. Under the beaming gaze of Roop Chand Jain and officials from the special economic zone (SEZ), the commissioner of SEZs for North India cut a ribbon at the gate of the manufacturing zone, addressed the gathering of 100-odd people and formally released a consignment of knitting needles to the waiting courier company representatives. Such fanfare isn’t part of the routine here, but this was a special occasion: it was the first export consignment being sent from a unit in the manufacturing zone of the 3,000-acre private SEZ. “We were the first to export from the Noida SEZ two decades and we’re the first here as well,” says Jain, MD of KnitPro International, which came to the Jaipur SEZ in mid-2010. “High real estate costs prevented us from expanding further in Noida. Besides, this place is closer to NH8 [the national highway that connects Delhi and Mumbai] and, therefore, the port. We were the first manufacturing company here.” Nine months later, the distinction has lost its sheen somewhat: KnitPro is still the only manufacturer operating at the Mahindra SEZ.
If manufacturing is to become a significant contributor to the economy’s finances, it will need more than just investment from the government and private sector — although that will be huge (see: Deep pockets required). Earlier attempts to kickstart manufacturing haven’t really worked and even the SEZ Act of 2005 has met with only limited success — the Mahindra World City example is only one of several. Now, though, there’s a new manufacturing policy that’s more comprehensive in its provisions and even more ambitious in what it aims to achieve. Can the National Manufacturing Policy (NMP) achieve what the SEZ Act could not?
Opening New Doors
Announced in November 2011, the NMP is the government’s most elaborate policy yet for the manufacturing sector. Primarily, it aims for 14% annual growth in manufacturing (from the current 3.9%), which will take the sector’s share in GDP to 25% as well as create 100 million jobs in the sector over the next decade. While skills gaps are proposed to be met through private-public partnerships, the key proposal in the policy is the creation of national investment and manufacturing zones (NIMZs), greenfield industrial townships spread over 5,000 hectares that will offer a host of incentives to boost manufacturing.
Exclusive manufacturing zones aren’t a new thought. Kandla port, which came up in the mid-1960s as an export processing zone, is considered the first SEZ in India, although the SEZs Policy wasn’t announced until 2000 and the eponymous Act took another five years. The idea was admirable: help manufacturing and boost exports by creating exclusive, tax-free and hassle-free enclaves that would generate additional economic activity and employment, promote exports and bring foreign investments into these areas. But it’s not worked out quite as anticipated.
Of the 587 SEZs approved till date, only 154, that is, only a quarter, are operational; the others are notified (that is, they’ve started availing the fiscal benefits), but not operational. Between December 2008 and July 2011, some 33 SEZs denotified and exited, citing reasons such as lack of demand and policy uncertainty. Almost every meeting of the SEZ board of approval, which is headed by the commerce secretary, has at least a couple of developers stepping forward seeking extension of formal approvals or denotification. At the last meeting held on November 29, 2011, close to 20 SEZ developers sought extensions while four wanted to be denotified.
Aggarwal says she wouldn’t be surprised if the real numbers relating to employment, investment, FDI and export projections at these zones are far from impressive. “The numbers we have were submitted by the developers. The actual numbers are much lower,” she says.
The bigger worry now is that NIMZs will face the same problems SEZs did. That includes issues over land acquisition, tussle over tax revenues and incentives, regional inequity, accusations of land grabbing, labour exploitation, environment degradation and the like. “There’s a state-Centre tussle likely to crop up as well,” says Abhilash Kumar, head of the realty and townships advisory at Feedback Infrastructure. Indeed, it’s already started. In November 2011, the Uttar Pradesh government blocked a DMIC industrial city proposal, citing purview and control issues and the state hasn’t even started the process of land acquisition for the DMIC and the zones to be developed as NIMZs.
There’s also a fear that the new policy is unrealistically ambitious in setting targets for the Indian manufacturing sector. According to the latest policy, a 2-4% differential over the medium term growth rate of the overall economy will enable manufacturing to contribute at least 25% to national GDP by 2022. But achieving that in just a decade looks tough: China, for instance, had to clock double-digit manufacturing growth for 30 years to reach a 30% share in total GDP.
The policy’s other main objective — of creating 100 million jobs over the next decade — also contradicts two clearly-stated aims in the policy: to increase technological depth in manufacturing and enhance global competitiveness of Indian manufacturing. Typically, modern manufacturing systems use fewer, highly skilled people and high-end technologies. Creating 100 million jobs is possible only if semi-skilled or unskilled people are used on manufacturing systems based on low-end technology. Also, as manufacturing productivity increases, job growth stagnates or falls: between 2005 and 2010, when India grew at 8-9% annually, only 2 million new jobs were created.
The trouble with SEZs
Before the NMP takes off, though, it’s worth examining why SEZs have proved to be of such limited utility in India — and why NIMZs need to worry. The biggest issues have all centred on land. There are allegations of land grabbing, displacement of farmers from fertile agricultural land and claims that rather than for industrial activity and export generation, SEZs are being used for real estate development. The last argument, especially, gained traction because of the number of realty companies that entered the SEZ space.
Two years ago, Rakesh Mahajan mooted the idea of setting up the country’s first sports good SEZ at Meerut, a city that already exports sports equipment worth Rs 600-700 crore every year. Mahajan, whose company BDM Sports Goods has made and exported cricket bats for over 50 years, recalls how a society for the Meerut SEZ was formed, a tract of unfertile land identified and a developer, IL&FS, identified. But the news leaked, and the price of the land shot up from Rs 400 a sq yard to Rs 4,000 a sq yard, rendering the project unviable. “We got no help from the Uttar Pradesh government,” Mahajan charges. “Manufacturing can’t be boosted without the state’s help.”
Navin Raheja, managing director of the Delhi-based Raheja Builders, is a fervent admirer of the idea of exclusive enclaves for manufacturing. “SEZs are growth engines that have been gifted to industry by government, so that we can compete with the Chinese,” he says enthusiastically. A few years ago, Raheja got approvals for three SEZs in Gurgaon. But he withdrew from all three after the government’s turnaround on fiscal incentives in 2011. He wasn’t the only one to pull out of SEZs — the other biggies who denotified in the past three years include DLF, Essar, Satyam and Bata.
It’s not as if there are no success stories among Indian SEZs. So, what worked for them and can the NMP learn anything from their experiences? The two biggest advantages of successful SEZs are their location and support from local governments. Feedback Infrastructure’s Kumar agrees. “Getting the MoU [to set up the project] is the easiest part and is only 10% of the work. The rest comes later and many states fail to provide the promised infrastructure, making the developer’s task that much tougher,” he points out.
Others also cite the importance of state support in the form of infrastructure for SEZs to succeed. “We can’t think of developing 150 km of road to connect our SEZ with the port. The government has to build that,” says Ravi Reddy, managing director of Sri City, India’s largest multi-product SEZ, located 55 km north of Chennai, in Andhra Pradesh. Once that’s done, though, how the SEZ grows is up to it. Sri City’s proximity to Chennai and its connectivity advantages — two seaports and major rail and road routes close by — has made it a natural choice for ancillary units wanting to tap into the auto hub outside Chennai. The developer is actively encouraging smaller enterprises in its project and about five or six Japanese SMEs have already set up units here on 10- to 30-acre plots. A functional domestic manufacturing zone helps create synergies between units and encourages growth. Some Rs 800 crore has been invested in Sri City till date and in the past two years, some 20 companies have begun functioning from the zone. Reddy has been aggressive on marketing front. “We promise the units that their factory will be in production within eight to 10 months of the day they sign in. That assurance gives foreign investors a great deal of comfort,” he points out.
The Road Ahead
Under the NMP, state governments have been assigned crucial responsibilities to ensure NIMZ projects stay on track. The state will be in charge of selecting land for the NIMZ and its acquisition, if necessary. It will also be responsible for ensuring power and water connections to the plot. Still, 5,000 hectares is a huge chunk of land and given the trouble in acquiring far smaller tracts for the SEZs, how will land acquisition for NIMZs be handled? Clearly, states with ready land banks and better external infrastructure are more suited for these industrial townships — that is, states like Gujarat and Maharashtra. Not surprisingly, other states are worried the manufacturing revolution will pass them by. “Uttar Pradesh has no land bank, so it will lag again,” predicts a gloomy DS Verma, executive director of the Indian Industries Association in Lucknow.
Meanwhile, the concerns over achieving the targets set in the NMP continue. The success of the first seven manufacturing zones depends entirely on the successful completion of the 1,500-km DMIC and the improvement of ports (which the government has promised in the policy to improve in a timely manner). The DMIC is still in the planning stages and Uttar Pradesh has been holding it up over land acquisition issues — clearly, Centre-state and interstate cooperation will be critical in implementing the NMP.
Then, if a criticism of the SEZ policy was that it incentivised only a few and left out the rest, the NIMZs aren’t too different. Pillai believes there’s nothing unfair about this. “You are competing against countries like the US and China. They provide tax concessions to their manufacturers and world over, the policy is that taxes are not exported,” he says. Sri City’s Reddy also defends the government policy. “It’s not really incentivising — the government is actually compensating you for going to a backward area. When we came here, there was nothing — not one 3kv power line, road or even water supply. If you build a SEZ in Chennai, you don’t need incentives. Here, you do.”
It suggests short-term courses for minimally educated workforce; relevant vocational and skill training through the establishment of Industrial Training Institutes (ITIs) through public-private partnerships; specialised skill development through establishment of polytechnics and the setting up of an instructor’s training centre at each NIMZ. But not everyone is concerned this will be enough. “There was a similar public-private partnership attempt in 2004 as well, but that remained on paper. One can only hope it works this time round,” says out NCAER’s Aggarwal.
For all its obvious flaws, the new policy is a brave attempt to set right all that ails the manufacturing sector in India. But for it to succeed not only does it have to make a conscious attempt to not repeat the mistakes of the SEZs, it also needs to temper its ambitions with a healthy dose of realism. KnitPro’s Jain adds another condition: “The government has to learn to deliver on its promises.”
We at Outlookindia.com welcome feedback and your comments, including scathing criticism
1. Scathing, passionate, even angry critiques are welcome, but please do not indulge in abuse and invective. Our Primary concern is to keep the debate civil. We urge our users to try and express their disagreements without being disagreeable. Personal attacks are not welcome. No ad hominem please.
2. Please do not post the same message again and again in the same or different threads
3. Please keep your responses confined to the subject matter of the article you are responding to. Please note that our comments section is not a general free-for-all but for feedback to articles/blogs posted on the site
4. Our endeavour is to keep these forums unmoderated and unexpurgated. But if any of the above three conditions are violated, we reserve the right to delete any comment that we deem objectionable and also to withdraw posting privileges from the abuser. Please also note that hate-speech is punishable by law and in extreme circumstances, we may be forced to take legal action by tracing the IP addresses of the poster.
5. If someone is being abusive or personal, or generally being a troll or a flame-baiter, please do not descend to their level. The best response to such posters is to ignore them and send us a message at Mail AT outlookindia DOT com with the subject header COMPLAINT
6. Please do not copy and paste copyrighted material. If you do think that an article elsewhere has relevance to the point you wish to make, please only quote what is considered fair-use and provide a link to the article under question.
7. There is no particular outlookindia.com line on any subject. The views expressed in our opinion section are those of the author concerned and not that of all of outlookindia.com or all its authors.
8. Please also note that you are solely responsible for the comments posted by you on the site. The comments could be deleted or edited entirely at our discretion if we find them objectionable. However, the mere fact of their existence on our site does not mean that we necessarily approve of their contents. In short, the onus of responsibility for the comments remains solely with the authors thereof. Outlookindia.com or any of its group publications, may, however, retains the right to publish any of these comments, with or without editing, in any medium whatsoever. It is therefore in your own interest to be careful before posting.
9.Outlookindia.com is not responsible in any manner whatsoever for how any search engine -- such as Google, Bing etc -- caches or displays these comments. Please note that you are solely responsible for posting these comments and it is a privilege being granted to our registered users which can be withdrawn in case of abuse. To reiterate:
a. Comments once posted can only be deleted at the discretion of outlookindia.com
b. The comments reflect the views of the authors and not of outlookindia.com
c. outlookindia.com is not responsible in any manner whatsoever for the way search engines cache or display these comments
d. Please therefore take due caution before you post any comments as your words could potentially be used against you
10. We have an online thread for our comments policy:
You are welcome to post your suggestions here or in case you have a specific issue, to directly email us at Mail AT outlookindia DOT com with the subject header COMPLAINT