If India only reforms when under pressure, then now should be a time for big changes: gross domestic product contracted nearly 24% in the second quarter, more than any other major economy; tens of millions have lost jobs in the formal and informal sectors; and the country adds more than 85,000 confirmed cases of coronavirus every day. There is also an obvious place for the government to start: fixing India’s failed special economic zones.
China, of course, pioneered the idea of testing politically difficult economic and legal reforms in some of those areas before implementing them more widely. The experiment was tremendously successful. Shenzhen, one of the first special economic zones on the continent, went from a population of 310,000 and a GDP of 160 million dollars in 1981 to a population of 12.5 million, a GDP of 388,000 million dollars and a higher per capita income to $ 30,000 in 2019, probably the fastest. human prosperity will always increase.
The model is even more attractive in a disorderly democracy like India, where vested interests and a risk-averse bureaucracy have hampered previous attempts at radical economic reform. Not surprisingly, the country is home to 238 such zones.
However, the results have been disappointing for several reasons. For one thing, there are simply too many special economic zones. The capacity of the Indian state is already limited. Asking the government to provide even a basic set of services in so many places is futile. (India is facing similar problems trying to develop a multitude of “smart cities”). China’s experiment started with just four of those zones in Shenzhen, Shantou, Xiamen, and Zhuhai. India should do the same.
Furthermore, while the Shenzhen agglomeration only spans 2,000 square kilometers, all of India’s SEZs together occupy less than 500 square kilometers. Larger areas benefit from several side effects: they attract business clusters, encourage knowledge transfer from foreign companies to domestic companies, and extend employment, infrastructure and development to neighboring regions. Areas of India are too small to do the same.
Most importantly, the so-called “reforms” that India has implemented in its EEZs have been the opposite. They have largely focused on concessions to favored companies (tax benefits and cheap real estate) rather than a fundamental reestablishment of India’s complicated and restrictive rules to do. If low taxes were the only thing that mattered to attract investment, any country poor could attract global manufacturers by lowering taxes. Clearly, good governance and a strong rule of law are much more important to these companies.
The government, which is reportedly considering a $ 23 billion incentive package to attract global manufacturers to India, wisely sees an opportunity. The pandemic has exposed the fragility of critical global supply chains. No country wants to concentrate risks in any one jurisdiction, especially given rising trade and geopolitical tensions between China and the West.
However, to drive manufacturers away from the mainland, India will have to convince them that they will be able to operate as easily and efficiently as in China. Some large areas need to be located near deep water ports or around large airports. They can be entirely new or abandoned sites, depending on whether the focus is on manufacturing or services. The latter could exploit underutilized public lands, such as the east coast of Mumbai. Of course, all must offer reliable water and energy, affordable housing, and excellent transportation connectivity.
Above all, these areas should provide the kind of governance and clarity that is lacking in the rest of India. Local administrators must be empowered to make radical changes in labor laws, for example. Fast track courts to resolve disputes are critical, as is the removal of most restrictions on foreign investment. The point is not just to make production cheaper, but also to create a fundamentally different atmosphere for doing business than companies would find in other parts of the subcontinent.
Of course, success will create its own political headaches, as few regions become richer than others. But compared to the alternative, a future in which India never fully integrates into global supply chains and is unable to create the millions of salaried jobs demanded by its young and growing population, that is a problem the government should accept. .
Reuben Abraham is Executive Director and Senior Fellow of the IDFC Institute.
This story has been published from a news agency feed with no changes to the text. Only the title has been changed.
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