Needed: Coastal economic zones

CEZs could help improve exports and employment, attract FDI and offer a credible public works programme

It has been 15 years since the Special Economic Zones Act was passed by Parliament. On paper, the results seem impressive. The government claims that as of the end of last year, a total of 240 SEZs were operational (423 were formally approved), with a total investment of over Rs 5.37 trillion. Over 2 million additional people have found employment in these SEZs, official statistics claim.

Yet there is a widespread view that India’s SEZ policy has been less than successful. The agitations over land acquisition and the controversies over adequate compensation to farmers whose land was acquired have meant SEZs have acquired a reputation for political notoriety in inverse proportion to the much-touted “spillover” effects that were the reason for the SEZ policy in the first place.

Detailed studies beyond the official statistics provide more insight. Meir Alkon of Princeton University, in a study in 2018, attempted to identify the impact on development indicators in a given area due to an SEZ being set up there – and concluded the net economic benefits were minimal. “…SEZs in India have failed to significantly improve development indicators”, he concluded. In fact, his study gave weight to one of the biggest criticisms of SEZ policy —that they were little more than real estate plays intended to benefit politicians and local developers, rather than being used for wider developmental goals as was the case in China.

Crucially, Alkon pointed out, given that the SEZs were real estate (plus in many case-corruption plays), the SEZ location was less than optimal. The rent-seeking meant that “site selections of SEZs were often controlled or heavily influenced by state governments, which meant that these investments were poorly matched for market conditions, and poorly suited for private or public investment in developmental infrastructure”.

Given these reality checks, a proposal aired by the former vice-chairman of NITI Aayog, Arvind Panagariya, becomes especially relevant. Back in 2015, Panagariya had advocated the setting up coastal economic zones (CEZs) adjacent to deep draft ports, thus bypassing, to a considerable extent, the logistics and connectivity problems associated with moving the output of SEZs to the nearest port.
 

It is relevant take a fresh look at this proposal now for three reasons.

First is the need for a massive infrastructure boost and public works programme to revive the economy post-Covid. Such activity in quickly building these CEZs — three on the east coast and three on the west — with the associated internal and external infrastructure would fit well within such a programme.

Second, the reason for revisiting a coastal CEZs programme is that in the post-Covid world, global manufacturing companies are looking to derisk their supply chains by moving factories outside of China. CEZs would be a credible pitch for some of that manufacturing to move to India. The pitch should include the elimination of bureaucratic and regulatory hassles within such zones. Third, Panagariya’s basic thesis was to use CEZs as the springboard to launch a new generation of labour-intensive exports. This is all the more important now — considering the unemployment levels.

This was actually the original Chinese model as well. China established four large CEZs along its coast and located them close to Taiwan and Hong Kong. The key was location — this maximised the ability of the new CEZs to draw off business from these other much higher-developed states. Further, “coastal location allowed these firms to operate in the world markets unhindered by the poor infrastructure in the hinterland, especially in the early years. They could import inputs from and export outputs to foreign destinations. Employment opportunities for Chinese workers multiplied”, pointed out Panagariya.

Part of Panagariya’s proposals is being implemented as part of the Sagarmala project, which envisages the development of ports and importantly, port infrastructure and connectivity. The next step — setting up a full-fledged CEZ adjacent to a port — is a logical one.

The key benefit is the kind of firms that would be attracted to such SEZs — large-scale companies, with high ability to employ large numbers of workers and with high capability for technology transfer. These CEZs would act as beacons of infrastructure and regulatory improvements, providing a huge demonstration effect for the art of the possible.

As others have pointed out, the other key feature of China’s approach, which ensured success, was decentralisation. Local governments were the drivers of the CEZ policy with local bureaucrats and party functionaries being given promotions and other benefits linked to the economic progress of their area. As Lotta Moberg of George Mason University had pointed out in a research article in 2015, comparing the Indian and Chinese SEZ policy, “Decentralisation was important in making China’s CEZ scheme robust and hence a key component in its success”.

Ironically, India already has an example where decentralisation was the key to economic success — the so-called non-major ports (such as Mundra, Kakinada and Pipavav) which have become key to India’s export drive. These ports, under the administration and control of state governments, and with much more autonomy in decision making than the “major ports” (under the thumb of the central government) accounted for 43 per cent of total port traffic in 2016, compared with just 10 per cent in 1981. This success makes such ports ideal candidates for the setting up of CEZs.

Thus, getting on with CEZs ticks all the boxes required in the here and now — a credible public works programme, creating jobs and investments, spurring exports and serving as the new face of India to attract foreign direct investment.

The author is chairman of Feedback Infra