Economic reforms that can make India a manufacturing hub

[ecis2016.org] Can India be an alternative manufacturing hub for world-class brands, or will it continue to struggle with its own policy failures?

With gross domestic product (GDP) contracting 24% in the June quarter of 2020, there is little doubt that India needs large economic reforms, to set things in order and to create a new wave of development and growth, which can generate new avenues of employment. As India aims to become the next manufacturing hub of the world, there have to be major policy changes to control the upheaval following the Coronavirus pandemic and to make things easier for foreign investors.

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1. Better management of special economic zones

India has around 238 special economic zones (SEZs), covering around 500 sq kilometres, as compared to China’s 2,000 sq kms. The lack of infrastructure and facilities provided by states, have made it difficult for investors to consider it as a worthy alternative to China. Even providing basic services have been difficult for the government as it is visible in the 100 smart cities, which are nowhere close to completion after six years of its announcement. To manage these, India needs to downsize the number of SEZs and focus on creating bigger ones that provide all kinds of resources and facilities. These could be core centres of activities, which could enable job creation, employment and development in its neighbouring regions.

2. Establishing efficient supply chains

For any successful manufacturing hub, it is important to establish a healthy supply chain, for which India needs efficient connectivity. Therefore, the sites for SEZs should be selected, considering its proximity to the nearest deepwater ports or existing / upcoming international airport. A greenfield or brownfield site could be easily identified near underutilised public lands, which could be transformed into a hub of affordable housing, with excellent connectivity and efficient water and electricity supply.

Similarly, the new airport development scheme under UDAN could be a torchbearer for founding new cities. For example, Sialkot in Pakistan is a global manufacturing hub for sporting gear. Since the government failed to create infrastructure, the local business community created the country’s first private airport and power station, to fulfil the requirement. Now, most of the international sporting brands have their factories in the city, which attracts more investment than any other region of Pakistan.

3. Promoting good governance and establishing a strong rule of law

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If lower taxes could attract investors to any economy, poor countries would have been the first ones to witness economic turnaround. What foreign investors usually look for, is good governance, where bureaucratic hurdles do not affect their business and solid rule of law, where the local administration is powerful enough to make policy decisions. India is a union where land and labour laws are in the concurrent list, with both, the state and centre, competent to enact legislation. This leads to a lot of confusion over dispute resolution and corruption. The other regions in Asia-Pacific are vastly different from India, where doing business is fundamentally easier with less political headache.

Apart from this, the kind of offerings and incentives available in India for investors, are limited to cheap real estate and concessions. There should be added advantage for people relying on the Indian eco-system to establish their manufacturing setup and good governance is definitely one incentive. China’s example of Tianjin is a perfect illustration of what can go wrong, if governance is not a part of economic reforms and corruption trickles in. Once seen as China’s Manhattan, 70% of offices lie vacant here in the Binhai district, as many property developers flouted zoning rules by paying off bureaucrats and exploiting political connections, thereby, denting investment opportunities here.

A strong framework of infrastructure, which includes housing options, reliable sources of water and electricity and smooth domestic and international connectivity, will be crucial for India to attract foreign investment.

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