A
new dawn
Special
Economic Zones could kick-start Indian manufacturing and propel the
nation forward, says Raju Bhinge
In
recent times several global manufacturing majors, especially those in
the automotive sector, have established India as a manufacturing and
sourcing base for their global operations. Hyundai Motor Company has
decided to make India its global hub for small cars. Toyota has short-listed
its Indian arm to supply transmission units for Sports Utility Vehicles
in Asian, African and South American markets.
Suzuki, Ford, Hino Motors, Volkswagen and Volvo are among other global
auto majors that are seriously evaluating the Indian option. Among Indian
players, Bharat Forge, which is targeting 25 per cent of the global
market for heavy complex automotive forgings, has ambitious plans to
further expand its exports from India. Is this merely a flash in the
pan or is it the beginning of a long-term trend? Could India, like China,
ever emerge as the new workshop to the world?
CHINA
VS INDIA
To
understand this better, let us first explore the factors that have enabled
China to reach where it is today. Not long ago, India and China were
comparable entities with the two countries having similar per capita
GDP even as late as 1990. Today, China’s per capita GDP is almost 60
per cent higher than that of India. The last decade saw China’s GDP
grow at an average of 10.3 per cent per annum, as opposed to India’s
GDP which grew at a little less than 6 per cent per annum.
China
has also witnessed a more balanced growth with manufacturing still garnering
over 50 per cent of the country’s GDP. Manufacturing growth creates
more low-skill jobs and fuels domestic consumption. Special Economic
Zones (SEZ) have been a major catalyst for enabling such accelerated
growth in China.
Low
import duties, low uniform indirect taxes and numerous special tax holidays
for fresh investment projects in the SEZs provide a favourable regulatory
environment for large manufacturers to set up operations. This has been
further augmented by extensive infrastructure in the form of transportation
reach, world-class telecom services, reliable power, water, sewage and
heating systems.
Flexible
labour laws, productivity-linked wages and a steady infusion of global
best practices through multinational companies and Foreign Direct Investment
have also contributed to improving quality and reducing costs. The SEZs
have thus become cradles of manufacturing with favourable regulatory
policies and excellent infrastructure for companies to set up largescale,
low-cost manufacturing units. This low-cost base coupled with lower
margin expectations have significantly contributed to lower consumer
prices. A recent study pegged Chinese prices to about 30 per cent lower
than those in India.
Lower
prices have had a two-pronged effect:
1) They fuelled greater domestic consumption
2) They have made Chinese products more competitive in the global market,
enabling China to garner a larger pie of the export market (5 per cent
as against India’s 0.8 per cent).
VOLATILE
PROGRESS
There
are several lessons to be learnt from the Chinese experience. The liberalisation
and reform process, which began in India in 1991, has been through several
rough patches. While there are success stories, a lot needs to be done
to put India on the take-off trajectory. The critical policy initiatives
necessary to foster India’s manufacturing competitiveness are listed
below:
IMPORT
DUTIES
High
import duties, while reducing imports, reduce domestic consumption and
hamper competitiveness of Indian exports. The government initiative
of reducing duty from 26 per cent to 10 per cent by 2006-07 and further
to 5 per cent by the close of the decade is not just desirable but essential.
.........CONTD
