Zoning
in on success
The
Government of India is eying eight per cent annual growth in GDP. A
growth rate of 8-10 per cent could create employment for millions in
India. For India to achieve this in the current year Foreign Direct
Investment (FDI) must supplement internal savings and investment rates,
and a good chunk of the output from FDI should be exported.
According
to China Securities Journal, in the year 2002, the fixed asset investment
in China rose 16.1 per cent over the previous year. China’s economy
grew at a robust eight per cent last year on strong exports and sustained
state spending on the infrastructure. The annual combined exports of
China, Hong Kong and Macau are about $410 billion, while India’s exports
are about $41 billion. Take away China’s exports and its spectacular
growth will disappear.
Western
corporations invested in China attracted by the huge market potential
of China. Today, FDI has transformed China into a massive exporter.
India’s typical export basket of software products and services, gems
and diamonds, minerals, and agricultural products may not be adequate
for the desired rate of growth. India needs a larger export market for
manufactured goods. Indian brand names are not yet established abroad
to generate the exports India needs immediately. Foreign manufacturers,
who invest in production facilities in India, already have established
markets outside India. If India offers a viable manufacturing base for
exports to Asia or the West, she would attract adequate FDI for sustaining
the desired growth rate.
With
the exception of certain countries like China, Malaysia and Thailand,
manufacturing exports from most developing countries are from labour
intensive industries like garments and leather goods that exploit cheap
wages. The composition of manufacturing goods from capital-intensive
industries like industrial machinery, and electronic goods in India’s
exports is about $3 billion in 2000. China’s export of machinery and
electronic products in 2002 is estimated at roughly $160 billion. This
indicates India is not in the same league as China in manufacturing
exports but is still in the same league as Bangladesh and Sri Lanka,
which mostly export garments. After gems and jewellery, garment exports
are the second largest component of India’s manufacturing exports. Most
jobs created in such industries do not require highly skilled workforce.
For India to become a serious exporter of machinery, consumer and electronics
goods, she must attract FDI in these capital-intensive industries.
However,
attracting FDI in capital-intensive manufacturing industries such as
electronics and machinery would require India to take new initiatives.
Various studies from India and abroad have shown that manufacturing
FDI flows into India are slowed by slow-moving transportation, insufficient
and piece-meal reforms, bureaucratic hurdles, sluggish government agencies,
tardy labor reforms, poor infrastructure, and high rates of import duty
and other tariffs.
How
is it possible to increase the rate of FDI into high technology manufacturing
in India? India must invest in special economic zones (SEZ) that provide
relief to foreign investors from the slow-moving bureaucracy and antiquated
infrastructure. The Government of India has already invested in Special
Economic Zones in major port cities. A glance of the Indian SEZ website
shows a desire on the part of the government to boost manufacturing
exports. The exports from the eight SEZs in the first six months of
this financial year is about $1 billion with employment of about 90,000
people. Is the magnitude of exports from SEZs adequate for India to
become a major exporter of manufactured goods? No.
While
India’s physical infrastructure is deterrence to FDI in manufacturing,
in contrast, SEZs should boast modern physical infrastructure and access
to India’s skilled workforce. These Zones must operate on a new set
of industrial, trade, tariff and labor policies that would make investment
in these zones more attractive than in China or other competing nations
in Asia. The policies, procedures for investment and various clearances
must be simplified and as transparent as possible. The government agencies
that operate in these zones must be newly created. They should recruit
employees with education in India and foreign nations, preferably an
MBA degree and years of experience interacting with foreigners or foreign
businesses.
The
success of these zones would depend on their coastal location, world-class
infrastructure in high-speed highways, access to suppliers, housing,
education, health, transport (air and sea), water, power, information
technology and telecommunications. A coastal access would reduce the
dependence of manufacturers in the zone on India’s slow-moving highways.
Honk Kong, Singapore and Macau are apt models for this export-oriented
manufacturing zone.
Superior
supply chain management has created dominant players in the USA such
as Wal-Mart (mega retailer with annual sales in excess of $230 billion)
and Dell Computers, to name just two. Other manufacturers and retailers
are also streamlining their respective supply chain. China figures in
the supply chain of many US manufacturing firms. The export zones suggested
here are intended to create manufacturing facilities that would serve
as supply partners to renowned global firms, whose brand names and global
reach will give easy access to world markets for parts and products
made in Indian SEZs. India-based manufacturers should receive assistance
to become part of the supply chain for renowned US or other Western
firms locating in the SEZs. This would require excellence in cost, quality
and and an ability to provide just-in-time delivery.
For
years, India has aspired for more FDI but this has not happened. One
concrete step would be to elevate India’s SEZs to new levels. If new
SEZs could be so constructed as to relieve foreign manufacturers’ dependence
on the existing highways and ports, the SEZs may become attractive destinations
for leading multinationals from abroad.
One
large new SEZ in India, which attracts many multinationals to one world-class
location that offers a strong supply chain, is preferable to many small
SEZs scattered all over the nation. It is essential to seek input from
leading multinationals before designing a large world-class SEZ, the
future Macao or Singapore on Indian soil. This calls for thinking big,
a break from the past, and a daring move.
Paul
M Swamidass, Professor, Auburn University
Balram
Avittathur, Assistant Professor, IIM Kolkata
