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Learning from or repeating the past? Industrial zones in India (Part II)

On Tuesday, we looked at the disappointing performance of 2005’s SEZ Act when measured against the Government of India’s stated goals.

Will NIMZs be better for India's industry? ( Credit: Rajesh_India, Flickr Creative Commons)But the Indian government has an ambitious new plan to spur industrial growth, create 100 million jobs and increase manufacturing’s share in the GDP from 16 percent to 25 percent within the decade.  If ratified, the National Investment and Manufacturing Zones (NIMZs) will offer simplified regulation and better infrastructure to attract businesses. In this second installment of the series on India’s industrial zones, we assess its prospects.

National Investment and Manufacturing Zones (NIMZs)

The proposed NIMZs look different from the zones under the SEZ Act in several important ways, including:


• Size: Whereas the old policy had minimum size requirements as low as 10 hectares, resulting in lots of very small SEZs, the new policy calls for a handful of zones of at least 500 hectares in size.

• Land acquisition: While the old policy left land acquisition—a source of major controversy and difficulty for both citizens and companies—to the private sector, the new one will seek to use land already owned by the GoI.
 

• Broader policy framework: While the previous policy was narrowly focused on SEZs, the new one is situated in a broader policy framework that addresses important issues related to zones like training, the environment, and exit policies.

The new policy reflects a shift away from using financial incentives to attract companies and toward improving the business environment. This is a welcome step, and is likely to be more effective and sustainable, both economically and politically.

However, major risks remain. One lies in providing infrastructure. In the old policy, the private sector was primarily responsible for providing the necessary infrastructure. In the new policy, the Indian government has committed to doing so—despite the difficulty it has historically had in delivering quality roads, suitable ports, reliable energy, and the like in a timely and cost-effective manner. Precedents for coordinated delivery across sectors at a large scale are not encouraging.

Another risk lies in acquiring land. While the new policy offers some hope for a smoother land acquisition process, significant political and implementation risk will remain. Several steps could mitigate both the land and infrastructure challenges, above all not requiring the NIMZs to be contiguous. Allowing a patchwork of sufficiently large areas to be designated as one zone for regulatory purposes would avoid the problems of holdouts and forced land acquisition, while still achieving the goals of the policy.  Doing so could provide a balance between the overly small SEZs and enormous monolithic areas, of questionable feasibility. Permitting existing industrial parks to be re-designated as NIMZs would also relax the pressure on acquiring new land. 

Perhaps the most important risk, however, has to do with India’s overall approach to zones and to private sector investment. The zones are intended to be a platform for investment that generates broad, inclusive growth. But even if the zones can overcome the obstacles to implementation, only the firms that invest or work in them directly will reap the benefits. In a smaller country that might be sufficient, but not in one of India’s size. 

The most meaningful benefits that zones can deliver are those that extend beyond their perimeter into the broader economy. Such benefits include improvements in the investment climate for the private sector more broadly; linkages between local companies and those in the zones; and the attraction and diffusion of knowledge and skills. This is where some of the greatest disappointment in India’s experience with SEZs lie. Seven years after SEZ Act was passed, India’s private sector faces many familiar and important barriers to growth.

Learning from this will require an explicit strategy to use the zones as labs for focused experimentation that can drive reform and growth throughout India. States could and should use them to test and share solutions to strengthen overall competitiveness. Instead of large, monolithic, and top-down visions—subject to innumerable implementation difficulties—the zones could become the spear-points of a continuing movement forward.

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