Indian economy seeks Chinese characteristics
India is to experiment with Special Economic Zones, inspired by the mainland
When Indian Commerce and Industry Minister Murasoli Maran travelled to the mainland this year, he spent most of his week-long visit trying to figure out how the mainland had become such a powerful force in world trade and hoping to learn a few lessons he could apply back home.
Mr Maran zeroed in on Shenzhen-style special economic zones (SEZs), a brainchild of late paramount leader Deng Xiaoping.
Decentralised enclaves, dedicated to producing for export, free of political and bureaucratic interference that shackles investors elsewhere, Mr Maran decided, held the key to the success of the mainland as a trading nation and an investment destination.
Two months later, Mr Maran has unveiled an Export-Import Policy 2000 that draws heavily on the mainland model to kick-start an export boom.
'My recent visit to the various provinces of the People's Republic of China has been an eye-opener to me,' Mr Maran said.
'I am proposing a major step of establishing, as in China, special economic zones in different parts of the country. The idea basically is that in these areas export production can take place free from the plethora of rules and regulations governing import and export.' Foreign investors would be allowed to set up wholly-owned units in the zones, import capital goods and raw material duty-free. A 10-year tax holiday is under consideration. The only condition would be that investors export their entire production.
The first of two SEZ modelled on Shenzhen, an 880-hectare site in Positra, in the western coastal state of Gujarat, with planned investment of 100 billion rupees (about HK$17.5 billion), is ready. The other one will be on a 1,012-hectare site in Nangunery in southern Tamil Nadu, he said.
The Gujarat government and Seaking International, which will hold stakes of 26 per cent and 25 per cent in the Positra project respectively, are trying to rope in Japan's Sumitomo and Singapore government interests, project officials said. Many Japanese and United States multinationals are being sounded out about setting up units in the zone.
But not all are convinced the transplanted concept will work in the Indian context.
C.R. Ranganathan, a former ambassador to the mainland said: 'The Chinese had certain advantages which they successfully leveraged, for instance the proximity to places like Hong Kong and China where capital was looking for land and labour where it could grow. There were ready-made conditions for them on the mainland.
'In our case, things are different. We need to develop the kind of facilities to which we are best suited. Blind imitation will get us nowhere.' Officials deny it is 'blind imitation'. Investors in the SEZs will not be allowed to hire and fire labour, nor will they be exempted from domestic banking laws, given India's political sensitivities.
The government is facing obstacles from opposition parties, its own allies and labour unions in its bid to get rid of loss-making state-run units and is unwilling to risk agitating labour.
Industry figures and analysts said that could make all the difference between success and failure.
'Foreign investors would look for special labour laws,' said R. Gopalakrishnan, vice-chairman of Tata Sons, India's leading industrial house.
'Mr Maran's expectations of inviting foreign direct investment via the special economic zones are unlikely to be fulfilled.' R.K. Dhawan, former additional director-general of foreign trade, said while the SEZs were a welcome initiative 'we will have to dispense with the administrative laws' such as labour legislation to ensure the enclaves succeed.
Manufacturers in India have little flexibility in firing staff.
Investors also tend to be put off by the lack of recreation in industrial areas. Gujarat, which claims it has India's best industrial infrastructure, has suffered investment setbacks because it prohibits alcohol.
Mr Dhawan wrote in The Economic Times that Shenzhen's success lay in its proximity to Hong Kong's free-wheeling ways.
'This zone caters to the needs of Hong Kong and functions in such a manner as if it is not part of China,' he wrote.
'Only dollars can be used, five-star hotels, night clubs cater to the needs of tourists in this zone.' India is expected to earn about US$40 billion this year from exports - just a fraction of the mainland's.
India has experimented in the past with four export-oriented zones called free-trade zones, but political uncertainty kept investors at bay, while the revenue department's opposition to concessions robbed it of income and the zones' manufacturers wanted to produce for the domestic market rather than for export. The four free-trade zones will now be converted into SEZs.