It's Time To Embrace The Idea Of Coastal Economic Zones — Infravisioning With Vinayak Chatterjee

Vinayak Chatterjee's Infravisioning video series analyses and explains developments in India’s infrastructure sector to the BQ Prime audience.

Edited excerpts of the video:

India needs breakthrough ideas on revving up the economy, employment and exports. It has been 18 years since the Special Economic Zones Act was passed by Parliament.

On paper, the results seem impressive. A total of 240 SEZs were operational with a total investment of over Rs 5.37 trillion (Rs 5.37 lakh crore). Over two million additional people have found employment in these SEZs, official statistics have claimed over the years.

Yet, there is a widespread view that India's SEZ policy has been less than successful. The agitations over land acquisition and controversies have meant that SEZs have acquired a reputation for political notoriety in inverse proportion to the much touted spillover effects.

Various studies have provided more insight. Mayor Alcon of Princeton University, in a 2018 study, attempted to identify the impact on development indicators in a given area due to an SEZ being set up. He concluded that the net economic benefits were minimal.

SEZs in India, he said, failed to significantly improve development indicators. In fact, his study gave way to one of the biggest criticisms of SEZ policy that they were little more than real estate plays intended to benefit politicians and local developers rather than being used for wider developmental goals, as was the case in China.

Crucially, Alcon pointed out given that the SEZs were real estate-plus plays, the SEZ location was less than optimal. The rent-seeking meant that site selection of SEZs are often controlled or heavily influenced by state governments, which meant that these investments were poorly matched for market conditions and poorly suited for private or public investment in development infrastructure.

With this background, a proposal aired by Arvind Panagariya, former vice chairman of the NITI Aayog, becomes especially relevant. Back in 2015, Panagariya advocated setting up Coastal Economic Zones or CEZs adjacent to deep-draft ports, thus bypassing to a considerable extent the logistics and connectivity problems associated with moving the output of SEZs to the nearest port.

It is relevant to take a fresh look at this proposal for three important reasons.

First is the need for a massive infrastructure boost and public works programme, to pump prime the economy. Such activity in quickly building these very large CEZs, three on the east coast and three on the west, with the associated internal and external infrastructure could fit in very well with a new public works programme.

Second, the reason for revisiting a coastal CEZ programme is that in the post-Covid world, global manufacturing companies are looking to derisk their supply chains by moving factories outside of China and other countries. India should be a prime candidate and CEZs would be a credible pitch for some of that manufacturing to move to India. The pitch should include the elimination of bureaucratic and regulatory hassles within such zones, a common complaint of potential FDI investors.

Third is Panagariya's basic thesis to use coastal economic zones as a springboard to launch a new generation of modern yet labour intensive exports, such as garments, light engineering, gems and jewelry, leather and furniture. This is all the more important now, considering the need to rev up employment levels across the country.

As others have pointed out, the other key feature of China's approach which is worth emulating was decentralisation. Local governments were the drivers of the CEZ policy, with local bureaucrats and party functionaries being given promotions and other benefits that linked the economic progress of their areas.

As Lotta Moberg of George Mason University had pointed out in a research article in 2015, comparing the Indian and Chinese SEZ policy, the differentiating factor for China was that decentralisation was important in making China's CEZ scheme robust, and hence, a key component in its success.

Ironically, India already has an example where decentralisation has been the key to economic success in specific regions. The so-called non-major ports—an euphemism for private ports, such as Mundra and Kakinada—have become key to India's export drive.

These ports are under the administration and control of state governments and with much more autonomy and decision-making than the major ports—again, an euphemism for centrally controlled ports—account for a large chunk of Indian exports today.

This success makes such ports, and similar new ports, ideal candidates for the setting up of Coastal Economic Zones. Thus, getting on with CEZs ticks all the boxes required in a credible public works programme, creating jobs and investments, spurring exports and serving as the new face of India to attract foreign direct investment.

This was actually the original Chinese model as well. China established four large CEZs along its coast and located them close to Taiwan and Hong Kong; the key was location. This maximised the ability of the new CEZs to draw business from these other much developed states.

Coastal location allowed these firms to operate in world markets, unhindered by the poor infrastructure in the hinterland. They could import inputs from and export outputs to foreign destinations with ease. Employment opportunities for Chinese workers multiplied, as Panagariya had pointed out in his report.

Part of Panagariya's proposals are being implemented as part of the Sagarmala Project, which envisages the development of ports and, importantly, port infrastructure connectivity to the hinterland.

It is logical, therefore, to move to the next step of formally setting up of Coastal Economic Zones. The key benefits is the kind of firms that would be attracted to such CEZs—large-scale companies with high ability to employ large numbers of workers, with high capability for technology absorption and transfer.

The CEZs would act as beacons of infrastructure and regulatory improvements and provide a huge demonstration effect for the art of the possible in the rest of the country. It will be worthwhile for India to consider setting up Coastal Economic Zones.

Vinayak Chatterjee is founder and managing trustee, The Infravision Foundation; and chairman, CII Mission On Infra, Trade & Investment.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.