Thursday, December 26, 2013

Industrial Policy is not just about clusters and concessions

A Business Standard article writes,
At the aggregate level, SEZs appear to have made a significant contribution to investment and exports. They have received investment of over Rs 2.39 lakh crore. Exports from SEZs have seen a dramatic jump from Rs 22,840 crore in 2005-06 to Rs 4.76 lakh crore in 2012-13. But a disaggregated analysis is less favourable. Of the 589 formally approved and 389 notified SEZs, only 170 are operational. Further, only two SEZs accounted for nearly 42 per cent of the total SEZ exports in 2011: the Jamnagar refinery and DLF Infosys Mangalore. The share of FDI also remains abysmally small. Not only that, the proposed FDI in newly notified SEZs has been declining. It has declined from Rs 34,509 crore as on 31 December 2009 to Rs 30,964 crore in September 2010 and then further to Rs 26,984.4 crore as on March 31, 2012.
A major share of the growth also is a simple case of displacement of economic activity that would in any case have materialized but was attracted to the SEZs by the concessions provided.

It is lazy thinking to assume that we could easily solve our numerous structural problems - onerous labor market regulations, credit constraints, skilled human resource deficiency, infrastructure bottlenecks, excessive and costly business regulations, and weak contract enforcement - by establishing enclaves of industrial activity and providing concessions to encourage businesses. The New Manufacturing Policy (NMP) too makes the same mistake, little realizing that much the same has been happening since 1965, with limited success.

Most of the efforts of state and central governments at improving business environment has focused on providing fiscal and other concessions, overlooking the other more important challenge of removing structural and regulatory barriers to doing business in India. India's manufacturing will grow not because government will set up a few industrial zones or provide concessions. It will happen when we addresses the aforementioned structural problems and creates economy-wide (and not merely restricted to some clusters) conditions required for achieving global competitiveness. And that goes way beyond cosmetic solutions. 

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