The Telegraph
Thursday , April 28 , 2016

A road map to develop an export powerhouse

- India should move beyond special economic zones and attempt to build modern Freeports, writes Jayanta Roy

Bangalore: future city?

Modern and effective zones, growth poles and innovative clusters were created in China and in Southeast Asian countries to better integrate into the global supply chains, largely financed through the domestic private sector and foreign direct investment. Unfortunately, India's attempts with government-controlled special economic zones are completely out of line with such modern concepts as zones, growth poles and clusters. Hence these are neither generating sufficient export nor creating employment or attracting FDI. The time has come to cut our losses in these, and move on to more modern concepts such as Freeport, growth poles, and clusters.

We should move towards the modern version of SEZs - Freeport. It is a much broader concept than that of the earlier Chinese SEZs and appropriate for an economy moving towards becoming a major global player. It replicates a first-world environment with minimal restrictions, streamlined procedures, sound infrastructure and easy access through world-class ports and airports. All activities are eligible, with no export obligations. Sales to domestic tariff areas are allowed, subject to payment of national duties. Permanent visas are allowed to qualified investors. The process should be demand driven with a bulk of the investments coming from the private sector - domestic and foreign. Singapore, Hong Kong, Gibraltar, Aqaba, Labuan, Batam and Jebel Ali are well-known Freeports.

Experience suggests that the following are the characteristics of a successful Freeport - i) It must cover a large area to generate economies of scale to host numerous activities and provide integrated development.

ii) The head of the Freeport authority must wield considerable power and autonomy. Most Freeport authorities report directly to the head of government. The challenge, over time, is to gradually transform its authority into promotional, facilitating and regulatory bodies, and divest the physical development and operation function to the private sector.

iii) National security must be ensured. In Subic Bay, a special security force falls under the control of the governmental authority, which liaises with police and military forces.

India can have several Freeports. A beginning can be made by transforming a large part of Goa into a Freeport. This was the recommendation of the report of the Advisory Committee on Feasibility of Setting up a Free Port in India, which was constituted by the then commerce minister, Subramanian Swamy, in 1990. It considered Kandla, Tuticorin, Pondicherry, the Andaman and Nicobar Islands, Goa, Colachel and Leepuram as possible locations, and finally chose Goa. As a committee member, I was most impressed with the prospects of Goa, given its proximity to Mumbai and the Maharashtra-Gujarat hinterland, and what it had to offer in terms of exports, FDI and employment. The concept died with the change of government. I used the report to help the Jordanians set up the successful Aqaba Freeport when I was in the World Bank. With our dynamic prime minister, the time has come to set up a model Freeport at an appropriate location. This will help boost exports, generate employment, attract FDI and promote other Freeports in India.

We need to simultaneously develop innovative clusters and growth poles just like the Southeast Asian countries. The process has begun. Any serious observer of India notices a distinct vibrancy, not easily captured in conventional economic analysis. Certain forces are generating a momentum of growth that was hitherto unknown. The private sector and some innovative state leaders are moving ahead without constantly approaching the Indian government for concessions. Karnataka, Andhra Pradesh and Tamil Nadu are keeping pace with some of the East Asian tigers. Megacities in these states are being transformed into growth poles and clusters, contributing immensely to growth and foreign exchange earnings. Some of them are becoming household names in the world. Growth poles such as Bangalore, Chennai and Hyderabad have sprung up and are attracting a lot of external investment and attention. Bangalore's contribution to the Indian economy is enormous. Bangalore displays the basic characteristics of a growth pole - an urban agglomeration with good infrastructure, logistical facilities, and services and utilities that serve as the centre around which several specialized industrial clusters develop. Other megacities like Chennai and Hyderabad are rapidly moving in that direction. In the north, Delhi-Noida is emerging as a growth pole. There are positive externalities associated with growth poles: they create dynamic economic clusters around them. Hosur, Ramanagaram and Mysore around Bangalore and Gurgaon around Delhi-Noida are a few examples. Stand-alone clusters like Tirupur and Surat are making an enormous contribution to our exports with a small population base. An innovative strategy to firmly place us in the major league would be to fine-tune and improve the existing growth poles, promote new growth poles and develop several economic clusters like Tirupur and Surat all over India. The idea is to act as a catalyst in a natural process, which has gained momentum of its own.

How do we do it? We should follow the East Asian examples of Penang in Malaysia and Cebu City in the Philippines. Pragmatic policy and dynamic cooperation between private and government stakeholders have led to both these cities emerging as specialized export-oriented clusters. The success of the Shanghai-Suzhou growth pole in China provides another important example to India's policymakers on the potency of a growth pole and innovative clusters.

For successful growth poles we need the following - i) first world infrastructure with special focus on infrastructure that connects them to the world - airports, telecommunication system and access to efficiently handled ports.

ii) A strong supply chain that allows low inventory management expenditure.

iii) Access to cheap capital goods.

iv) Production networks that allow firms to specialize and subcontract;

v) Access to markets through good, cheap information networks and transport facilities for shipping out goods.

vi) Reliable access to utilities, such as electricity, water, and so on.

vii) Ready and flexible supply of cheap, unskilled and semi-skilled labour.

viii) At the next stage of cluster and pole development, we require first world services like banking, information technology, insurance, legal services, consulting, and so on.

ix) Strong academic institutions that are proactive in research and private-industry-based research facilities that are allowed to invest and collaborate with centres of academic excellence.

x) Networks between researchers, managers, and so on, within the cluster as well as with other high-tech clusters around the world.

Based on the above criteria, we notice that even our top growth pole, Bangalore, has some way to go. The process of creating dynamic poles and clusters can be accelerated by joint efforts of the Centre, the state governments and the private sector. The role of the government must be collaborative, not authoritative. The Niti Aayog is ideally placed to play that key role in linking the thinking of the Centre and the state governments. Another crucial dimension would have to be attracting sufficient investment of financial and human capital from the large, expanding and affluent Indian diaspora. A beginning could be made in the south to transform Bangalore-Hyderabad-Chennai into a diamond triangle of growth, which will be comparable to those of Malaysia and Thailand. If other states follow suit, India will soon be comparable to Southeast Asia and China as export powerhouses.

The author is a well-known trade economist

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