Here’s a growth booster that’s crucial for India

India needs coastal economic zones even if they prove less successful than they have for China.

special economic zone, economy, CEZ, growth India, NITI aayog
Implicit in the idea of CEZs is the need for India to connect better with the sophisticated regional production networks that have arisen in Southeast Asia (Reuters)

Early in June, the Stanford Center for International Development held its 17th annual conference on Indian economic reform. One of the speakers was Arvind Panagariya, vice-chairperson of the NITI Aayog, in a session titled “Manufacturing Progress and Export Enclaves”.

Panagariya addressed a topic that he has been articulating for some months, an implementable path to creating larger numbers of jobs with higher productivity than India has been able to manage so far.

Of course, the broader argument is an older one, almost with the status of being “traditional”. The most recent examples of rapid economic growth, especially in East and Southeast Asia, have been economies that used labour-intensive, export-oriented manufacturing as a key part of their development strategies. Since all of these countries were much smaller than India, it was possible to argue that India could not follow suit at the scale needed to make a difference. Then China showed that not to be true.

Panagariya summarised China’s experience, and contrasted it with that of India. China was able to grow its exports much faster than India, and faster than its overall rate of economic growth, gaining an increasing share of world trade over the last few decades.

Manufacturing exports made a difference, in overall growth, but most importantly also in creating better jobs than those available to the masses working in agriculture. There are several possible cautions for India as a candidate to follow this path.

First, the global economy is less dynamic now, leaving less room for export growth at the speed and scale achieved by China.

Second, China’s success has left little or no room for India to follow.

Third, the nature of manufacturing has changed, making it less labour-intensive than it used to be.

Fourth, India’s starting point and its institutions are different than those of China or its export-led-growth predecessors. I have gone over these arguments in previous columns, which have come from several academic sources.

What was interesting was that Panagariya made a convincing case for not being bogged down by pessimism and caution. His argument was not new, in some ways, because he was making the case that India can and should do what China already did.

By tracing China’s export growth quantitatively, he made the case that the size of the pie and its growth are certainly enough for India to make inroads into global markets at a much greater clip than it has so far.

This deals with the first two cautions. He also argued forcefully that there is still enough manufacturing that is labour-intensive and uses production techniques that rely on scale and standardisation, to support substantial growth in traditional manufacturing, thus dealing with the third caution.

The crux of the issue for implementation then becomes the fourth caution—that India cannot even get started because of where it is.

Certainly, the data presented by the NITI Aayog vice-chairperson, showing that far too many Indian manufacturing firms are small and unproductive, made one despair of getting going on large-scale, export-oriented manufacturing. It is well known that India needs to reform labour laws and ease of doing business more broadly.

India has also instituted many Special Economic Zones (SEZs) in the past, without spectacular results. What can be done differently and better?

Panagariya has argued for a small number of Coastal Economic Zones (CEZs), situated near deep-draft ports. The “E” could just as well stand for “Export,” because that is the key idea, as it has been for SEZs.

What is different about the new proposals is their focus and rationale. Having just a small number of CEZs, making sure they are large enough, and providing the necessary infrastructure, make it more likely that they can provide fertile ground for large exporting firms to develop in various possible areas of manufacturing.

The economic drivers will be economies of scale and agglomeration, which have not always been given enough attention in Indian policymaking in the past.

Implicit in the idea of CEZs is also the need for India to connect better with the sophisticated regional production networks that have arisen in Southeast Asia.

Even one large, successful CEZ on India’s eastern coast would allow this to happen. Another on the western coast would draw on a different hinterland and serve markets to the west. Panagariya has made a convincing case for this strategy.

Even with all the factors that might not make this strategy as successful for India as it has been for China, it seems to me that CEZs are a necessary part of India’s growth path—even if they are not sufficient.

The Indian government took a step in this direction in May, with the announcement of as many as 29 CEZs, but it is not clear yet whether they will have the scale and infrastructure to achieve the larger vision. But if they are implemented well, they could provide a major boost to Indian growth.

The author is professor of economics,
University of California, Santa Cruz

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