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India Revives an Old Plan for New Growth


Trying to duplicate China's success, India is reviving a system it pioneered 45 years ago by offering companies tax breaks and better infrastructure in designated zones

It takes more than an hour to drive the 25 miles of clogged, potholed highway linking New Delhi to the Noida Special Economic Zone. Inside the gate, it's a different India. A smooth four-lane road connects electronics, engineering, and textile plants. A generator guarantees that the electrical power never fails. The phone system is world-class. "It's the kind of place where one can think of doing business," says Vishnu Pal Singh, whose Noida-based Optic Electronic India sells night-vision devices for rifles and tanks to Germany and Poland.

India is counting on entrepreneurs such as Singh to revive a system it pioneered 45 years ago: using enclaves that offer lower taxes, less bureaucracy, and better roads and utilities to companies that want to boost exports. India tried using the zones in the 1960s and 1970s. The sites were poorly chosen, though, and the initial incentives offered to companies to move to them were inadequate, so just a few zones were opened. China adopted the approach in the 1980s, with spectacular results. The former fishing village of Shenzhen became a special zone that developed into the one of the world's biggest export hubs.

Now India is pushing zones as Prime Minister Manmohan Singh tries to raise manufacturing to 22 percent of the economy from 17 percent. "Improving infrastructure in the entire country will take a long time. So if you want to promote industry, you need to create more islands of excellence, which these SEZs are," says Dharmakirti Joshi, chief economist at Crisil, the Mumbai-based Indian unit of Standard & Poor's (MHP).

Investment in the zones may double, to about 3 trillion rupees ($66.2 billion), by 2012, the Indian Commerce Ministry says. Exports from the special zones more than doubled in the 2009-10 fiscal year, to 2.2 trillion rupees, a quarter of India's total.

About 100 zones now operate in the country, and 478 more have been approved. The government-sponsored areas reduce red tape by using just a single office to handle permits certifying that environmental, export, and other requirements have been met. Companies operating in the zones get tax breaks for 15 years and don't have to pay local excise or customs duties.

Spread over 310 acres, the Noida zone's rows of white, two-story buildings bustle with workers loading and unloading trucks with steel pipes, cement, electrical equipment, and other materials destined for new factories. The zone has its own power plant, bus network, mail center, banks, and automatic teller machines. Proposed additions include a second generator and a six-lane highway to Delhi. Optic Electronic's Singh invested 100 million rupees to start his factory in the zone and plans to expand. "I can do business better in here since it is exempt from local laws," he says.

Companies that help build the zones are benefiting too. Shares in Adani Power, which co-developed the 16,000-acre Mundra Port & Special Economic Zone, one of India's largest by area, have risen 40 percent this year, vs. just under 13 percent for the benchmark Mumbai Stock Exchange index.

Because the government got serious about building the zones only relatively recently, India still lags far behind China. "The difference between Indian and Chinese SEZs is one of scale," says Rajesh Mohan Joshi, who teaches economics at the Indian Institute of Foreign Trade in New Delhi. One of India's most successful, the Santa Cruz Electronics Export Processing Zone, covers 100 acres. China's largest special zone by area is the southern island of Hainan, spread over 13,100 square miles. The Shenzhen zone includes many of the electronics factories of Taiwan-based Foxconn, which employs 430,000 Chinese there. All of India's zones together employ only half a million people.

The political difficulty of acquiring sizable tracts of land also hampers development of the zones in India, says N. R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi: "Unless the government resolves the issue, India will struggle to match the manufacturing prowess of China." Singh's government is backing a land acquisition bill that may be debated soon in Parliament. The bill proposes to guarantee market prices for land seized for the zones and offer resettlement help to displaced residents.

The bottom line: India is trying to catch up to China by building special economic zones that promote manufacturing and exports.

Dhara is a reporter for Bloomberg News.

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