A few Shenzhen-style coastal economic zones can start a manufacturing revolution in India

It is generally agreed that a key element in the transformation of India is the creation of a large number of good jobs. While micro and small enterprises provide lots of jobs, given their low average labour productivity, they are able to pay relatively low wages given their low average labour productivity. Economists Rana Hasan and Nidhi Kapoor of the Asian Development Bank find, for example, that manufacturing firms with less than 20 workers employed 73% of manufacturing workforce but produced only 12% of manufacturing output in 2010-11.

With such a large share in employment but small share in output, these firms could pay only a fraction of the average wage paid by larger firms, which is itself low in India when seen in the international context. There is compelling evidence that productivity and wages rise with the size of the enterprise.

Large firms are able to attain higher levels of productivity by exploiting scale economies. They also operate predominantly in the highly competitive world market, which forces them to continuously improve product quality and adopt costcutting technologies. Their presence also enhances the efficiency of small and medium firms because these later must either become their ancillaries or compete against them.

Unfortunately, large firms are missing in India in precisely the sectors where they are needed the most: employmentintensive sectors such as apparel, footwear, electronic and electrical products and a host of other light manufactures. These are products in which China has done well, thereby generating a large volume of good jobs for its workers. In 2014, China exported $56 billion worth of footwear, $187 billion worth of apparel and $782 billion worth of electrical and electronic goods.

The corresponding exports by India were $3 billion, $18 billion and $9 billion, respectively. The single most important key to China’s success in manufactures has

been its decision to go for the large world market, which today stands at $18 trillion.

In 1980, when China’s GDP was less than $500 billion at today’s prices and exchange rate, it began by establishing four very large Special Economic Zones (SEZs) along its southeast coast. Shenzhen, one of these four SEZs, was then at best semi-urban with a population of 3,00,000. Attracted by its low wages and business-friendly environment, investors from Hong Kong and Taiwan flocked to it.

Its coastal location allowed these investors to operate in world markets unhindered by poor infrastructure in the hinterland. Today Shenzhen has a population of 11 million, gross city product of $265 billion and per-capita income of $24,000. Though originally Cantonese, it speaks Mandarin because the bulk of its population migrated from other parts of China. Most of the major multinational firms have a presence in Shenzhen. Rapid growth has sent Chinese manufacturing wages shooting up, they now stand at Rs 5 lakh per year.

Unsurprisingly, many multinational firms from China are looking for alternative lower wage locations. With its large labour force, India is well positioned to become home to these firms. But this requires the creation of a business friendly ecosystem in locations that can serve as export bases for these firms. It is here that India can leverage the Sagarmala project of the prime minister.

It can create a handful of Shenzhenstyle Coastal Economic Zones (CEZs) on its coasts next to deep-draft ports. The CEZs must cover a large area (Shenzhen spans 2,050 sq km) and have some existing infrastructure and economic activity. They must also provide a business friendly ecosystem including ease of exporting and importing, swift clearances and speedy water and electricity connections.

They must also offer urban spaces to house the local resident workforce. For firms that create a threshold level of direct employment (for example, 50,000 jobs), a tax holiday for a pre-specified period may be considered. The incentive may be offered during a short window of three to four years to reward the firms that take early initiative.

An important advantage of locating the zones near the coast is that they would attract large firms interested in serving the export markets. These firms would bring with them technology, capital, good management and links to world markets. They would help create an ecosystem around them in which productive small and medium firms would also emerge and flourish.

Initially the number of these zones must be limited to two or three. This would help ensure that limited resources are not diluted and many sector-specific zones and clusters can emerge within each of them to fully exploit economies of scale and agglomeration. Simultaneous creation of too many zones would spread the available public resources thinly while also diffusing economic activities with potential synergies.

As initial zones succeed, more may be subsequently launched. This is not unlike the software industry, which initially concentrated in Bengaluru but subsequently spread to other towns. One final point is worth noting. Given the vast size of the world market and our tiny share (1.7%) in it, there remains vast scope for the expansion of exports even if the global economy remains stagnant. Slow growth of the world economy is not an insurmountable barrier to export-led growth.

Views are personal and may not be attributed to either the Government of India or NITI Aayog.