Panel Discussion Remarks*

Rana Hasan

Asian Development Bank

These remarks are based on ADB South Asia Regional Department’s draft feasibility study of Phase 1 of the East Coast Economic Corridor in India and ongoing work with Sekhar Bonu and Saby Mitra.

Economic zones: Some questions and issues raised by today’s papers A catalyst or obstacle for wider economic reform?

A tool for promoting:

Structural transformation?

Urbanization?

RCI?

Concerns about linkages with the wider economy

Main message: Design matters!

Some perspectives from the India’s (still evolving) experience Indian manufacturing as the starting point: What ails it?

Why is it not more integrated in GPNs?

Policy responses: Reforms at the national and state level: Unfinished legislative

agenda SEZ Act of 2005: A geographically focused approach Economic corridors: A regional approach to economic and

spatial planning

Perspectives from ADB South Asia Regional Department’s

work on the “East Coast Economic Corridor”

• Highly diversified with a considerable

technological and design capabilities

• But, low contribution to aggregate value added

and employment compared to East and Southeast

Asia [Figure]

• If not always in quantity of employment, certainly

in quality [Figure]

• Less engaged in international trade and

participation in GPNs [Figure]

Indian manufacturing in a comparative perspective

What is holding Indian manufacturing back? • A “long-list” of constraints:

• Infrastructure: Power and transport logistics

• Regulations and administrative processes

• Skills

• Credit

• Land

• Learning externalities and coordination failures

• Which constraints are truly binding? And how do you relax them?

Way forward • First best: provide modern infrastructure and streamline

regulations nationally. But, in the face of political,

administrative, and financial constraints a geographically

focused approach may be the way forward.

• Two approaches in India:

• Traditional: Economic zones

• New: Economic corridors

The SEZ Act 2005 experience Main objectives: boost output, employment, exports;

attract FDI; and develop infrastructure

Exports increased. But, one single SEZ (oil refinery in Gujarat) accounted for 1/3rd of 2010-11 exports!

IT and not manufacturing dominate (almost 2/3rds of operational SEZs).

FDI has been limited.

SEZs seem to have helped those already doing well (oil refinery, IT)!

And, it probably led to a loss of tax revenue for the state.

What went wrong? Regulatory climate within SEZ: Better. But more

emphasis on streamlined administrative procedures. Also missing: “learning orientation”.

Unforeseen interaction with other policies (e.g., phase out of STPI tax credits for IT industry)

Land acquisition: Initially left to the private sector

Infrastructure: To be provided by developer. Largely silent on infrastructure outside the SEZ.

Weak mechanisms for dispute resolution.

Source: Aggarwal (2012); World Bank (2013)

Economic corridors • A “regional” approach

• Characterized by “learning by doing”

• Dovetailed to key policy goals

• Make in India’ and National Manufacturing Policy:

• Latest corridor is the East Coast Economic Corridor (ECEC)—India’s first coastal economic corridor

• ‘Look East’ Policy

• Connectivity with ASEAN and East Asia

• Integration into the most dynamic Global Production Networks in the world

The Vizag Chennai Industrial Corridor (VCIC): Phase 1 of the ECEC

Note: The administrative boundaries of the districts in the range of 75 km from the NH5 have been considered

1

2 3

4

5

6

7 8

9 10

11

Successor state of AP*

Tamil Nadu

NH 5 alignment

1.Visakhapatnam

2. East Godavari

3.West Godavari

4. Krishna

5. Guntur

6. Prakasam

8. Kadapa

9.Chittoor 11.Chennai

10.Tiruvallur

7.Nellore

Slide 10

Conceptualizing and planning for the corridor

• SARDs feasibility study, the Conceptual Development Plan:

• Industry analysis

• Economic nodes

• Infrastructure

• Regulatory Issues

• A detailed analysis on each of the above is needed to avoid the pitfalls discussed earlier

Slide 11

Scenarios for manufacturing in Andhra Pradesh: With and without the VCIC

Slide 12 Source: Various sector reports, ASI 2010-11 AP, District Domestic Product AP 2010-11, Labour intensity report 2008, etc.

3,027

1,110

7,823

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Corridor’s manufacturing output (in Rs. billion)

10 years

20 years

Conceptual development of nodes in the VCIC

Visakhapatnam

East Godavari

West Godavari

Krishna

Guntur

Prakasam

Nellore

Chittoor

Tiruvallur

Chennai

Kadapa

Medium term (5 -10 years) – Regions between the existing industrial clusters will organically expand

Long Term: to emerge as an economic corridor with nodes as key growth drivers

Short term (3-5 years) - Linkage with nearby industrial clusters for Visakhapatnam and Chennai districts

Infrastructure Strategy for the Corridor – Macro Perspective: Enabling Strong Gateways, Spinal and Grid Connectivity

Each node has been identified in proximity to key gateways, whose performance is critical for competitiveness of the corridor

Strengthening the arterial roads and rail networks of the corridor is also critical for the competitiveness of the corridor

Nodes and Gateways Road Network

Strengthening of the coastal road/rail spines is an important step to enhance the corridor competitiveness

Strengthening Road Spine Strengthening Rail Spine

Macro Perspective: Spinal Connectivity

Supporting linear road/rail stretches with cross-connecting lateral links can further enhance logistics competitiveness

Strengthening Road Grid Strengthening Rail Spine Grid

Macro Perspective: Grid Connectivity

In addition, individual nodes have been analyzed for connectivity with important hinterland centres, gateways and with each other

Krishnapatnam

Machilipatnam

Kakinada

Gangavaram

Vishakhapatnam

Yerpedu-Srikalahasti node

Gannavaram Kakipadu Industrial Node

Atchutapuram Node

Vizianagaram –Srikakulam Node

Kakinada Node

Bellary Hospet

Tumkur-Chittadurg

Bangalore

Hyderabad-Secundrabad

Nagpur

Raipur-Bokaro

Types of Connectivity Projects considered

1. Node to VCIC gateway:

• Critical for integrating with Global Manufacturing chains

2. Node-Hinterland:

• Important for domestic distribution

3. Hinterland – VCIC gateway:

• Will provide quicker cargo agglomeration and economies of scale to VCIC gateways

4. Node-ex VCIC Gateway

• Connecting to proximal gateways rather than Greenfield development likely to be capital efficient (esp. in airports)

5. Intra-Node

• Resolving localized connectivity issues

Micro Perspective: Strengthening Nodes

4 key regulatory issues need to be addressed…

Slide 18

Enablers for Industrial Development Land allotment / acquisition / conversion; Development & management of industry specific zones / clusters / estates; Specific support for priority sectors / industries

Synchronized Urban Development Urban planning, infrastructure development / upgrade & management; municipal services

Attractive Investment Climate EM I & II; VAT & other tax related compliance; Labor related compliances; Environmental clearances; Power, water. connections

Ease of Logistics Integration of check posts; Streamlined inspection & clearance processes; Inter-state coordination mechanisms

What will success hinge on? Issue 1: Framework for coordinated industrial, infrastructure, and urban planning How to consolidate fragmented governance mandates of the

federal, state, city and rural authorities under one zonal or cluster management entity?

Models being examined: Can Andhra Pradesh Urban Areas (Development) Act, 1975 and

Industrial Local Area Authority be used to get us something like Special Investment Region Act (Gujarat)?

Sri City model?

Issue 2: Frameworks for land management Can we formulate a policy for improved land acquisition

process with land pooling option (land-in-lieu-of-land)?

Issue 3: Can we go from streamlined procedures to better regulation? Example: Is shying away from reform of regulations governing layoffs and contract labor going to attract investments in modern labor intensive manufacturing?

Issue 4: Infrastructure financing. Developing workable models for monetization of land?

Issue 5: Need for an apex body such as the Corridor Management Authority that works on various issues including trade facilitation.

A Corridor Management Authority could play a key role in addressing regulatory issues at the corridor level..

State-Specific Regulatory:

Technical & financial support

subject to minimum

baseline; Periodic monitoring

against agreed milestones

Inter-State Regulatory:

Institutional mechanisms for

harmonization and

monitoring anchored by

Corridor Authority.

Other focus areas:

Anchoring contracting /

institutional mechanisms for

project conceptualization,

financing & implementation

Commercial Tax, Finance, Industries, Labour, Urban

Development, Revenue

• Adoption of Single Window system for entry / expansion as well

as simplification of recurring compliance requirements

• Integrated check posts within State with minimum automation

• Adoption of IALA and SIR-like regulations

Commercial Tax, Finance, Urban Development

• Harmonization of tax rates

• Integration of inter-state check posts, sharing of information,

adopting standardized regulatory processes

• Common minimum standards for development and O&M of key

corridor transit infrastructure

Corridor development and management

• Project conceptualization and prioritization

• Project financing and procurement / contracting support

• Periodic monitoring of implementation and O&M support

• Sharing of best practices and facilitating technical assistance

Lower contribution to aggregate value added and employment than in East and Southeast Asia

0

5

10

15

20

25

30

35

40

45

196

0

196

4

196

8

1972

1976

198

0

198

4

198

8

199

2

199

6

200

0

200

4

200

8

2012

Manufacturing, value added (% of GDP)

PRC

India

Indonesia

Malaysia

Thailand

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

196

0

196

4

196

8

1972

1976

198

0

198

4

198

8

199

2

199

6

200

0

200

4

Share of manufacturing in total employment

India

Indonesia

Malaysia

Thailand

PRC

Back Source: WDI Source: GGDC database

Manufacturing employment in India concentrated in micro- and small-sized, informal

and low paying firms….

0

5000

10000

15000

20000

Av

era

ge

mo

nth

ly w

ag

e p

er

wo

rke

r (R

up

ee

)

Enterprise Size

Wage gap between formal and informal manufacturing in India

Formal

Informal

Source: ASI 2010-11, NSSO-SUME 2010-11 datasets Source: ADB estimates

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

firm-size

Distribution of manufacturing employment

Formal

Informal(w/o OAME

(w/o OAME)

Back

India remains a small player in GPNs……

Source: Athukorala (2013), compiled from Uncomtrade database

0

10

20

30

40

50

60

70

80

90

% Share of network products in manufacturing exports (total network

exports in $ billion)

1990-91

2000-01

2010-11

(851)

(21)

(90)

(32) (26,641)

(35)

ARIC

Back

Policy must be aligned with value chain realities; Electronics

Slide 27

Raw Materials and Equipment

Components and

Subsystems

Final Product Design and

Development

Assembly and Testing

Marketing and Sales

Distribution End Market After-Sales

Services

Chemicals

Silicon Crystals

Metals

Plastics

Textiles

Glass

Active Semiconductors (Transistors, Diodes)

Passive Semiconductors (Resistors, Capacitors)

Printed Circuits Boards

Tubes (Cathode Ray, X-Ray)

Liquid Crystal Displays

Data Storage

Radio Broadcast Receivers

Plastic Cases and Other Parts

Product and Software Design

Base Stations

Electronic Calculating Machines

Personal Computers

Cellular Telephones

Calibrating Meters

Spectrometers

X-Ray Devices

Navigational Instruments

Microtomes

Marketing Materials

Transportation, Distribution and Logistics

Services

Support Services

Product Replacement,

Return and Recycling

Warranty Fulfillment

Hardware and Software Upgrades

Equipment Vendors

Design Tool Vendors

Material Vendors

Original Equipment Manufacturers (Lead Firms)

Electronics Manufacturing

Services

Semiconductors and Other Components (Foundries,

Fabless, IDM, Design

Houses, Equipment Vendors)

Original Design Manufacturing Services Advertising

Transportation and Logistics

Service Providers

Wholesale and Distribution

Retailers

Research

and

Development

Education

and

Training

Government Policy

and Regulation

International Standards

International Trade

Agreements

Value Chain

Products and

Services

Value Chain Actors

Institutional

Framework

Communications Equipment

Automotive Electronics

Medical Electronics

Industrial Equipment

Computers and Storage

Computer Peripherals

Consumer Electronics

Electronics Manufacturin

g Services

Back

Policy must be aligned with value chain realities; Apparel

Slide 28

Back Source: CRISIL Report 2009

Alternatives for land management

Modified Land Acquisition, Land Pooling Haryana model: • Standardized minimum floor rates • 30% solatium + 20% for non-litigation • R&R: skills, jobs, annuity for 33 years • Developed plots instead of cash with

flexibility in cash-plot ratio

Land pooling through Town Planning Schemes

Gujarat SIR model: • Development Plan at SIR level • Town Planning Schemes at area level • Developed plots given back upto 50%

Dholera Town Planning Scheme

Dholera SIR Development Plan

Back

Food Processing, 23.1%

Metallurgy, 13.9%

Pharma, 2.1% Chem &

Petrochem, 20.8%

Auto, 0.3%

Textiles, 13.8%

Electronics, 6.0%

Others, 20.0%

BIS 2014-15

Food Processing,

22.0%

Metallurgy, 7.7%

Pharma, 5.3%

Chem & Petrochem,

19.9% Auto, 1%

Textiles, 13.2%

Electronics, 11.7%

Others, 20.0%

BIS 2034-35

INR 7,823 bn INR

1,100 bn

While sectors like Food Processing, Textiles

and Chemicals &Petrochemicals will continue being major contributor to output.

Sectors like Electronics,

Automobile and Pharmaceuticals will grow faster than the

rest

A strategic mix of industry sectors have been chosen based to drive industrial transformation

Detailed Industry analysis involving assessing both Global, National, and State level industry indicators was undertaken