The contribution of India’s manufacturing sector to GDP has been stagnant at 16% for many years now while that of services sector has steadily increased to 60% since independence. This indicates that India has been quick to adopt technological advances in the highly skilled services sector, but has failed to encourage manufacturing entrepreneurship despite prevalence of many World class technical institutes. Why is it that technical knowledge is not being translated into manufacturing enterprises, which go on to reap economies of scale and eventually become World leaders.
The answer to this question lies in understanding the various geographic and economic factors that must be carefully analyzed to lower sunk costs, fixed costs, variable costs and cost of logistics. ‘Cost of logistics’ refers to the costs of transportation and distribution which will be low only when there exists a multi-modal transportation system that is quick, cheap, efficient and links production centers to end markets. It is in the logistics space that India lacks the required infrastructure, because of which there are unwarranted delays in end to end transportation, transit damages and high insurance claims which bump up the price thereby eroding price competitiveness of Indian goods in international market and inflation in domestic markets.
Therefore, need has been felt to build multi-modal logistics system that is spread across the length and breadth of the country such that it provides equal opportunity of development to all States and harnesses the local talent. This multi-modal logistics system would facilitate smooth transit of manufacturing goods produced in hinterlands of the country to dry ports and sea ports which shall act as nodes of domestic and international distribution system respectively. Hitherto, the industrial centers in hinterlands of the country had poor road, rail, and inland waterway connectivity because of which time was wasted in transition of goods. According to Amitabh Kant, Secretary, GoI, it took 14 days for goods to be transported from Delhi’s industrial areas to ports on western coast of India. In light of this argument, let’s understand the concept of Industrial Corridors.
Steps taken prior to Industrial corridors:
But before we go on to understand the concept of Industrial corridors, let us understand the initiatives taken so far to boost manufacturing activity in India.
SEZ and its shortcomings:
In year 2005, SEZ Act was enacted by Indian Government in the hope that provisions of this act would give boost to manufacturing sector in India as China benefitted from it’s SEZ policy, but India’s ‘Special Economic Zones’ lacked multi modal port connectivity to ports unlike Chinese SEZ units which had good connectivity to sea ports and thus SEZs in India failed to augment manufacturing activity. It was this realization that gave birth to the concept of Industrial corridors and National Manufacturing Policy (2011).
National Manufacturing Policy and cluster approach
In 2011, National Manufacturing and Investment Zones (NMIZ) were proposed to be set up wherein the cluster approach would ensure the presence of all ancillary and auxiliary firms catering to a particular sector at one location. For Example, to set up a car manufacturing unit, the presence of raw material suppliers such as upholstery, steel, rubber tyres, paint etc. at one location would ensure a robust supply chain and enable the car manufacturer to practice just-in-time inventory management system that would further bring down costs. In addition to the cluster approach, labour laws were amended to give greater social security to workers employed at manufacturing firms in the NMIZ. For example, if the firm turned sick and decided to close down, then it‘ll have to pay all dues to its workmen along with their worker’s insurance claims before it can get permission from the government to close down.
Synergy due to proximity:
The minimum prescribed area for NMIZ has been set at 5000 acres (50 sq km) wherein 30% of the area will be used for processing. The huge size of NMIZ would provide ample space for ancillary and auxiliary firms to set shop and act in synergy with the downstream firms thereby cutting logistics cost due to proximity.
Industrial corridor concept:
An industrial corridor is basically a corridor comprising of multi-modal transport services that would pass through the states as main artery. Freight cargo from industrial and NMIZ located upto a distance of 100-150 km on both sides of this main artery will be brought to the industrial corridor via rail and road feeder links that shall provide last mile connectivity. This will lower costs of logistics and enable firms to focus on their areas of core competence.
Benefits of Industrial Corridors
It is argued that benefits of industrial development should be reaped by all states and regions so as to avoid developmental divide between states.
The establishment of NMIZ in a scattered manner along the industrial corridor across the length of the state would prevent distress migration and provide people with job opportunities close to their dwelling place. Another added advantage of industrial corridors is that it will prevent concentration of industries in one particular location which exploited the environment beyond its carrying capacity and caused environmental degradation.
As efficiency creeps in India’s industrial production structure due to improved transportation system and health labour force, the production costs would come down. The lower costs would make Indian goods competitive in the global market and thus open avenues of export. The production of export surplus would generate employment opportunities and raise per capita incomes. Moreover, people would find job opportunities close to their homes and would not have to migrate to far-off places thereby preserving family as an institution. This will also increase social integration in the country.
The spread effects of industrial corridors in socio-economic terms are many such as setting up of industrial townships, educational institutions, roads, railways, airports, hospitals that will generate employment and raise standard of living. Therefore, industrial corridors should be regarded as engines of growth which will provide the necessary logistics infrastructure needed to reap economies of scale.
Problems in setting up industrial corridors:
The foremost problem being faced in setting up industrial corridor is Land Acquisition. Since the industrial corridor would cut across the length of the state, acquisition of land has been slow because of legal hurdles and the amount of compensation.
Secondly, since India lacks technological knowhow in certain sectors, it would be prudent to raise FDI caps to allow foreign players to bring in the required technological knowhow and encourage Indian investment in setting up ancillary and auxiliary industries in that sector.
Thirdly, India’s taxation regime needs to clearly define the tax liabilities of foreign firms operating in India as permanent establishments and otherwise.
Fourthly, macroeconomic stability is necessary to have a stable exchange rate so that foreign players with investments in India can avoid currency risks.
Fifthly, India needs to clearly lay down ground rules for cancellation of licenses in Bilateral Investment Treaties which could later create confusion as in case of Antrix-Devas deal.
Lastly, the economic and financial feasibility of industrial corridors should be ensured by attracting potential investors to set up manufacturing units at NMIZ.
Industrial corridor projects of India:
1. Amritsar Kolkatta Industrial Corridor.
2. Delhi Mumbai Industrial Corridor.
3. Mumbai Banglore Industrial Corridor.
4. Banglore Chennai Industrial Corridor.
5. Vizag Chennai Industrial Corridor.
National Industrial Corridor Authority of India will be headquartered in Pune.