 "Arvind Panagariya")
Ahead of the Union Budget, NITI Aayog vice-chairman Arvind Panagariya has a different take on the Centre’s ambitious Make in India campaign to boost manufacturing.
In a note, he’s favoured creation of mega coastal economic zones (CEZs) on the west and east coast, with a long-term tax holiday for units, if they fulfil minimum job creation criteria.
The idea is different from the current focus on special economic zones (SEZs) and the national investment and manufacturing zones, both conceptualised by earlier governments.
The zones he’s contemplated, says Panagariya, would have to be set up near deep-draft ports, capable of accommodating very large and heavily loaded ships. Modelled on China’s Shenzen SEZ, he says to be successful, these should be over a large area (Shenzhen covers 2,050 sq. km) and must have some existing infrastructure and economic activity.
“They must provide a business-friendly ecosystem, including ease of doing business. Especially, ease of exporting and importing, flexible labour laws, swift decisions on applications for environmental clearances, and speedy water and electricity connections. Apart from conventional infrastructure, the zones should create urban spaces to house local resident workforce,” he said.
For companies that create a threshold level of direct employment, say 50,000 jobs in a specified period, Panagariya advocates a tax holiday for a pre-specified period, such as 10 years.
Officials said he’d shared ideas on boosting the manufacturing sector and job creation with the Prime Minister’s Office. Some of it could be incorporated in the coming Budget.
In his note, Panagariya says to incentivise early investments in the zones, the tax holiday could be limited to investments made in the first three or four years of the zones’ creation.
“An important advantage of locating near the coast is that the zones would attract large firms interested in serving the export markets. They’d bring technology, capital, good management and links to the world markets,” he’s said.
Initially, the zones must be few — two or three — in number. Simultaneous creation of too many would spread the available public resources too thinly, while diffusing the potential synergies. Panagariya also says the CEZs would not be like the software industry, initially concentrated on Bengaluru and subsequently spreading to other places.
Micro and small enterprises, he observes, provide a lot of jobs, but because of low productivity, usually produce low-paying ones. Citing a recent report of Rana Hasan and Nidhi Kapoor of the Asian Development Bank, he says manufacturing firms with less than 20 workers each had employed 73 per cent of the manufacturing workforce but produced only 12 per cent of manufacturing output in 2010-11, the latest year for which such data is available.
"With such a large share in employment but small share in output, these firms are able to pay only a fraction of the average wage paid by larger firms, which is itself low in India when seen in an international context....The position of small firms within manufacturing is not unlike that of agriculture in the economy as a whole, employing 49 per cent of the workforce while contributing (only) 15 per cent of the GDP in 2011-12," he observes.
Panagariya also says there is unequivocal evidence that wages rise with the size of an enterprise. India's own experience is consistent with these observations. In apparel, for instance, where we lack substantial presence of large companies, average labour productivity is low.
"Our apparel exports are less than one-tenth those by China and less in absolute terms than those by much smaller Bangladesh and Vietnam," he notes.
He says lack of a substantial presence of large companies in India has impacted average labour productivity in two ways. First, the level of productivity in micro, small and medium companies is low when compared to counterparts in countries such as China. Second, a disproportionately large volume of the workforce is employed in these low-productivity entities.
