India Revives 45-Year-Old Trade Zone System China Adopted to Boost Exports

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Photographer: Pankaj Nangia/Bloomberg

A rickshaw driver rides out of the Noida Special Economic Zone (SEZ), in Noida.

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Photographer: Pankaj Nangia/Bloomberg

A rickshaw driver rides out of the Noida Special Economic Zone (SEZ), in Noida. Close

A rickshaw driver rides out of the Noida Special Economic Zone (SEZ), in Noida.

Photographer: Pankaj Nangia/Bloomberg

Cadence Design Systems India Pvt Ltd. offices stand at the Noida Special Economic Zone (SEZ), in Noida. Close

Cadence Design Systems India Pvt Ltd. offices stand at the Noida Special Economic Zone (SEZ), in Noida.

Photographer: Pankaj Nangia/Bloomberg

Construction workers haul material at the Noida Special Economic Zone (SEZ), in Noida. Close

Construction workers haul material at the Noida Special Economic Zone (SEZ), in Noida.

Photographer: Pankaj Nangia/Bloomberg

Contract laborers pull a trolley packing material at the Noida Special Economic Zone (SEZ), in Noida. Close

Contract laborers pull a trolley packing material at the Noida Special Economic Zone (SEZ), in Noida.

It takes more than an hour to drive the 25 miles of clogged highway linking New Delhi to Noida Special Economic Zone. Inside the gate, a smooth four-lane road leads to electronics, engineering and textile plants that are at the heart of India’s plan to imitate China’s export success.

“It’s the kind of place where one can think of doing business,” said Vishnu Pal Singh, 51, whose Noida-based Optic Electronic India Pvt. sells night-vision devices for rifles and tanks to Germany and Poland. “The zone offers top class infrastructure and tax benefits.”

India is counting on entrepreneurs such as Singh to revive a system it pioneered 45 years ago: using enclaves that provide lower taxes, faster permits and even their own power source to boost exports. While India switched focus in the 1970s to industry tax breaks, China adopted the zone idea a decade later.

The system turned the former fishing village of Shenzhen into an export hub of 8.5 million people in 30 years and made China, with overseas sales of $1.2 trillion last year, the world’s largest exporter.

Now India, which shipped $165 billion worth of goods and services in the same period, is reviving zones as Prime Minister Manmohan Singh tries to raise manufacturing to 22 percent of the economy from 17 percent and double exports to 4 percent of global trade by 2020.

‘Islands of Excellence’

Investment in the special economic zones may double to about 3 trillion rupees ($66.2 billion) by 2012, India’s Commerce Ministry said. Exports from the SEZs more than doubled in the 2009-2010 fiscal year over the previous year, to 2.2 trillion rupees, a quarter of India’s total.

“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,” said Dharmakirti Joshi, chief economist at Crisil Ltd., the Mumbai- based Indian unit of Standard and Poor’s. “India needs manufacturing to grow rapidly now to absorb the growing workforce.”

India set up its first zone in 1965 in Kandla in the western state of Gujarat and had established another by 1975, said Lalit Behari Singhal, former director general of the Export Promotion Council of Export Oriented Units and Special Economic Zones in Delhi. In the next 25 years, six more were set up.

Poor land selection, insufficient fiscal incentives and inadequate transport ensured that the zones didn’t prosper, said Rajesh Sonthalia, a founding member of the export promotion council.

Zones and Jobs

Only since 2005, when the government enacted laws favoring the zones, have they taken off. About 100 zones have opened since 2006, attracting 1.6 trillion rupees in investment, 60 times the level four years earlier. That helped create more than half a million jobs, the Commerce Ministry said. About 478 more SEZs have been approved.

“China spent a lot of money creating infrastructure, which India did not do,” said Priyankar Bhikshu, head of India research at DTZ Holdings Plc in Gurgaon, near Delhi, and author of a report called “Special Economic Zones in India: Expanding Contours.” “As the true spirit of SEZs now emerges, export competitiveness will unfold in the next couple of years.”

“SEZs have the potential to propel India as a major exporting nation,” said Aradhana Aggarwal, who teaches economics at the University of Delhi and is writing a book called “SEZs in India: Past Experience, Present Status and Future Prospects.”

One Office

The government-sponsored and private enclaves reduce red tape by offering a single office for environmental, tax and other government clearances. They also offer a way around power and water shortages in a nation that produces 10 percent less electricity than it needs. Companies operating in the zones get tax breaks for 15 years and don’t have to pay local excise or customs duties.

“Units can profit from tax and infrastructure benefits,” said Kishor Ostwal, managing director of Mumbai-based CNI Research (India) Ltd. He recommends investors hold stocks of Adani Power Ltd., which co-developed Mundra Port & Special Economic Zone Ltd., one of India’s largest by area at 16,000 acres, and Torrent Pharmaceuticals Ltd., which is building a plant in Dahej SEZ, both in Gujarat state.

Adani Power shares have risen 38 percent this year, while Torrent is up 40 percent. The benchmark Mumbai Stock Exchange Sensitive Index of 30 companies is up almost 14 percent.

Power Plant

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. 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.

“The biggest benefit is that this is designated as foreign territory,” said Optic Electronic’s Singh, who invested 100 million rupees to start his factory in unit 4C and is planning to expand. “I can do business better in here since it is exempt from local laws.”

Companies, including Gitanjali Gems Ltd., India’s biggest jewelry retailer, have benefitted.

“Our exports have risen after we moved some of our production to a special economic zone,” said Chairman Mehul Choksi. Overseas sales have grown between 40 percent and 50 percent, he said, without citing a time period. Gitanjali Gems shares have almost tripled in the past 6 months.

Export Battle

India’s push to build up exports may exacerbate a battle between nations from Brazil to South Korea that are trying to raise their own exports to lift economies after the global slump. Brazilian Finance Minister Guido Mantega said in September that a “currency war” had begun as nations tried to cheapen exchange rates to boost exports.

Brazil, South Korea, Turkey, South Africa and Russia are among nations that have their own economic zones, according to the World Bank.

“As these zones take off and Indian exports become more competitive, countries which rely on exports to drive economic growth will have a tough time,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai.

India’s biggest zone by exports, the Santa Cruz Electronics Export Processing Zone, covers 100 acres and produced shipments worth $4 billion in the fiscal year to March 31, 2009. China’s largest SEZ by area is the southern island of Hainan, spread over 13,100 square miles.

Chinese Scale

“The difference between Indian and Chinese SEZs is one of scale,” said Rajesh Mohan Joshi, who teaches economics at the New Delhi-based Indian Institute of Foreign Trade.

China now has seven economic zones and another 100 smaller state and high-tech industrial parks. Shenzhen boasts some of China’s largest companies, including Huawei Technologies Co., the nation’s biggest maker of telephone-network equipment.

India’s zones are hindered by difficulty in buying land, said N. R. Bhanumurthy, an economist at the Institute of Public Finance and Policy in New Delhi.

“Unless the government resolves the issue of acquiring land, India will struggle to match the manufacturing prowess of China,” he said.

Singh’s government is backing a land acquisition bill that may be debated in parliament in the session scheduled to end Dec. 13. By guaranteeing market prices for seized land and helping resettle displaced residents, the government is trying to reduce disputes that have blocked companies from expanding.

Fatal Clashes

India suspended its SEZ program in December 2006 after farmers protested what they said were cheap prices paid for their land. Clashes in March 2007 left 14 dead in West Bengal state. The government restarted the system in April 2007 after prescribing a ceiling on size -- 12,355 acres -- and forbidding state administrations to take land by force.

More export zones are springing up in India.

Indiabulls Industrial Infrastructure Ltd., a unit of India’s sixth-biggest developer by market value, plans to complete a 2,500-acre zone in Nasik, western India, by March 2011. Sri City Special Economic Zone, 34 miles outside the southern Indian city of Chennai, held road shows in Malaysia, Australia, Japan and Taiwan to attract investors. Ravindra Sannareddy, managing director of Sri City, said he expects to attract 80 billion rupees in the next three to five years.

“Special economic zones offer unexplored opportunities,” said Vinay Sharma, who quit his job in 2008 as vice president of Mumbai-based Reliance Industries Ltd., owner of the world’s largest oil refinery, to set up a warehouse for oil and gas companies in Visakhapatnam SEZ on India’s east coast. “It is the unique set of services they offer that make them attractive.”

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net.

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