What India needs to create successful economic zones

India has 272 operational SEZs with a combined employment of just 28 lakh people
India has 272 operational SEZs with a combined employment of just 28 lakh people


  • While countries such China, South Korea, Taiwan and Vietnam have been able to develop huge economic clusters that enable growth, India has failed so far. Here’s what needs to change

We are aware of the transformational economic impact of a cluster-led development model. Shenzhen over the last 40 years has transformed itself from a small fishing village near Hong Kong into a large metropolis with over 10 million people. In 2018 the Shenzhen SEZ region (around 300 sq km) was estimated to have contributed over $250 billion in exports, while GDP per capita in the region shot up from $122 in the early 2000s to over $28,000 in 2019.

Foxconn alone is estimated to employ over 400,000 people in its two campuses in Shenzhen. Similarly, the Northern Key Economic Region (KER) in Vietnam, comprising seven cities and provinces that total just 4.7% of the country’s land mass, contributed more than 33% of GDP and more than $115 billion in exports. Samsung alone is estimated to employ over 110,000 people in the Northern KER region.

While countries like China, South Korea, Taiwan and Vietnam have been able to develop economic clusters that enable growth, India has failed. As of 2023, India has 272 operational SEZs with a combined employment of just 28 lakh people. These SEZs account for $133 billion in exports (of which around 60% is service exports) from India. In comparison, China has been able to achieve twice the value of exports and four times the employment from just the Shenzhen SEZ, which is about the same size as the combined area of all Indian SEZs.

Why is it that other countries have been able to develop globally competitive manufacturing regions while India has failed, and what can we learn from them?

The building blocks

While cluster-development policies in India have tried to emulate the success of clusters such as Shenzhen in China or Hsinchu Science Park in Taiwan, they have only managed to partially replicate these, and have completely failed to capture the functions that go into making a successful cluster. This tendency to mimic policies from other countries while not capturing the essence has become endemic, and is also the primary reason why India has struggled to build capabilities even after years of policy and reform engagement.

In this article, we lay out a simple framework that outlines the key building blocks of a successful cluster. In the following sections, we will use this framework to highlight challenges and identify strategies that we can adopt to overcome them.

  • R: Region (size & location)
  • I: Infrastructure
  • S: Strategic incentives & investment promotion
  • E: Enabling governance & regulations

The aim of every element in this framework is to help India attain global competitiveness, which is critical for it to deliver on its employment and growth potential.

R: Region (size & location)

Firstly, we need a fundamental shift in the way we identify and develop these clusters. Cluster development in India is highly fragmented. For example, the country’s 376 SEZs have a combined area of 39,762 hectares (about 400 sq km). For comparison, the size of Shenzhen SEZ at conception was around 150 sq km, and over time it has grown to over 300 sq km. This fragmented development in India hampers our clusters from realising the scale and ecosystem benefits of manufacturing in an industrial region, which in turn affects our global competitiveness.

Clusters in India have been developed with the intention of drawing manufacturers to areas with low levels of development. That’s because these clusters have been wrongly seen as tools to drive equitable growth across the country. This fragmented approach to cluster development is not conducive when it comes to enabling scale and network effects; which is critical to driving competitiveness. Most clusters in India are 1/100th the size of a successful international SEZ.

One may rightly argue that creating large clusters has serious budget implications, mainly driven by the cost of land acquisition. But there are a few tactical strategies that governments can adopt to solve the ‘right size vs right cost’ dilemma.

  • Ensure that the improved governance and regulatory framework that it creates spills beyond the identified core region to a much wider region that would truly define the size of the SEZ.
  • Focus on expanding existing clusters rather than developing new clusters in undeveloped areas.
  • Don’t focus on acquiring the entire piece of land but rather on building infrastructure and acquiring a critical core that can go to large anchor investors.

These strategies could help optimise budgets while ensuring there is a sufficiently developed core that allows private investment to develop the ecosystem in the rest of the region.

I: Infrastructure

India’s industrial parks are very basic, with minimal development and infrastructure, including substandard roads, an electric substation, and a rainwater drainage system. There is no plug-and-play infrastructure or housing for workers near factories. This leads to the creation of slums near factory areas, which are usually occupied by migrant workers while the local workforce struggles to find transportation. Additionally, most industrial clusters have become hubs for real-estate speculation, causing prices to shoot up in these areas.

This lack of planned infrastructure in industrial regions is why most large and medium plants prefer to stay away from these regions and build factories where they find land at the most competitive prices. This leads to fragmented development of large factories outside most Industrial regions and is the reason why most Industrial zones get converted partially or fully into IT service parks or office spaces (for example Okhla, Udyog Vihar, Gurgaon.)

By studying international parks, we realise that when it comes to creating enabling infrastructure in these regions, the focus should be on creating high-quality infrastructure across four key domains.

  • Basic infrastructure: Roads, water connection, electricity, gas, sewage and drainage lines, disposal facilities, network connectivity, etc.
  • Common industrial infrastructure: Effluent treatment plants, testing labs, integrated waste management, etc.
  • Export infrastructure: Fast, on-site customs clearance, multi-modal trade routes to the nearest port, bonded warehousing facility, etc.
  • Social infrastructure: Primary health infrastructure, hostels, banking services, schools, skill-training institutes, recreational facilities, hotels, etc.

It is critical to note that not all this infrastructure needs to be developed directly – much of it can be developed in partnership with private companies. Purely from the infrastructure perspective, Brandix Apparel Park in Andhra Pradesh stands out as a good example.

S: Strategic incentives and investment promotion

Incentives have become a necessary evil of Industrial policy. But the reality is that long-term investment decisions are not based purely on incentives. So while we can create subscale parks where we attract investors with incentives, these parks can never become sustainable ecosystems unless we solve for fundamental competitiveness.

Hence, we need to be strategic while offering incentives. They need to be targeted at sectors and regions where there is the highest probability of developing an ecosystem. Additionally, incentives should not be offered merely to offset costs but must be targeted at large players who could help achieve scale and build a long-term competitive ecosystem. This is the reason why the PLI scheme has been successful in attracting investment in sectors such as electronics but has failed in other sectors.

When it comes to offering large incentives, it is critical to ensure they are delivered on time. Far too often, this has not been the case. This causes mistrust amongst investors and hinders future investment.

In addition to offering large incentives, investment-promotion agencies play an integral role in driving investment in a region. But these agencies are often not consulted when the clusters are planned and are only involved in the downstream end of investment promotion (marketing). This has caused some agencies to become completely out of touch with the real challenges that influence investors’ decisions.

In many states these agencies are largely political marketing bodies with little to no direct investor relationships. This is because investors over time have also come to view them as mere marketing agencies and engage with them accordingly. The role of investment agencies should not be an afterthought and they should be consulted from the very start. This will allow us to co-create these regions based on investor requirements, giving us a higher probability of success.

For example, Li Kwoh-ting, once head of the Taiwan Industrial Development and Investment Center and later a key minister in the Taiwan government, played a critical role in crafting policies that led to the development of the Hsinchu Science Park in Taiwan, where TSMC is headquartered. This allowed the park to be developed around the needs of a key anchor tenant, who has gone on to become the world’s largest semiconductor manufacturer.

Also, the role of the investment manager does not end once the initial investment is made or the unit set up. It needs to be seen as a long-term engagement role with the goal of achieving scale and global competitiveness. This is the only way to enable future investment in the region. This full spectrum of service, right from ideation to expansion and beyond, is vital to making these parks successful.

E: Enabling governance and regulations

India’s regulatory landscape is plagued with excessive regulation and frequent ad-hoc changes. While efforts have been made to improve our regulatory environment, overbearing clauses in laws, and rules that are presented as necessary but are typically used for rent-seeking, continue to make manufacturing in India unattractive. Also, there is no real regulatory or governance benefit to operating within an industrial cluster. In contrast to the Indian experience, a very high degree of legal and regulatory freedom, along with strong commitment from the top leadership, is what has helped Chinese SEZs become successful.

The Brandix Apparel Park is a good example of where our regulations hurt investment. It’s a 1,000-acre park with best-in-class infrastructure, but remains under-used due to regulatory cost overheads that are unique to India. The park has the potential to employ over 60,000 people but it continues to operate at sub-scale, employing just 22,000 people. That’s because it is less competitive than an apparel park in Bangladesh, even for markets like the US, where Bangladesh does not have any FTA advantage over India.

This is because the regulatory cost overheads in India continue to make manufacturing in our parks uncompetitive. For example, the minimum wage bill for any international apparel manufacturer operating in India is $110-120 per worker per month. But our regulatory overheads (high overtime rates, travel and night time work related requirements, shift restrictions, provident fund, etc) mean the real cost to the company is as high as $200 per worker at the entry level.

The labour cost at a comparative park in Bangladesh (which has a similar minimum wage) would be around $160, meaning our regulatory environment adds an additional 15-20% to the labour cost.

A poor regulatory environment coupled with a weak governance machinery has made doing business in India unattractive for most international investors, who prefer to operate out of Vietnam and Bangladesh rather than India.

While reducing this regulatory cholesterol will take time, it is important to take an experimental approach towards governance and regulations in our clusters. To achieve this, we need to leverage all the three arms of the state – the executive, legislature, and judiciary – to break down the barriers that stop the smooth flow of ideas, money and, most importantly, the entrepreneurial spirit. Only then will be able to spark innovation and create an ecosystem.

To give credit where it is due, states such as Gujarat are trying this approach in the financial-services sector with the Gujarat International Finance Tec-City Company Limited (GIFT City). GIFT City has an International Financial Services Centre (IFSC) which is governed by the International Financial Services Centers Authority (IFSCA) Act, 2019. Under this act, the powers of the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA) to regulate financial products and services have been vested in the IFSCA.

While it is still too early to assess the effectiveness of GIFT City in boosting employment and exports, we know from other countries' examples that if implemented well, the approach holds immense potential to drive growth. We now need to create a strong regulatory environment that enables growth in manufacturing. The long-awaited DESH Bill seems to have some of the provisions necessary for us to enable just that, but it must also allow states to provide flexibility in key areas.

Rahul Ahluwalia is co-founder of FED, and Ronak Pol is team lead, strategy, FED.

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