NMIZs Vs SEZs

Abstract

India’s   draft   national   manufacturing   policy   proposes   National   Manufacturing   and Investment   Zones  (NMIZs)  as  instruments  for  revitalising  manufacturing.  The  policy addresses major challenges for Indian manufacturing such as inflexible labour laws, multiple procedures and environment-friendly production.  However, NMIZs pose several questions with respect to their relationship with Special Economic Zones  (SEZs). Unless states are consulted actively, the paper argues, NMIZs might be as controversial as SEZs.

Introduction

The High Level Committee on manufacturing, chaired by PM Dr Manmohan Singh, recently gave its in-principle approval to the draft national manufacturing policy. Prepared by the Department of Industrial Policy and Promotion (DIPP), the policy aims to raise the share of manufacturing in India’s gross domestic product to 25 per cent by the year 2025, from what is 16 per cent at present. Ministerial consultations on the policy are expected to be completed  within a month, following which it will be reviewed by the Cabinet and announced formally.

The change and dwells at length on how production in NMIZs will be encouraged to be ‘green’. Considerable attention has also been devoted to inflexible provisions in India’s different labour laws and the options available to manufacturers in NMIZs for overcoming these inflexibilities. The policy  also highlight of the policy is its emphasis on NMIZs as principle instruments for enhancing manufacturing output and exports. The policy takes note of  India’s  imperatives  in  tackling  climate  addresses  two  critical  constraints  of  Indian manufacturing – shortage of skilled labour and complying with multiple procedures –  and offers various suggestions for overcoming the constraints.

What are NMIZs?

A discussion paper prepared by the DIPP, which is the basis of the new manufacturing policy, explains NMIZs.3  These are proposed to be dedicated areas devoted to manufacturing and will not only include industries producing manufactured items but also public utilities, logistics, residential complexes, environmental safeguards and other administrative services. Like SEZs, NMIZs will have distinct ‘processing’ and ‘non-processing’ segments; the former will house core production facilities backed by logistics and production-related infrastructure, while  the  latter  will  comprise  of  the  institutional  infrastructure  such  as  residential, commercial and social facilities.

The  policy  expects  the  Central  Government  and  state  governments  to  meaningfully coordinate the development of NMIZs. The main responsibility of the Central Government, other than approving  establishment of the zones, would be to connect them with external physical infrastructure facilities such as rail, road, seaports, airports and telecommunications. This   will   be   done   through   appropriate   public-private-partnerships   (PPPs),   wherever necessary. State governments, on the other hand, will be  responsible for identifying and acquiring land, and ensuring supply of electricity, water, sewerage, state road connectivity, health facilities and safety measures. The governing authorities for NMIZs will be in the form of  special   purpose   vehicles   (SPVs)4      with  participations   from   developers,   industry associations  and  the  major  manufacturers  in  zones.  The  SPVs  will  be  responsible  for preparing master plans for the zones, specification of land use, demarcation of processing and non-processing segments,  identifying industries that can emerge in the zones, approving establishment  of  units within  zones,  planning and  developing internal  infrastructure  and determining  user  charges  for  various  facilities.  The  SPVs  will  also  be  responsible  for choosing the developers for the zones and those developers can be either government, private agencies or PPPs.

‘Green’ Production, Labour Laws, Skills and Procedures

‘Green’ production is heavily emphasised in NMIZs with such production encouraged by specific fiscal incentives. Those fiscal incentives include cheap loans for investing in projects with  green  technologies,   creating  earmarked  funds  for  supporting  research  on  green manufacturing and investment subsidies for independent power plants in NMIZs using green technology.  In  addition  to  incentivising  green  manufacturing,  the  policy  also  contains suggestions for making labour absorption and retention in NMIZs  a more flexible process. Several   exemptions   for   NMIZ   industries   have   been   proposed   under   the   Industrial Employment  (Standing  Orders)  Act  of  1946,  the  Industrial  Disputes  Act  of  1947,  the Employees State Insurance Act of 1948, the Factories Act of 1948 and the Payment of Gratuity Act of 1972. NMIZ enterprises have been proposed permanent ‘public utility’ status so that they are unaffected by production disruptions from unexpected strikes and lockouts. Subject to specific conditions, the Trade Union Act of 1956 and other laws relating to trade unions will be inapplicable to NMIZs.

The policy has tried to address the Indian manufacturers’ demand for uninterrupted supply of skilled labour, by recommending establishment of training centres in NMIZs through PPPs with training curricula addressing specific needs of industries located in the zones. Training will focus on building three skill pools;  an abundant pool of minimally trained workers, a sizeable body of well-trained personnel and a select group of highly specialised employees. In  an  attempt  to  reduce  the  significant  transactions  cost  involved  in  obtaining  multiple clearances and complying with various procedures, producers in NMIZs are proposed  to benefit from ‘single-window’ clearance systems for both the Central Government and state government clearances.

Unresolved Questions

The new  manufacturing  policy  attempts  to  address  some  major  challenges  confronting industrial  production in India. Over the years, these challenges – inflexible labour laws, multiple  procedures,  shortage  of  skilled  labour  and  energy-inefficient  carbon-intensive production – have assumed chronic proportions, casting serious doubts over manufacturing’s ability to increase output in a cost-efficient and sustainable fashion. The proposed NMIZs are expected to do exactly this by providing manufacturers  enabling  environments comprising quality infrastructure, effective logistics and incentivising green production.

While objectives behind proposing NMIZs are laudable, they raise a few questions. First and foremost,  with  NMIZs  coming up,  what  happens  to  SEZs?  Five  years  ago,  SEZs  were launched with almost identical objectives. Now, 133 SEZs are functioning in India, including several manufacturing zones. 5  Many of these are focused on manufacturing. The question is will introduction of NMIZs lead to lesser roles of SEZs in India’s industrial strategy?

The DIPP paper suggests NMIZs can include one or more SEZs. This ‘inclusive’ nature of NMIZs can create complications. For example, given a choice, where would industries prefer to be located – SEZs or NMIZs? Incentives are likely to influence the choice. By locating in SEZs, industries not only enjoy duty-free imports but are also exempt from paying income tax, central sales tax, service tax and other state taxes. ‘Single-window’ clearance facilities are also available to SEZs. In contrast, general incentives for NMIZ industries, such as tax exemption   on   expenditure   incurred   in   obtaining   international   certification   like   the International Organization for Standards’ ISO 9000, or subsiding expenditure on filing of patents, while useful, might fall well short of the fiscal largesse available to SEZ enterprises. This might create difficulties in incentivising industries to move to NMIZs, unless they are in SEZs within NMIZs.

A particular incentive proposed for NMIZ producers, distinct from SEZ industries, is the assurance  of   purchase  preference  in  government  procurements.  While  this  could  be encouraging for producers and  draw industries to the zones, it might, in the long run, be incompatible with procurement rules of the World Trade Organization (WTO). WTO rules do not encourage discriminatory treatment for specific enterprises in government procurement.

Availability of land and issues surrounding its acquisition will remain in full public glare as NMIZs  take  shape.  If  NMIZs  include  SEZs  –  along  with  additional  logistics,  support services, and processing and non-processing segments – they can hardly be small in size. As in case of the bigger SEZs, land can be a critical factor in curbing expansion of NMIZs. Other than a handful states and private developers with large land banks, obtaining land for large NMIZs will be a daunting task for both government and private agencies. More so, given that the policy expects states to bear the initial funding of land through either low-cost loans from international agencies or by raising resources from the market through long-term tax free bonds with land as the security. Poor maintenance of land records for establishing title rights to property and India’s relatively underdeveloped bond market make land a rather risky asset for issuing bonds against.

The SEZ experience underscores the importance of consulting states before implementing an industrial policy that depends heavily on active participation of states. India’s SEZs could have avoided much of the controversies they generated had the consultations between the Centre and states been deeper and wider. Success of NMIZs will depend upon how far the states have been consulted on the  policy and to what extent they are keen on pursuing it. Hopefully the ongoing consultations on the policy  will involve states as well. Otherwise, NMIZs might become as despised as SEZs and can be assumed by most as ‘land grab’ efforts by greedy real estate developers, as opposed to being virtuous vehicles for industrial growth.