The US-China trade war is an opportunity for India
Uncertainty regarding the future of global trade due to US-China trade tensions has presented India with an opportunity to position itself as a key player. India has a number of advantages. It is a thriving democracy with a young workforce; it is strategically located; and it acknowledges the importance of a relatively open economy with strong public institutions. However, a number of essential conditions crucial for attracting private and global investment, such as a skilled workforce, good infrastructure, protection of private and intellectual property rights, credibility in honouring commercial contracts, and timely resolution, are either weak or missing. Given that an overhauling reform is likely to be gradual and uneven, special governance zones — founded on robust legal and administrative institutions — can play a major role in the country’s transformation.
India’s experiment with special governance zones began with the enactment of the Special Economic Zone (SEZ) Act in 2005. The major focus of this legislation was to incubate export-oriented industries within exclusive zones by granting them special concessions. Studies show poor performance of SEZs, especially in investment growth and employment generation. This, it seems, is a consequence of the legislation establishing these zones. The SEZ Act exhibits an inherent aversion to institutionalised legal as well as regulatory reforms, reducing these zones to mere tax havens for rent-seeking industries. For special governance zones to thrive, India needs to cast aside this approach for a more holistic one with a focus on rule of law and governance that can unleash economic freedom. China experimented with this model in Shenzhen, which was a small fishing town in the late 1970s. Shenzhen was carved out as an experimental ground for capitalism with flexible governance and legal framework. It started out as a centre for export activities and moved up the value chain by initiating institutional reforms. Now, on Shenzhen’s 40th anniversary, it is commemorated as the moment China committed to reforming its economy, which embarked on its historic growth trajectory.
One contemporary example of a functional and more encompassing special governance zone is the Dubai International Financial Centre (DIFC). In a region simultaneously characterised by civil law and Shari’a, Dubai has created a common law framework, which is more market-friendly. The major institutional reforms within this zone are the creation of independent civil and commercial courts, a robust financial services authority and a world-renowned arbitration centre. Backing these institutions are legislation, modelled on common law, covering several economic aspects such as contracts, data protection, employment, insolvency, and securities.
Hong Kong as well has been successful in attracting businesses having an open and competitive business environment, a sound regulatory system, in addition to a low corporate tax rate. Owing to its status as a Special Administrative Region (HKSAR), first with the UK, and now as part of China, it was able to formulate monetary and financial policies to promote entrepreneurship and market growth as directed by its constitution.
This idea has gained momentum in the Indian policy space as well. Arvind Panagariya, former Vice Chairman, NITI Aayog, advocated the setting up of such zones along coastal areas to take advantage of their location and existing connectivity to boost employment and exports. Such designated areas can be testing grounds for piloting market-oriented reforms. The framework of these zones must include predictable, fair and equitable norms, a business-friendly regulatory environment, incentives for foreign as well as domestic investments, speedy redressal of contractual disputes, land reforms, including eased regulations, technology learning and innovation, among other reforms.
Engaging in holistic reforms that value economic freedom and are entrenched in the rule of law will not only enable faster development, economic and export growth but also create employment opportunities and accelerate poverty alleviation. And with a large labour force, India is well positioned to capture the market of larger firms exiting China for greener economic pastures. While the government must offer strong commitment and support, the zones should have institutional and economic autonomy. Redefining the role of the government, civil services and civil servants will be key to unleashing its potential for economic growth.
Tinaz Mistry is associate and Avanti Durani is senior associate at IDFC Institute
The views expressed are personal