By Arpita Mukherjee and Avantika Kapoor
The Delhi–Mumbai Industrial Corridor (DMIC) is India’s first mega corridor project with an initial estimated investment of USD 100 billion and spanning across six states (Uttar Pradesh, Delhi, Haryana, Rajasthan, Gujarat and Maharashtra) with the aim to create a global manufacturing and investment destination. The project is expected to include 24 industrial regions, eight smart cities, two international airports, five power projects, two mass rapid transit systems, and two logistical hubs. Out of USD 100 billion, USD 4.5 billion came from Japan International Cooperation Agency and Japan Bank for International Cooperation as a loan. More recently, other countries such as Republic of Korea, Canada, the United States, Singapore and Taiwan have shown interest to invest in the corridor project. It is expected to be completed in phases, and in the first phase, eight industrial regions are planned.
Financing of the project
DMIC is a mega project requiring substantial investment. Depending on the location and size, the development of each city in DMIC was estimated to require an investment of INR 50,000-75,000 crore (at 2010 prices), which would include the cost of land procurement and development. The financial assistance for the DMIC project was in the form of grant-in-aid of INR 17,500 crore over five years beginning from 2011-12 for the development of industrial cities, at INR 2,500 crore per city on an average, subject to a ceiling of INR 3,000 crore per city, and an additional corpus of INR 1,000 crore as grant-in-aid over five years. As on June 2017, the central government approved INR 11,405 crore for developing various DMIC projects, after which states concerned would have to match the same contribution in the form of land.
The DMIC project had a slow start, but after Modi became the Prime Minister in the year 2014, he showed a keen interest in driving infrastructure projects, including the DMIC. However, the actual funds allocated to the DMIC are much lower than planned. Looking specifically at central government investments in the infrastructure projects, instead of concentrating on completion of the DMIC corridor, funds are being thinly spread across multiple projects. This has somewhat slowed down the investment in DMIC. Further, in spite of various initiatives by the government, including Make in India, Digital India and Smart City projects, private players have not been forthcoming in investing in the zones in the corridor and India did not get foreign investment in manufacturing as expected. This is partly because many incentives given to manufacturing units in India, including those given to units located in special economic zones, are either prohibited or actionable under the World Trade Organization’s (WTO) Agreement on Subsidies and Countervailing Measures. Therefore, exports from India using such incentives can face countervailing duties. While the Ministry of Commerce and Industry is aware of this issue, it is yet to design a WTO-compliant smart subsidy package for manufacturing units, and this has stalled the growth of manufacturing.
The policy bottlenecks
India has a much higher corporate tax rate compared to its ASEAN neighbours. The corporate tax rate of 25 percent for smaller companies and over 30 percent for larger companies is high compared to countries such as Cambodia (20 percent), Thailand (20 percent) and Vietnam (20 percent). This, along with other cesses, makes India an unattractive investment destination compared to the competing countries. Further, lower corporate tax rates for smaller firms prevent scale expansion, and the success of industrial corridors depends on large-scale units. India has one of the highest import tariffs in the region which makes it challenging to establish global value chains.
While India’s rank in World Bank’s ‘Ease of Doing Business 2018’ index has improved 30 places from the previous year, the country is ranked 100, which is lower compared to other competing countries like the Republic of Korea (4), Malaysia (24), Thailand (26), Vietnam (68) and China (78). The core issue in this context is, what can industrial zones in corridors offer, which is not already available to rest of the country? Can they help reduce the logistics cost from the present figure of 14 percent of the GDP to less than eight percent, as is given by other developing countries? For this to happen, zones should first develop fast transport facilities and efficient logistics networks. As of date, this has not happened in DMIC.
Issues with land procurement
In India, land acquisition is a state subject, and there have been issues with land acquisition in the corridor, which has delayed project implementations. For example, the Reliance Haryana SEZ project (Reliance Haryana SEZ Limited) was approved in 2006 over two districts in Haryana (Gurugram and Jhajjar). There were large-scale protests by farmers over land acquisition for the SEZ, and moreover, Reliance Ventures Limited (RVL) was unable to acquire contiguous land to meet the minimum holding requirements. This led to delays, after which RVL walked out of the joint venture with the Haryana state government, something that has been widely discussed in media. In the case of Dighi Port Industrial Zone in Maharashtra, while the DMIC Development Corporation had estimated 253 square kilometres of land available for development in the region, only 22.55 square kilometres have been acquired in its financial statements presented before the Parliament. DMIC mentioned that even the land parcels which have been acquired are not contiguous. India enacted the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (LARR) Act, 2013, which covers fair compensation for land acquisition for SEZs. However, private players have raised concern about the high compensation for land acquisition as per the Act, which makes projects non-viable. The present government has not been able to solve this issue.
Even after procuring land, the DMIC board on November 16, 2016, decided to return the land to respective state governments for gas-fired power plants that were abandoned due to difficulties in procuring gas. This is a case of bad planning. Moreover, without basic infrastructure such as electricity, it is difficult for large-scale corridor projects to succeed.
What India needs to learn
Experience of ASEAN, China and other countries show that corridor projects are successful and can attract investment in manufacturing if there are proper planning, implementation and right incentives. Instead of concentrating on multiple projects in a piecemeal manner, the government should focus on making the existing project operational and successful. India should have a strategy and implementations plan for DMIC, and delays have to be carefully monitored. Centre and state governments can work together with private players to resolve issues related to land acquisition and provide proper compensation for land acquisition. Proper planning is required for the creation of basic infrastructure. For example, the priority is to create logistics infrastructure to bring down the logistics costs, before attracting units into industrial clusters. If industrial nodes are built first without the logistics infrastructure and connectivity, they will fail to attract units. In a globalised world, companies will only locate and invest in India if the tax structure is favourable and tariffs are lower, which would enable them to import raw materials easily, and have fast-track clearances. It is crucial for the government to focus on pruning down the subsidies and making them WTO non-actionable. To conclude, unless India becomes an attractive destination for manufacturing and services, large projects of the scale of DMIC will not be successful.