Agenda #2 – CEZs could help India revive from its continuous decline

India had three major milestones when the tide could have turned but each time, history was made and unmade

Could the CEZ (coastal economic zone) concept be India’s hope for salvation? Most emphatically, yes.

India’s ratings are collapsing. It now has the lowest investment grade rating with a negative outlook from all three major global agencies — S&P, Fitch and Moody’s. That will make raising funds extremely difficult, just when India needs investments desperately. The CEZ could be a big help.

But first a backgrounder.

Three major disappointments

Hindsight can make people wise, but only if they seek answers. India had three major milestones when the tide could have turned, and the country could have been a major player among the best in the world. • The JP (Jayaprakash Narayan) revolt against Indira Gandhi, which led to the Janata regime. Disastrous.

• The Narasimha Rao government, which ushered in liberalisation. But the Congress tripped him up. This was followed by the Atal Bihari government and then by UPA-1. The India growth story did not really falter. But UPA-2 was a nightmare. The stench of corruption rose sky-high. • Then came Narendra Modi. His track record as Gujarat’s chief minister made him the most promising candidate to lead the country. Aspirations ran high. He spoke the right words – less government, more governance. Transparency. But the opposite happened. Corruption reared its head again. The country’s fortunes began sagging. The Covid pandemic accentuated the flaws and cracks.

At each of these turning points, history was made, and unmade. India stumbled; but picked up the pieces and hobbled along.

This time, however, if India stumbles, it may be overrun by vigilantes, or worse. Its GDP growth rate has been plummeting, year after year, since 2016-17.

FDI needed urgently

If India must survive, it needs to ensure (a) that purchasing power in rural India does not fall. It must therefore revive the cattle trade; (b) that FDI (foreign direct investments) pour in to revive the industry and service sectors, to ensure rapid growth and wealth generation. But FDI inflow into India has been decelerating.

Why? Three reasons.

First, the government restrained foreign investors from approaching international arbitration tribunals for speedy redressal of disputes.

Second, the government cancelled almost all bilateral investment treaties (BITs). That made investors even more insecure. Today, Singapore and the Netherlands are two countries with which India still has BIT. The government tried to persuade them to prematurely terminate the BITs. Both countries refused. Hence most foreign investors come through these two countries.

Third, the government became arrogant.

Arrogance

The government offered a modified BIT, which forbade investors from approaching international arbitration tribunals, till they had exhausted existing legal remedies in India. Most countries rejected this.

Arrogance made the government spurn all arbitration awards that went against it. It refuses to accept the awards relating to Vodafone, Vedanta and Devas Multimedia where the government lost both appeals).

India arrogantly banned access to its markets by any country which opposed its policies. It was confident that countries would be so desperate to tap into India’s market, that they would overlook other flaws.

Then Covid arrived and shrank India’s middle class and increased poverty. India’s clout as a robust market weakened. Citibank, General Motors and Honda began walking out of India as did a few other auto producers.

Unemployment rose. Almost all indicators relating to capital goods have also begun registering painful declines.

“For God' s sake, let us sit upon the ground And tells ad stories of the death of kings ...” -- Richard II, William Shakespeare

The CEZ option

The CEZ, almost as large as a city, ought to be given away to a partnercountry-investor.

A CEZ would thus be given the status of a protected territory under Section 234Q of the Indian Constitution. It allows for building an industrial city like Shenzen, or Noida. Like Indian ports which give terminals to foreign players on 25-50 years’ lease, these CEZs could be given on longer leases.

CEZs would be exempt from the notorious police raj. It would have access to alternative dispute resolution mechanisms, could export and even sell to the domestic market. Our discussions with two countries – Germany and Japan – suggest that they would be willing to take up major investments in CEZs if the concession period were for 60 years. Since CEZs call for huge investments (significantly higher than port terminals) they need longer concession periods and more incentives.

CEZs translate into townships. Construction booms. Education and medicare infrastructure too. Medical tourism, and health solutions for the rest of India. They could spur investments in drugs and pharmaceuticals, food processing industries, BFSI enterprises, electric vehicles, and telecommunications. Economic growth.

This would immediately allow India to get a surge in investments. You just need one successful CEZ to trigger other CEZs. India could bounce back.

Of course, the government will have to swallow its pride. But that is better than losing one’s face and then losing everything.