As the government steps up its efforts to boost the manufacturing sector, it is falling back on one of the conceptualisations of the pre-liberalisation era: townships built around manufacturing centres.

The earlier townships may have been predominantly in the public sector and the ones that are now being proposed have a much more prominent role for private investors. But they share several strategic elements in the approach to expanding manufacturing — including the weakness of underestimating the importance of location.

The earlier public sector townships had more success than it is now fashionable to give them credit for. In addition to creating a manufacturing base in a largely backward economy, their emphasis on education and health facilities for their workers had several longer-term benefits.

The children of these workers who had access to these facilities went on to join the educated manpower that powered the boom in IT and other technology centres.

The political potential of these high-wage and high-benefit islands was soon recognised by those who could influence policy.

Governments began to tap this potential by setting up townships in areas where political support was needed. And these needs ranged from gathering votes in poverty-stricken areas to trying to make the Indian state more acceptable in areas of political strife, including Kashmir.

Not surprisingly the costs of these townships increased, often ensuring that the products manufactured there were no longer economically competitive.

THE impact

In a welcome change from simply scoffing at all that was done in the pre-liberalisation era, the recent manufacturing policy provides the pride of place to townships. In a positive move, the case for industrial clusters has been expanded into one for entire townships.

The size of the National Investment and Manufacturing Zones (NIMZs) is to be a minimum 5,000 hectares and some States have planned much larger areas for their NIMZs.

These zones are to also provide housing for workers, thereby going well beyond merely gathering land for industry. And since workers’ housing cannot go without education and health facilities, it is possible that the NIMZs could have as beneficial an impact on future manpower as the public sector townships once did.

What is less comforting is that the new policy shows just as much indifference to the costs of inefficient location as the approach before liberalisation did. It seems to assume that there is no longer any pressure to set these units up in areas that are politically, rather than economically, viable.

Yet State governments today do compete quite aggressively with each other to attract investment. They could then end up offering expensive concessions to industries to invest in areas that are not the most efficient location for them.

The scope in the new policy for viability gap funding, in fact, raises the possibility that the concessions could extend to direct subsidies.

The chances of such inappropriate location of NIMZs are enhanced by the new manufacturing policy, ignoring the wide differences across the country in the availability and skills of labour.

The policy seems to assume that labour in India is now mobile enough to move from one part of the country to another. And a large number of workers from the north and the east of the country do seek work in the west and the south. But this mobility only takes place when workers know jobs are available at a particular site.

A new NIMZ will only attract labour if manufacturers have already set up shop, and manufacturers are quite unlikely to move into new townships without adequate labour being available.

It is then quite possible for a NIMZ township to look very attractive in brochures but come up short simply because it is located in an area that does not have the appropriate labour force.

Start with local labour

In breaking out of this vicious circle of the absence of labour inhibiting investment and the absence of investment making it difficult to attract labour to a township, it would help if the NIMZ is located in an area where labour is locally available.

If there is labour with a particular skill set available locally, it will attract industries seeking workers with those skills.

Once these industries are set up the township could become a magnet for labour elsewhere with the same sets of skills. In other words, locally available labour is necessary to kick-start a township, after which the cycle of labour and industry attracting each other can take off.

The availability of labour with the appropriate skills in adequate numbers is not the only dimension of the costs of production that is affected by location.

Access to other resources, including land at affordable prices, is also a potentially critical factor in the competitiveness of a manufacturing unit.

The successful NIMZs are likely to be the ones that are located at points where the manpower, resource and other advantages are significant enough to minimise the viability gap funding.

At the same time, by explicitly opting for location neutrality, the new manufacturing policy has kept wide open the possibility of several NIMZs failing simply because of inadequate attention being paid to the adverse impact of location on their competitiveness.

The author is Professor, National Institute of Advanced Studies, Bangalore

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