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Make in India: The Gujarat Production Base Opportunity podcast

As a leading industrial state in India, Gujarat offers a good choice for Hong Kong companies considering relocation of labour-intensive industries.

Following its recent fact-finding trip to India, HKTDC Research is rolling out a series of articles on the suitability of India as an alternative production base for Hong Kong companies burdened by the soaring cost in Southern China. The first article, Make in India: An Alternative Production Base with a Huge Local Market, provided an overview of India’s manufacturing landscape, labour cost, supply and quality and logistics, along with some government initiatives. This article examines the suitability of Gujarat as one of the leading Indian states that Hong Kong companies may examine for factory relocation.

As a western Indian state, Gujarat overlooks the Arabian Sea and shares borders with other states, including Rajasthan, Madhya Pradesh and Maharashtra. It has a number of ports along its coastline, in particular the Mundra Port, which specialises in containerised cargo, and Kandla Port for bulk and break-bulk cargo.

Ahmedabad is the economic hub of Gujarat and Gandhinagar is the state capital, which were both visited in HKTDC Research’s trip to Gujarat. This article looks at not just at Gujarat’s industry-friendly policies, but also labour-intensive industries and infrastructure development, along with a discussion of the industrial park visited in Sanand, Gujarat.

 

A Transformed Gujarat under Modi Outpaced India

Gujarat is among the top five Indian states in terms of gross state domestic product (GSDP) at constant prices, accounting for about 8% of India’s GDP. It had been governed by Chief Minister Narendra Modi from 2001 to 2014 before his victorious bid to become India’s Prime Minster in 2014. Modi’s pro business and FDI-friendly policies have transformed Gujarat, making it one of the fastest growing Indian states. From FY2005-06 to FY2013-14, [1] Gujarat recorded an average GSDP growth of 9.3%, compared with the national average of 7.6%. As a relatively well-developed Indian state, Gujarat’s per capita income is some 40% higher than the national average.

A major industrial state in India, Gujarat’s share of industry is about 40% of GSDP (while 28% of GSDP is attributed to manufacturing alone), with the share of service in GSDP accounting for about 45%. According to India’s latest Annual Survey of Industries, Gujarat contributes about 18% of the country’s value of industrial output. Major manufacturing sectors in Gujarat include petroleum products, chemicals, engineering, automobile and auto parts, textiles and garments, gems and jewellery, and pharmaceuticals.

Gujarat is among the top five FDI destinations in India, reporting a cumulative FDI of US$12.1 billion as of September 2015. Gujarat’s exports of US$59 billion in FY2014-15 ranked second in India after Maharashtra.

The following two sections will examine the business environment of Gujarat and the government’s pro-investment policies adopted.

Vibrant Gujarat Ranks Top in World Bank’s Ease of Doing Business in India

Gujarat’s population of more than 60 million is only 5% of India’s total and half of Maharashtra’s. If Gujarat were to be treated as a country, it would have a population similar to Thailand’s, trailing behind alternative production base competitors including Indonesia, the Philippines and Vietnam in ASEAN, but ahead of countries like Myanmar, Malaysia and Cambodia. With about half of its population aged 15-40, Gujarat has a good supply of young manufacturing workers.

Chart: Population Comparsion: Gujarat vs ASEAN
Chart: Population Comparsion: Gujarat vs ASEAN

As the home state of Prime Minster Modi, Gujarat has been a frontrunner in implementing economic reforms in India, with Modi trying to emulate the Gujarat governance model at the national level [2]. The World Bank's 2016 Ease of Doing Business (EODB) survey found India advancing to an overall ranking of 130, climbing 12 places from the previous survey. In collaboration with India, the World Bank published the EODB survey for Indian States in September 2015, with Gujarat ranked top in the overall survey. The report set out to assess implementation of business reforms on eight areas and revealed that Gujarat came first or second in five out of the eight assessed areas, as shown in table below.

Table: Gujarat Leads in Ease of Doing Business in India
Table: Gujarat Leads in Ease of Doing Business in India

The World Bank report also hailed Gujarat’s introduction of an Investor Support System to enhance access for both domestic and foreign investors to information on locations of industrial land, availability of infrastructure and proximity to ports and airports. Furthermore, application for a number of official registrations and procedures can now be made online, including labour registrations and pollution control board clearances. This should be welcomed by Hong Kong companies, as they can gain online access to information and procedures.

While the Chinese mainland and Hong Kong are not among the top FDI sources for Gujarat, rising production costs on the Chinese mainland have attracted growing interests in investing in this Indian State. The Gujarat government also indicated that it will establish trade facilitation centres in China to provide the State’s latest industrial policy information and address FDI-related enquiries.

Gujarat Supports Manufacturing, including Labour-Intensive Industries

While Modi’s Central government has attempted to increase FDI with a host of reform policies, including the Make In India Initiative (MIII) (Make in India: An Alternative Production Base with a Huge Local Market), state governments have also adopted many reform measures to enhance their business and investment environments.

Gujarat is an industrial powerhouse in West India, also known as the ‘Petrol Capital of India’ and an automobile manufacturing hub. The state government envisions turning Gujarat into a globally competitive and innovative industrial destination, which promotes inclusive growth, sustainable development and skilled employment. As said above, the share of manufacturing sector in Gujarat’s GSDP is at about 28% currently, which the state government expects it to rise to 32% by 2020.

Gujarat is not just an industrial base for heavy manufacturing, making cars, petrochemicals and engineering products, but also a light industry hub manufacturing products like textiles and electronics. Known as the ‘Manchester of the East’ and ‘Denim City’, Gujarat is the largest producer (35%) and exporter (60%) of cotton among Indian states, and is the third largest denim producer in the world. The textile industry alone accounts for 6% of the state’s industrial production, while contributing 12% of India’s total textile exports.

In this context, the government has earmarked a number of industries as the growth engines of Gujarat, including agro-processing, engineering and autos, pharmaceuticals, gems and jewellery, textiles and garments, as well as electronics system design and manufacturing (ESDM). The figure below shows the location of major industries earmarked by the government of Gujarat.

Map: The Location of Major Industries in Gujarat
Map: The Location of Major Industries in Gujarat

Some of these industries comprise many labour-intensive business units operated by Micro, Small and Medium Enterprises (MSMEs), which are eligible for state government support schemes and incentives. In fact, assistance to MSMEs in Gujarat is manifold, including Interest Subsidy, Technology Acquisition Fund, Market Development Support, Cluster Development, and Support for Ancillary and Vendor Development, with the purpose of encouraging MSEMs to expand and diversify.

In addition, eligible enterprises can apply for payroll assistance of INR1,200 per person (US$18). In order to shore up women’s workforce participation in Gujarat, an additional amount of INR300 (US$4.5) will be given to each woman employed. Aside from payroll assistance, eligible units are entitled to a Value-Added Tax (VAT) reimbursement of up to 80% the paid amount.

Initiatives Specific to Manufacturing of Textiles, Garments and Electronics

Aside from the subsidies for MSMEs, more initiatives are available for specific industries. Under the Gujarat Textile Policy, there are many incentives schemes assisting the promotion of textile industries, which include Interest Subsidy, Power Tariff, VAT Concession, support to Technical Textiles, Assistance for Energy Conservation, Water Conservation and Environmental Compliance to existing units, Assistance for Technology Acquisition and Upgrade, Assistance for Apparel Training, Training Support to Power Loom Sector, and Support for Establishing Textile & Apparel Park.

Similarly, under the new Electronics Policy introduced in 2014, Gujarat aims to bridge the huge demand-supply gap, which is expected to widen to about US$300 billion by FY2020, by creating a local business environment capable of meeting the domestic supply shortfall, suitable for product innovations, and presenting many investment and FDI opportunities. Under the new policy, incentives such as registration and stamp duty concession, subsidy on power tariff and tax incentives are provided.

Gujarat Wages Highly Competitive Compared to China and Southeast Asia

India’s labour cost is much lower than that of China. Similarly, Gujarat’s labour cost beats that of Chinese provinces, as well as that of most ASEAN countries. The monthly minimum wage for an unskilled garment worker in Gujarat is about US$100 in 2015. [3] The chart below compares the monthly minimum wage of garments workers in Gujarat with those in Asia’s major garment exporting countries.

Chart: Comparison of Monthly Minimum Wage
Chart: Comparison of Monthly Minimum Wage

Gujarat Has Well-Developed Infrastructure

Stable electricity supply at affordable cost is always a key consideration for manufacturers setting up production bases. While some Indian states may experience electricity outage at times, Gujarat’s electricity supply exceeds demand by some 20%.

Chart: Gujarat is an Electricity Surplus State
Chart: Gujarat is an Electricity Surplus State

Aside from a stable supply of electricity, Gujarat has a well-established transportation system connecting industrial areas and ports. It has the highest percentage of paved roads to total roads in India. The State government is also launching an ambitious 6,000 km State Highway Development Program (SHDP) to enhance the transport network. The programme includes providing multi-lane roads of good quality for entry and exit to ports, as well as enhancing connectivity between industrial areas and ports.

Situated on the west coast of India, Gujarat commands a location advantage, with a shorter transport route to Europe compared with either China or Southeast Asian countries. Container throughput at Mundra Port, India’s largest private port, is the second highest in the country after Maharashtra’s Jawaharlal Nehru Port (JNP). There are three container terminals at Mundra currently, with Mundra International Container Terminal (MICT) wholly-owned by DP World, India’s Adani Ports and Special Economic Zone Ltd (APSEZ) operating another, plus a joint venture between APSEZ and Geneva-based MSC.

Mundra Port is increasing its share of India’s container throughput amid JNP’s capacity constraint and last-mile congestion. In FY14-15, JNP handled a combined 4.46 million TEU, operating at more than 100% capacity, with an ongoing expansion to increase its handling capacity to 6.6 million TEU. Expecting further growth in containerised cargo arising in India’s western and northern industrial regions, MICT has partnered with French liner CMA-CGM, to build the fourth terminal with a capacity of 1.3 million TEU at Mundra, which is expected to be completed by mid 2016. A fifth terminal, also owned by APSEZ-MCS, will be added to raise Mundra Port’s combined handling capacity to 7.8 million TEU in late 2016, surpassing JNP by the time of its completion.

Chart: Mundra Port is Catching Up in terms of Container Throughput
Chart: Mundra Port is Catching Up in terms of Container Throughput

State-owned Kandla Port in Gujarat ranks top in cargo handling among all Indian ports, as it is the major import hub for petroleum, chemicals and iron, as well as an export hub for textiles, salt and grains.

GIDC Industrial Estates with Plug-and-Play Offers for Smaller Manufacturers

During the field visit in Ahmedabad, HKTDC Research visited Gujarat Industrial Development Corporation (GIDC), a state government agency tasked with developing industrial parks equipped with basic infrastructure and utilities. GIDC currently operates 186 industrial estates and is acquiring more land in Gujarat for further development. GIDC managers pointed out many advantages of establishing production units in GIDC industrial estate, where the allotment of land would be transparent and centralised, supplemented by good utilities and transport connectivity. Also, there are plug-and-play options for MSME manufacturers requiring smaller land plots. The allotment of land will be on a 99-year long-term leasehold basis and is renewable.

The business-friendly environment in Gujarat has attracted a number of foreign manufacturers to establish factories in the State. This includes Abbott, a US based healthcare products manufacturer which has established a factory in Jhagadia, Gujarat and Schurter Electronics, a Swiss electronics manufacturer, which set up its one of its production bases in Surat, Gujarat. In May 2015, a memorandum of understanding (MoU) was signed between the Gujarat government and a Chinese enterprise, which pledged an investment of US$1.6 billion for building a textile park in Sanand, Gujarat.

GIDC also showed HKTDC Research one of their industrial estates, Sanand Industrial Estate (SIE), about 25 km from Ahmedabad. The total SIE area is more than 20 sqkm. The second phase of SIE, Sanand II Industrial Estate (SIE II) was visited, with the first phase having successfully attracted a number of overseas manufacturers, such as Coca Cola from the US, Hitachi from Japan and Bosch from Germany. SIE II hosted manufacturers including Ford from the US and Baosteel from China, which have established their production plants with large factories and warehouses.

According to GIDC, the land allotment price for SIE II was about INR3,600 (US$56) per sqm as of April 2015, which compares favourably with industrial land price in most parts of the Pearl River Delta (PRD), China. For example, the price for industrial land in Shenzhen and Guangzhou (which were popular locations for Hong Kong manufacturers setting up factories) ranges from US$61 to US$95 per sqm.

Sanand is well connected by state highways, and the nearest railway station and airport are in Ahmedabad. As far as bulk cargo is concerned, Sanand is served by Kandla Port and Dahej Cargo Port about 270 km away from Ahmedabad, while Mundra Port is further west or another 80 km from Kandla Port. Therefore, manufacturers based in SIE may find it more convenient to use those cargo terminals at Mundra Port than JNP, which is 560 km away.

Map: Sanand Industrial Estate is Well Connected
Map: Sanand Industrial Estate is Well Connected

Roads within the SIE II are well-paved and organised, with dividers separating traffic from opposite directions. They are wide enough for large or container trucks to move in and out.

Photo: Baosteel’s production facilities in SIE II
Baosteel’s production facilities in SIE II
Photo: Baosteel’s production facilities in SIE II
Baosteel’s production facilities in SIE II
Photo: Lots of trucks go through SIE II
Lots of trucks go through SIE II
Photo: Lots of trucks go through SIE II
Lots of trucks go through SIE II

Gujarat Houses 40% of Delhi Mumbai Industrial Corridor

Aiming at transforming India into a global manufacturing hub, the central government of India launched the Make In India Initiative (MIII) in September 2014. Under the MIII, a number of national industrial corridors have been proposed, with the Delhi Mumbai Industrial Corridor (DMIC) as the most ambitious. This US$100 billion infrastructure and industrial project passes through six Indian states [4], with a total length of 1,483 km. DMIC’s Dedicated Freight Corridor (DFC), a high-speed rail link to connect Dadri in Uttar Pradesh to JNP in Maharashtra, will be completed by 2019. At that time, manufactures based in Gujarat would have the added option of sending their goods by rail to JNP, on top of dispatching them by road to either MICT or JNP.

Along the DMIC, a number of smart cities, Special Economic Zones (SEZs) and infrastructure will be developed in the areas 150 km either side of the DFC. Since 40% of the DMIC falls within Gujarat, the government of Gujarat is developing a number of large-scale Special Investment Regions (SIRs), including the Dholera SIR, which has a total area of 879 sqkm (about 80% of the size of Hong Kong). It is about two hours’ drive from Ahmedabad, traversed by the Ahmedabad-Bhavnagar Express Highway.

The Dholera SIR welcomes light manufacturing, such as garments, electronics and toys to establish production sites there. To further enhance connectivity, the government plans to develop a rail link, as well as a port for the SIR.

Map: DMIC Passes Through Gujarat
Map: DMIC Passes Through Gujarat

Summary

Gujarat offers a favourable environment for Hong Kong manufacturers to relocate labour-intensive factories. Aside from ranking top among Indian states in the World Bank’s EODB survey, the Gujarat government’s promotion of textiles and electronics manufacturing should be welcomed by Hong Kong manufacturers. The State’s improving infrastructure is another advantage for those seeking an alternative production base in India. Since India is a large country with huge diversity across states, the forthcoming articles will introduce other states and assess their potential as alternative production bases.


[1]  India’s fiscal year runs from 1 April to end-March of the following year.

[2]  The business environment of India has been improving since Modi took over the helm at the Central government to introduce sweeping economic reforms. Despite initial success in Modi’s first year of administration, there is growing opposition to certain radical reforms, including simplifying labour laws.

[3]  This is based on the translation of the daily minimum wage of INR276 (about US$4) for an unskilled worker in the manufacturing of ready-made garments, who is assumed to work 25 days in a month, excluding any allowance. A 30-day month would attract a minimum wage of US$120.

[4]  DMIC spans Uttar Pradesh, National Capital Region (covering Delhi & Haryana), Rajasthan, Madhya Pradesh, Gujarat and Maharashtra.

Content provided by Picture: Gary Ng
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