Dr Aradhna Aggarwal On Sezs Their Role In Economic Development And Indias Growth Ambitions

TITLE: Dr. Aradhna Aggarwal on SEZs, their role in economic development, and India’s growth ambitions CHANNEL: Markets by Zerodha DATE: 2026-04-29 ---TRANSCRIPT--- India is losing competitive advantage in labor-intensive industries because our wages are rising. Our economy is growing due to the service sector. We are losing that kind of advantage. Would you say India’s service growth has eaten into an opportunity for us to move into labor-intensive manufacturing? Is that the implication of this? Yes, that’s what I want to say. It is very difficult now to really promote on a big scale labor-intensive production in the country. So this is my take on it. Dutch disease, I believe. Dutch disease, I’m talking about Dutch disease. So some sector is growing very rapidly, wages are very high, they actually create a cost disease in the entire economy. Hi folks, hope you’ve been well. Through the stories we do on The Daily Brief, we often notice the role that Special Economic Zones, or SEZs, play, or are expected to play by the government instituting them. When we decided to look further into how SEZs work though, we were met with stories of failure failure is far more than success, and the conditions of success are often quite difficult to meet. Sometimes those conditions, while broadly similar, are not easily defined across countries. For instance, China’s SEZ policy has had different nuances than that of Taiwan or South Korea. Each of them faced somewhat different challenges while scaling up the success of the investments they attracted in these zones. This conversation is incredibly important in the context of an India that, for a while, has been actively courting foreign giants to bolster manufacturing. Say, for instance, Foxconn’s investments via Apple’s entry, or for that matter, Hyundai and Kia’s entry into India’s auto sector. To address all these strands of thought, we had a chat with Professor Aradhna Agarwal. She’s one of India’s foremost experts on SEZs, and her work spans industrial policy, international trade, and technology transfer. She has taught at the Copenhagen Business School in Denmark, served as a consultant at the Asian Development Bank, and is currently a senior advisor at the National Council of Applied Economic Research, in New Delhi. This conversation was the kind of economics lesson I wish I had earlier in life. It spans the histories of how various countries pursued economic development, eventually circling back to India. I hope you enjoyed it as much as I did. So, Professor, thank you so much for joining us. Professor Aradh Nagarwal is an expert on Indian industrial policy and special economic zones. So, Professor, sort of the first thing that I’d like to talk to you about is the idea of what an SEZ or a foreign direct investment is meant to do. It is, in your view, meant to form what you call backward linkages, where the investment sort of helps create linkages or networks with local suppliers. For example, if you have an Apple or you have a Foxconn and it sets up shop in India, you have many local players who are subcontracting with Foxconn, so to speak, and that is the ideal success case of an SEZ or a foreign direct investment. So to start with, what do you think are the conditions that are necessary versus the conditions that are sufficient for these backward linkages to form? Well, actually, as you said yourself, that backward linkages are very important if you really want to have a sort of spillover effect in the rest of the economy, because SEZs are generally considered as enclaves. And enclave type of growth actually doesn’t really affect the process of industrialization outside the SEZs. So I think that’s a very very interesting question about backward linkages, but these are not the only linkages through which SEZs are linked with the rest of the economy. So I think it is very important for the viewers to understand that apart from backward linkages, which actually happen due to subcontracting, due to procurement of local components, when these are procured by the SEZ firms, then actually the technology is transferred through these linkages. So these are the backward linkages, and you rightly pointed out that they are very important. But apart from that, there are other linkages, like when labor moves out of SEZs to the domestic mainland, then it brings with it the new technologies because this is how he has worked with. Then there are managers who have worked with SEZs. They, when they move out, they actually affect the processes in the rest of the economies. And there are forward linkages. Forward linkages happen when there are domestic sales from the SEZs to the rest of the economy. Then people get to know about new things, new technologies, and they are then may be replicated in the rest of the economy. So this is something which is not very prominently talked about, but in many, many economies, and I will show you how this becomes a kind of important linkage between SEZs. And then there are demonstration effects. Demonstration effects means that because the domestic firms are also co-located with the foreign firms within SEZs, there is a sort of spillover effect of how the things are managed and sometimes technology spillovers. So this co-location also leads to demonstration effects. But then there are social networks and information spillovers, like, you know, they are this industrial association or export platforms like Export Promotion Councils with the SEZ firms and local firms, they interact together. I think that is also where the two get together, and that also, that also leads to And one more linkage that I came across when I was doing research on SEZs was that sometimes the producers, domestic producers in particular, they get out of SEZs and they set up their shops even outside SEZs. So that also leads to a sort of— and this is a very prominent linkage, and I will come to that when I’ll show you how it happened in India and what industry was affected by that. So these are the various linkages. It is not merely about backward linkages. So this is— but of course, backward linkages are prominently discussed in the literature. So that’s the precise— I mean, so there I don’t say that you are wrong, but I’m just trying to, uh, you know, tell you that there are something more about SEZs than merely, uh, what is talked about. Is that these types of linkages are remain limited, uh, and they are actually prominent in a very few countries. Most of the countries, they really don’t, uh, they Now, what are the problems here? First of all, the problem is with the SEZs themselves. So sometimes SEZs are very small, they are very poor, they don’t really attract much of investment because unless there is a lot of investment, such linkages may not really occur. So there is no scale effect. Sometimes they are very poorly located and sometimes only foreign firms are allowed in SEZs. So there are many policies or specific structure that actually affects the kind of movement from SEZs to the rest of the economy. So this is one aspect of this. The second important reason is the policy barriers. So sometimes the policy barriers are such that people will allow transactions between the SEZ firms and the outside firms. For instance, you don’t give any incentives to domestic exporters to SEZs. So you are giving SEZ exporters, they can import free of duties from outside the world. But when it comes to the domestic suppliers, domestic suppliers don’t really— their sale to domestic SEZ firms is not considered sometimes as exports. So they are not given export benefits. But of course, in many countries now, this kind of problem is taken care of. So, but then the procedures may be very difficult because these are within the economy. So sometimes procedures are very, very complex to ensure that there is no leakage. Okay, so those procedures can have actually a major impact on that. Then there is also a problem with certain rules on domestic sales, as I just told you, that domestic sales are not normally allowed in the domestic markets. So this actually blocks the kind of forward linkage that can take impact. Some countries have taken care of that by allowing certain percentage of sales as domestic sales. But in most other countries, these are not allowed. But I will tell you that some countries that actually have allowed it have gained from it. Then the next factor is about the domestic economy, and which is the most important factor, that is the domestic economies. The farms in domestic economy are not really ready to really cater to SEZ farms because they are not technologically sophisticated, because they are— I mean, the cost the work norms, they are very different. They are not really of international standard. So sometimes it becomes very difficult for SEZ firms to really rely on the quality, cost, and timings of the domestic firms. So they prefer to import rather than getting involved with the domestic firms. So I think this is something which is the most important aspect, that how to really make the domestic firms capable of catering to SEZ forms. So this is a very important factor, and I’ll come to that when I give you some examples. And then sometimes foreign company-specific factors are important. You see that these MNCs which are operating in special economic zones, they are embedded in global value chains. So these global value chains, how they are to be formed, this is decided by the headquarters of the multinational companies. So they are— these enterprises which are set up in SEZs, they don’t take any decisions regarding And I’m not saying that this happens every time, I’m just giving you one possibility. So sometimes they are not really able to take the decision to really forge integration with the rest of the economy. Rather, they depend upon imports. Okay, so this kind of governance, MNC governance, that can also block this kind of, you know, these linkages, domestic linkages of SEZs. This structure, this entire Special Economic Zone structure is such that it really does not allow or facilitate the linkages to happen. Okay, but there are countries, there are instances where this thing can really happen. And this actually, and, and how this can happen and how this has happened, this is what I would like to talk about. Now, for instance, I am talking about this lowering of policy barriers. Now, many countries now have actually started doing that. They are really giving lots of incentives to domestic firms to export to SEZ firms. Subcontracting is also allowed principle. In many countries, joint ownership in special economic zones is promoted so that there are better linkages between the SEZ firms and the outside because, you know, you have domestic companies as well, which know more about, which have information about the domestic firms. So this is what actually is taken care of in many countries at the moment. Some countries actually have gone much beyond this. Now, for instance, Malaysia. Malaysia has promoted joint ownership. In the beginning, they promoted joint ownership between free zones and their outside companies, outside SEZ companies. Now, in Hainan, we see that recently this has happened, that if Hainan actually is an island in China— this is for your— and they have recently announced that as to be the Freeport. Now, in this Freeport, if processing is done and if 30% or more value addition is done on this island, then that can be sold to the Chinese mainland without any duty. It means that if 30% or more value addition is done on— within the— within these, uh, within this port, then domestic sale is allowed without duty. Now this is something which actually means that you have— you go to, to this free port and you can access the domestic mainland. Okay, so this is how the— this is the forward linkage, and this is going to have a major impact. In India, on the other hand, what we see that these domestic sales without duty are not allowed. We have 100% domestic sales, but on after paying the full duty, which makes it very expensive for companies to sell in domestic market. And this is a major demand by our SEZ firms to address this kind of problem. Okay, but in India, we are not really taking care of. On the other hand, what we are doing in the service sector, in the IT sector, any transaction between the domestic firm and the SEZ firm is to be done in foreign exchange. Now, this is again a kind of— this actually is affecting both backward and forward linkages, because you are actually making these transactions, domestic firms, it means that they have to have foreign exchange to really pay to you, or they have to buy foreign exchange to pay to you if you are taking services from this. So I think these are some of the policy-driven barriers are taken care of in many countries for backward linkages, but other linkages are not really, you know, like domestic sales, something is something that is not really taken care of. I think that is a very important aspect that needs to be looked into when we talk about that. Now, when secondly, we come to the SEZ-specific factors. Now, So here again we find that there are things which are happening in the sense that SEZs are becoming large now, okay. They— foreign, domestic companies are also allowed to be located in them. Some of the countries have benefited by that. For instance, this has come from China, and China has benefited it in a big way. This creates a sort of scale economy, and so large investments come and they they are open SEZs and they immediately forge linkages with the domestic firms. So we find that Thailand, Malaysia, these countries are actually benefited by this kind of SEZ structure. So Professor, sorry to interrupt you there, but I had a question in the middle of sort of what you were mentioning about sort of how SEZs are structured and more probably how MNCs in these SEZs work. What is the incentive of a multinational in an SEZ to form a backward linkage, or for that matter, allow, say, any other kind of linkage? For example, if I am, say, Foxconn, and I have set up shop in India, I would want to keep— ideally, I would want to keep as much of my know-how as much of what I know about how to make a phone with me, right, instead of sort of giving it away. Now, whether or not it eventually gets given away to, say, somebody who then leaves Foxconn to start another company, which is sort of the ideal outcome of an SEZ, as you’ve mentioned, right? But a lot of the times that doesn’t happen. How do you ensure that the incentives of these MNCs are aligned with this outcome? Actually, it is very difficult to do that kind of thing. But you actually create conditions that is more important. Okay, so for instance, for like one condition is that you facilitate through policy. Okay, for instance, you lower the barriers, transaction barriers, you actually give the incentives to the domestic firms, you actually try to really allow that subcontracting. So you don’t put policy barriers. For instance, domestic sales, you say that 5% of total sales could be in the domestic market without duties. Okay, simply. Now, like Philippines does. Okay, so this is what they do, and this is how you can actually— this is one way of having forward linkages. So one is that you facilitate that, you— and the second thing is that you actually, you actually promote the capability of your firms. Okay, so, so that they actually are able to cater to the domestic, to foreign companies. Now let me just give you an example. Actually, I was coming to that. In fact, sometimes what happens is that one possibility is that they are totally VC and they are not interested in having any kind of linkages with the rest of the economy. With FTI becoming, with SEZ becoming large and SKS becoming large, you know, they are becoming open now. So there are many services which are required, even if many other products, many sophisticated products are imported from abroad by SEZ firms. But there are many services which are required locally. Okay. And in that case, what they want is they actually try to give those, they try to train domestic firms outside the SEZs to provide those services. So these may not be kind of big, big things, but they may be small services, and that itself can transfer technologies to domestic firms to begin with. Now let me tell you that now it is very difficult after this WTO thing, but in like Taiwan, Taiwan actually adopted this kind of policy of developing their SMEs along with SEZs. And this is how they developed over the years. So what they did was they had put the condition for localization of their imports, you know, on a CZ form. And but not only the condition, they prepared their local firms to really supply to these companies. So a lot of efforts were gone into creating the kind of technological capabilities of SMEs. And over the years, Taiwan has become powerhouse of small enterprises. Okay, so this is how they did it. Malaysia, in Malaysia, Penang, I’m sure that many people have heard about it. This is a hub of electronic products. Here the state government, the provincial government, the Penang government actually took up this task and they prepared their companies to really cater to these SEZ companies. And this is how they established the kind of linkages. So they actually give them the platform where foreign multinational companies could network with small companies and these companies were given training so that they could actually cater to the demands of these companies. So this is a very deliberate effort. You cannot leave these things to the market. And why this doesn’t happen, as you were rightly saying at the beginning, that governments, they facilitate through policy barriers, but they do not really intervene in the market to create those kinds of capabilities to understand what SEZ farms require and how those, how those, those requirements can be met locally. Okay, you understand that? So that kind of understanding and that kind of intervention is absolutely important if you really want to have those backward linkages or even forward linkages for that matter, because ultimately when the foreign goods come, they may be new, but it is very important that they are replicated. And for that, again, you need to have domestic capabilities. So domestic capability is a very important factor. So policy measures are taken, but not this kind of improvement in the domestic capability and directly— direct policy intervention. Prepare to understand. Now let me give you example here so that you understand. Bangladesh, you know, is a kind of hub of textile products, apparel. They are manufacturing apparels, but most of their products they are importing. You understand that? So everything that they, they are only making apparels, the rest of the things are imported. So what happened was that the government has a very nice SEZ policy, this, that, very much facilitation and all that. And there is a facilitation of domestic market procurement also, but there is no direct intervention to create those SMEs which can cater to these, these companies. So this is how it matters. Let me give you one more example here before I finish. In Sri Lanka, you know that there are some branded textile companies. You know, we have that Brandix, for instance, here in India itself. They have Brandix SEZ. It’s a branded company, it’s a local company. And how this has come up, you see, they have actually come out of free zones only, the special economic zones. And here, luckily, they had a person, businessman, American businessman called Martin Trust. And this Martin Trust is known as the father of Sri Lankan textile industry. This is the person who took upon himself to create domestic capabilities to cater to the foreign markets. And this is how the free zone companies, they were— they could actually— the foreign multinationals, they could get in touch with the domestic companies. And domestic companies actually were trained and they were actually prepared through this direct intervention. So, but over the years, what we find that there are cases where it has happened. In India, we have this jewelry industry and we have this one of the largest exporter. Do you know how it has come up? It came up in Bombay Santa Cruz Export Processing Zone. It was Electronics EPZ at that time, but then in 1986, it was also turned into jewelry. Okay, so it was jewelry and electronics. And how it happened was that there was a person called Rajiv Seth. He got some order from Japan for this kind of jewelry. And he learned this technique from how to make that jewelry on a scale better from Japan. And he replicated that. And eventually what happened was that this this industry boomed. And this actually was everywhere because these people also set up their shops outside special economic zones. So first it boomed in special economic zones and then it came outside. So Gitanjali and all those brands, they came like, you know, outside like that. So what I— this is what I was saying, that if there are domestic entrepreneurs within SEZ, then there is a possibility that they gain experience there, and then they set up their shops outside as well. So, so there are many ways in which this has happened. This is what I am trying to say, but these instances are not many. That is the thing, okay? And not many countries have experienced this kind of spillover effects, you see. And therefore, overall, one really says— I mean, the generalization is that there is a possibility that this is an enclave model. So it’s a very famous terms, a very popular one. You say that this enclave model, it may not be enclave model if you really, you know, intervene in the market to ensure that this happens. Like, you know, I was in Sri City Special Economic Zones 2 years ago, and I was talking to the companies, and companies were telling me that they need some services from local vendors, but local vendors are not really prepared with the kind of technology that they want. So they were actually training them outside the special economic zones. So these foreign firms, at least for their local requirements, they do train them. And this is how the technology passes. And then, you know, this actually starts booming. So things can happen if there is a kind of thoughtful strategy of promoting this kind of spillover effects. You understand what they require. And you try to create a hub outside the special economic zones of these small companies so that they can, they can actually forge their linkages with these companies and the technology can flow out of special economic zones. So there are, there is a scope. This is what I want to tell you, and there are successful examples as well, but they are not on a very wide scale and not in every country. And this is why this turns out to be an enclave model. But we cannot really say that this is an enclave because you have to be efforts to get it done. China actually put the condition on foreign companies to, to share their technology, and then they created that, that kind of domestic capability to grasp that. They set up, you know what they did outside their special economic zones? They set up in their own indigenous zones, their own domestic zones, okay? And the whole idea was to have the trained people in those zones that they were known as high-tech zones. Zones. These people actually were the ones who were catering to these special economic zones, and from there, these special economic zones firms were talking to them. So, you know, if there is a possibility, then this linkage is always— this linkage can happen, especially in today’s world when the scale is increasing, the kind of value chains are developing across all types of products. So there is a possibility, even though it is not really leveraged. Professor, you’ve mentioned the rise of domestic entrepreneurs is like a huge signal for the success of an SEZ, and it makes sense, right? With China, I think with Shenzhen, you would say Ren Zhengfei, Wang Chuanfu, who both Huawei and BYD respectively, right? Or with Taiwan, Terry Gou, who is the founder of Foxconn. But there are a lot of countries where those domestic entrepreneurs or those domestic brands did not seem to come up. Like, for example, you mentioned Thailand, but To my mind, there are like— I can’t recall a Thailand— Thai auto brand, so to speak, right? A globally known Thai auto brand, even though Thailand has a very huge auto SEZ, right? Similarly for Mexico, right? Mexico has a lot of investments in auto driven by American car brands, right? And probably now Chinese as well. But Mexico still struggles to build a domestic car brand that is globally known. I was reading a piece by a historian named Pietro Messina who mentioned that Thailand, where it is today, even though it relied a lot on FDI to do its development, but it can never converge with, say, a China or a Taiwan because it was way too, like you said, it was way too reliant on the market, on foreign direct investments to sort of help them get there. So how do you think about this? On one hand, like you have the rise of domestic entrepreneurs in successful cases, but there are a lot more cases where they did not happen. Why did no domestic entrepreneur build a globally well-known brand out of, say, Thailand or Mexico? Actually, I was expecting that question from you when I said Thailand. You know, Thailand did develop all these ancillary product producers. You know, those are catering to that. So that was a backward linkage that they created. But you are absolutely right. That they are continuously dependent on foreign direct investors for this investment. For this, you know, they haven’t really created any kind of brand. And that’s a kind of huge problem that they are facing. And this is something— and even Malaysia, you know, we don’t have 70% of exports from SEZs is still from, you know, this, the foreign firms there. This is documented, even though there are instances of, you know, rise of domestic people, but overall, if you look at macro figures, are not very encouraging. So Southeast Asia actually has a problem. Let me tell you, they are continuously depending upon FDI, whereas Northeast Asia, if you look at, that’s a totally different case. And why that’s a totally different case? In both the cases, that R&D actually was totally, you know, that was neglected in that. They put a lot of money in attracting foreign direct investors. They also created production capabilities through backward linkages and all that, but they did not really create the R&D you know, the innovation kind of economy. So that innovation economy was done by, say, Korea or Taiwan or even China. So China, these countries, Northeast Asian countries, are the most successful. And this is what I have written in my article which is published in this Transnational Corporation, where I said these are the most— because they actually focused on technological development along with production capability. You see, when you say backward linkages, it may only have the kind of production capabilities because you are catering to someone who doing technology, okay, who is producing based on the new technology, but you are not, you know, you are not empowering them with technological development. So unless you invest in R&D, you cannot really produce your own brands. And if you look at, say, South Korea, they are the largest R&D spenders in the world after Israel. So I think that you have to really make sure that there are two different things: production capability and technological capability. So you can create production capability to cater to these multinationals, but you have to create that technological capability to come up with your own brands. You have to become from OEM to OEM. That is, so it is the other equipment manufacturers to original equipment manufacturer, original brand manufacturers. So OEM to OBM. So you have to really shift from OEM to OBM if you really want to do that, and that requires technological capability. So you have to put in money, you have to identify where you actually can, you can actually focus, what are your competitive advantages, where you can focus on and to create your own brand. And you can also identify those manufacturers, you know, those companies which can do that eventually. So this is a very difficult step to move from original equipment manufacturers to original brand manufacturers. This requires a lot of technological inputs in the economy if you want to do it. China actually had a huge model, a huge expenditure on— they are churning patents after patents every year. So I mean, that kind of attitude has to be there if you really want to promote your brands. So Professor, obviously we’ve heard the words China, Taiwan, South Korea a lot so far in this episode. In your research, you’ve documented sort of the various approaches that they had to export processing zones and special economic zones. What struck out to me was that besides China, Taiwan and South Korea had what you would sort of call complementary approaches, which is that their economy as a whole did not sort of necessarily gel with the rules inside an SEZ, which is also sort of what India did with Kandla, which is Asia’s supposedly first export processing zone. So whereas there was clearly in Taiwan and South Korea, at least there were some contradictions between what happened in an SEZ and what happened in the broader economy, except but they managed to smoothen over those contradictions. How do you think they did it? This is something India has infamously not been able to do. Where did we go wrong and where did they go right with sort of smoothing those contradictions and evolving over time? Well, actually, when you say go right or wrong, first of all, this is a very subjective term because so much depends upon the institutions, the context in which you are working. So perhaps the contexts there were very different. The institutional contexts in Korea and Taiwan, they were very different as compared with India, which is very large democracy and you have to take care of all the voices. In Korea, what happened was that they wanted to develop these chaebols, that is their large industrial houses, and they wanted to create that kind of scale of— and the regime that they adopted was a dual regime because they wanted to go for comparative advantage, defying industrialization. They wanted to develop large heavy industries. They needed a lot of, you know, technology. Which they did not have at that time. On the other hand, a lot of unemployment was around. So what they did was they tried to focus on some entrepreneurs, and I was actually hinting upon that last time in my last answer also, who could actually develop a kind of, you know, these large industries. So they gave huge incentives to them so that they develop those. But the problem was technology, so they had to import a lot. So what they did was they created their Special Economic Zones, which actually had nothing to do with the rest of the economy, as you were saying, but they could actually get foreign exchange and they could generate employment because those Special Economic Zones, they were focusing on— or the Free Zones, they were called— they were focusing on labor-intensive consumer goods industries. Okay, so they were actually trying to focus on heavy industries, high value-added products in the domestic market. But because there are limitations of that kind of industrialization, to address those limitations, they set up their free zones, which we did not do. We also focused on import substituting heavy industrialization based in a regime, but we did not utilize our export processing zones to generate foreign exchange or employment. We actually never paid attention to them. Some, there are success stories, but they are just because Indian entrepreneurs are really very entrepreneurial. Okay. So they complemented their free zones with their domestic economy industrialization. So they earned foreign exchange, they got mature technologies in their free zones, they got employment in those free zones so that they could focus outside on heavy industrialization. So the two were complemented, okay, in the beginning. So what happened was eventually what happened that after 1987, there were labor sites in Korea, and they started moving towards, even in SEZs, towards capital goods industries. And here again, you know, one more thing was there that outside special economic or free zones, Korea did not allow FDI. They allowed FDI only in those zones. So that was another thing. So I mean, they were basically complementing the limitations of the outside economy, as you also were pointing out. This was happening in Korea after ‘87, SEZs were, you know, they were reoriented to capital goods industries and then technology industry. So in 2003 onwards, they started having free economic zones where they even liberalized foreign direct investment in services. So earlier they liberalized foreign trade investment in goods in FEZs, and then later on in free economic zones, they liberalized foreign direct investment in services, which is not there outside the economy, you understand? So this is how they are complementing and they are trying to really you know, develop their special economic zones in line with their domestic economy. So they are actually using them as experimental labs. In Taiwan, they did not do that. In Taiwan, as I said you earlier, they actually used special economic zones to support their MSMEs, to support their small industries. So they attracted investment in those FEZs, and they actually tried to promote their SMEs in line with these free zones. So today, you know, earlier SMEs were dependent on free zones investment. Now I have heard and I have read that now these companies in free economic zones, they are looking for the support of small industries outside the SEZs because these SMEs are so powerful, I mean, so empowered with technological capabilities that they become a sort of source of new ideas for these companies, even in SEZs. So, so this is how the relationship had been. The two countries had adopted very different approach, one to support the growth outside and the other to complement the growth outside. Okay, these were the two different strategies which were adopted. China actually was more like Taiwan. They actually used foreign companies to come in, they use their technology, and they made sure that there is spillover So they had several contracts with them to have joint ownership, to share their technologies, and then they built their own technologies outside the special economic zones. So they actually, their entire growth is centered on special economic zones, and they made sure that special economic zones create economic transformation outside the special economic zones as well. Okay, so it is more like Taiwan, but Taiwan focused on small companies. SMEs, that is small enterprises. China focused on scale. You know, China is always about scale. So they have these large companies which are, which you named. They are large companies that develop because of the technological progress that they grew over time. From all the discussion, at least about Taiwan and South Korea, I also now want to move to sort of India in general. And in particular, I want to start with the electronics PLI because To a large degree, now these same Taiwanese and South Korean companies are investing in India. The hope is to, again, get the same things done, build backward linkages, hopefully build a capacity of domestic entrepreneurship and so on and so forth. How would you rate India’s PLI story so far, and how would you in particular rate the successes? Because electronics is obviously a huge success, but the big asterisks on it is that it’s still assembly driven. The move up to higher value activities is still slow, if not non-existent. So far as PLI scheme is concerned, basically they want to attract FDI in high value added activities. This is very important for them. Secondly, they actually also want to promote their growth within the economy so that we actually become a sort of a power in these high-tech products, which is because we won’t have that kind of technology. So these are the— I mean, I think the intentions are very good, but how they are implemented, I think the report came in 2025, and which shows that, you know, we are not able to really disburse this incentive because the companies could not really meet the targets. You know, many companies could not really, you know, kickstart the production. I don’t recall the figures, but yeah, the gaps in disbursements are quite public. But actually, I’m happy that it was continued. But, you know, it is not the point. The point is that you have to really create the kind of environment for the companies to really kickstart their production, to really meet the targets. So it is not merely Incentives do not really lead you to anywhere if you are not doing anything to reinforce them, to really make them effective. So merely by giving incentives, the targets, the kind of policy intentions, the objectives cannot be achieved. So it is very important, for instance, to see what are the problems that are being faced by them and how to really address those problems. So the attention should be first like, you know, we are just at the moment, we are trying to create production capabilities. We are not getting— PLI is not to make, you know, technologically strong India. We are trying to create those production capabilities within the country. So merely by giving incentives— the same story, you see, like in SEZ also you give incentives, but merely by incentives you cannot ensure that you develop the kind of capabilities. You have to really interfere. So similarly here, you have to see that, you know, there is a business environment where companies can really lead to that growth in production. And with this kind of international geopolitical uncertainties, this is becoming more difficult. So one has to really see how to address those problems and how to support the companies in such environment, because it may not be possible to really achieve the targets at this time. You don’t know because uncertainty is more dangerous for industrial growth than any fixed policy. You know, if you say that, okay, tariff is this much, it’s fine. But if you today say tariff is this much, tomorrow you say it is this much, the next day you say this much, then there is suddenly something happens. So this kind of uncertainty is really very hurtful for the industrial growth. So in this kind of situation, you really have to make sure that the incentives you are giving are effectively, you know, during, and you have to evaluate that. You have to identify the limitations and then address them. I think that is very important. So this hard part is not really done most of the time. The soft part, like you change the policy, you announce the incentives, you allocate some resources, that is done. But then how to really create those conditions for that to be successful, that is the hard part of a policy. So implementation is a hard part, and that’s That’s what we actually miss out on. So that’s the problem. There’s a— I forgot which paper of yours it is, but you’d also highlighted India’s export performance after 1991, after liberalisation, and then again after 2011. After 1991, you’d highlighted a lot of our exports, like they really zoomed past. But then after 2011, the export growth rate sort of significantly slowed down. And a lot of the slowdown was in labour-intensive goods like, say, textiles and apparel and so on and so forth, which is really weird to me because is how do you be the world’s, what, top 5, top 6 exporter of textiles in the world, yet you have this problem where it doesn’t seem like India’s export base in textiles at least is resilient, so to speak. And there are obviously multiple problems attached to it, of course, more so with the current geopolitical uncertainty. But what does it mean to sort of be such a large player in an industry yet not— where exports are high, employment is high, but yet not have like a base, export base on it. You are talking about my EPW article, Economic and Political Weekly article in 2000. So there actually I have shown that in my article that this is how it is happening. You know, this is not rocket science actually. This is because newer centers are coming. Like for instance, Vietnam is coming, like Bangladesh is coming. So these are the centers where the cost is very, very low. Okay. In India, the cost of production is high. This is one thing. Secondly, actually, India is losing competitive advantage in labor-intensive industries. We are moving towards skill-intensive production. So this is what actually I had mentioned that labor-intensive, because our wages are rising, our economy is growing due to the service sector. So we are losing that kind of advantage that is enjoyed by, say, these upcoming centers or the kind like Bangladesh, and they are also having tariff advantages. For instance, Europe has EBA. Scheme with Bangladesh. EBA is Everything But Arms. So you can export them free of tariff, you know. So that’s something, these kinds of preferential treatment, they also matter. So in India, where the cost of production is high, if you don’t have any kind of support like that, then it is very difficult to compete with these economies which have cost advantage, and at the same time they have preferential special treatment in this. So Vietnam is another major center that is coming. China actually is coming down, but still China is a major player in this market. We are not able to compete with them. We actually, and government actually is trying to, trying to push the textile sector like anything. You know, even in PLI scheme, they have put textile apart from other value-added technology-intensive industries. And the idea is that we have to generate employment. But I personally feel, this is my view is that India has lost the opportunity. It has lost the bus of promoting labor-intensive goods. Now we have to skill our people and we have to really focus on skill-intensive industries. And we really have to promote technological development, given the kind of maturity of the economy that we have. So we really have to move out of it. Because, or in textile also, we have to really focus on the specialized textile, because there is a high-tech segment within the textile sector as well, and India is doing well there. So I think it is important to, to really see that how we can focus within the textile sector, which components, which parts of the sub-industrial parts we can focus on and where we can compete better, rather than really taking textile as a whole. Because I personally feel that labor-intensive industrialization is not where India has the competitive advantage any And especially after this, there is something called— Dutch disease, I believe. Dutch disease. I’m talking about Dutch disease. So some sector is growing very rapidly. That sector, actually this sector, incomes are very high, wages are very high. They actually create a cost disease in the entire economy. So other economic sectors, they also demand that kind of salaries, that kind of wages. So wages start rising. And in that situation, you cannot really promote labor-intensive intensive production, which requires low labor, cheap labor. So we cannot have cheap labor with this kind of growth that has already taken place in the economy. So this is a controversial question, and I don’t know if there’s an answer to it, but because you mentioned Dutch disease, would you say India’s service growth has eaten into an opportunity for us to move into labor-intensive manufacturing? Is that the implication of this? Yes, that’s what I want to say. This is how I look at it, that, you know, this kind of specialization in the service sector, and that too high-skilled service sector, that has really affected the growth of the manufacturing sector. And we are moving towards— no, let me just further clarify that for your— right from the beginning, you know, when we adopted in 1956 the process of industrialization, we adopted the path of heavy industrialization. And heavy industrialization means we actually focused skilled specialization. You know, we could actually have used our special economic zones as complementary to this kind of process. You know, we did not do that. We just focused on this, and we had import substituting economy throughout the economy, whereas Korea had dual economy. So they had export-oriented unit for their regime for their export processing zones, and then they had import substituting regime for their heavy industrialization. So they had two kind of situations at the same time. In India, we adopted that and we paid attention to higher education, okay? We paid attention to higher education. We had inverted education paradigm. School education was neglected, so therefore our illiteracy rate was very high. On the other hand, we created these excellent institutions like IITs, IIMs, you know, these very, you know, elite universities in the country. So that is where we put a lot of money. So this kind of situation, actually, right from that kind of path, we had that kind of bias towards skill development, you see, skilled manufacturing. And now after the service, and this is the reason why service sector probably, because manufacturing could never really, you know, process could never accelerate in India, because we have so much of bureaucracy and so many, this protectionism, this, that. So manufacturing could not really prosper that much, could not become prosperous, but that led to service, you know, that when the service opportunity came, you know, because of the technological changes, we actually picked it up because we had those skilled people here. We had skill intensity. So these people actually pick it up and then we went for this kind of revolution. And then this revolution had reinforced the entire economy towards, they pushed the entire economy towards skill-intensive manufacturing and skill-intensive jobs. To me, actually, I personally feel that we are not really, whether you have these kinds of labor laws or not, but the thing is that people are now aspiring to get into better paid jobs rather than labor-intensive jobs. So it is very difficult now to really promote on a big scale labor-intensive production in the country. So this is my take on it. That’s a strong I have a very strong opinion. But it’s fair. It makes sense. I think I personally feel that now the thing is that we have to promote skill. We have this opportunity of AI and all that. So we have to really generate, otherwise we may miss the bus again. You see, so this is a time that we promote the entire structure now should be promoted towards the high-tech thing. So it is very important because you cannot stop technological change. You cannot say that now we don’t want technological. They are happening. They will come. Come. So you have to prepare your people. So human resource development is absolutely important in this country at the moment, because of the kind of structure that we have. Otherwise, 45% people are in agriculture, you have to take them out. So how you take them out, that is something we need really to work out and labor-intensive textile. I mean, I don’t think that this is the possibility somehow. Yeah. Very sobering sort of assessment. And I think that to some degree— I mean, I don’t think the degree is probably large, but I think with, say, electronics, right, with sort of getting Foxconn on board, what they did for, say, low-skilled people in China, is that the expectation is to do the same thing here, right? But at the same time, there are some signals that one might say are like good signals of sort of an investment like Foxconn working out here, which is that it is now also creating rise of certain domestic entrepreneurs like Dixon and Tata, right, which who have also entered the same game as Foxconn. There are some players who are working as ancillaries to say Apple, right? But would you say that that is necessarily like, is that a good sign or is it just an appearance? How real is progress rather? I think that that’s a good thing because I have seen myself 50,000 people employed in a Foxconn industry, you know, in Shenzhen city, I saw that. And I think that people are not interested in going to textile industry. Industry, but this is also a low-tech thing, but in high-tech industry. You know, this is also a low-skilled job in a high-tech industry, but people are interested in going there. So I think that this kind of employment is absolutely— and this is what actually we can now at the moment, we can promote. And this is what I really feel that this is a sort of, this is a way forward. This is how I feel, you know, this is happening. You know, if you were talking about this Thailand earlier. And I have just done a piece on Thailand, a report on Thailand, and I tell you that most of the time they are also actually having— they are not moving towards technological, as we talked about that, technology, high technological activities. They are also into that low technological segment within the high technology industry. So that is what their motto is. So I think that India, which is losing that competitive advantage in labor-intensive sectors, This is also labor-intensive, but it is in the high-tech sector. Okay, so assembly type of— so I think that this is something which is a way forward. And I personally want that India should actually think about this as compared with pushing in the textile sector also, they should push, they should actually look at the high-tech segments because there are, you know, so that is where, you know, we can have the hope. This is what I find. So Professor, I’ll like sort of just the last few questions. I know like quite a bit of time has passed, but I think very natural segue into probably more geopolitical concerns because our electronics success depends on foreign investments, right? It depends on at this point Chinese know-how also, not just electronics, but this is also true for solar. This is also true to a degree for pharma. Which supposedly we’re extremely good at, right? But in all of these industries, Chinese know-how, Taiwanese know-how, South Korean know-how is basically inescapable. You’ve probably heard that sometime last year, I think twice last year, Foxconn had to recall a lot of the Chinese engineers in Sriperumbudur because of geopolitical concerns, right? With sort of where the world is did. Obviously, this, like you said, right, India should aim for a low-skill opportunity in a high-tech industry. But the high-tech industries of today are dependent on what we would consider a geopolitical rival. How do you assess India’s stance towards China in that context and how it can avail the opportunity in what is clearly a tense time? I think that’s a very critical question. Yeah, because it is also becoming really very difficult at the moment to attract that kind of— but there is a positive aspect also. There is a sort of restructuring of global value chains across the world. We had a lot of investment that was going on. China, of course, China is still the most prominent country attracting FDI, but you know, there is a possibility of China Plus One policy, China Plus One strategy. Okay, so in that way, you know, we— there is a possibility India is still not really a major player, you know, in that China Plus One, because most of this, this investment is going to Southeast Asia, including Vietnam. And so we really have to see how to attract this investment, you know. So we are focusing on certain industries like semiconductor and all. We are doing some many, you know, some very good things. But the thing is that we have to really implement those policies seriously. PLI is one attempt to do that. So we are attracting, we are trying to attract, you know, this kind of investment in India through that. So I think that this is, there is a possibility despite all this, you know, these problems that are happening because this year we find that India’s FDI has grown. We have come up with $81 billion of FDI after a kind of, you know, continuous decline. In that. So there is a possibility of attracting that despite this geopolitical— and this is what every country is asking because I’m working for other countries and I find that this question is being asked by all other countries, how to do that, how to really, you know, address this kind of geopolitical crisis and get, you know, investment and get industrialization done, get markets and employment and technological diffusion. So everybody is actually trying to ask that question. So it is not only in India, whether it is renewable energy, because green energy, green technologies have become something very important now. How do you view India’s recent sort of bets with all the free trade agreements that we’ve signed with, say, the— I mean, the US, we still don’t have a final free trade agreement, so to speak. But with Europe, with the EU, obviously we have a landmark agreement. We’ve signed agreements with Australia, Oman, New Zealand, UK, and of course there is the interim free trade agreement with the US. How do you view India’s bets in that sort of world? And more importantly, how do you view all of these bets in context of India’s trade history as a whole, right? Our import substitution history as a whole. Yeah, you know that India had never been so active in this. We had a few, so we never relied so much on these kinds of agreements. This, actually, this has started happening after this geopolitical crisis only that we are now rushing to, because most of these countries are doing that. But if you look at Korea or even Vietnam, they are— one of the important policy factors driving their growth is these kinds of free trade agreements, because they also made their special economic zones more versatile, because, you know, this is how the investment comes, you know, when you have these kinds of agreements. Now, so far as India is concerned, now India— this is a kind of very latest thing for India. And, uh, the reports earlier had shown that if India has, you know, free trade agreement with countries, then India tends to lose in that, you know, import-export-wise. You know, you must have read those reports. And this was one reason why we were quite skeptical about getting into these But now, because the geopolitical crisis is happening, we are trying to make friends. So this is the, the kind of thing, and I hope that these are leveraged by strengthening domestic capabilities. You know, there is no substitute in policy of strengthening our own capabilities. So you— I mean, every other thing actually reinforces that or every other thing actually is based upon how much domestic capability you have. So at the same time, you go for trade. I mean, I, I’m quite pro this kind of thing that is happening, but I also would caution that India must now very sincerely put efforts on building our own production capabilities. Our value chains are not well developed in any sector. So we really had to— maybe we can identify some sectors and we can actually strengthen the Pharmaceutical is our strength, automobile is our strength. So we can actually look into those. Now renewable energy is the focus, semiconductor is what we wanting to get into. We have to identify the entire value chain. So I always say that we have to have value chain approach to industrialization. We have to see where we are lacking and we have to try to build capabilities there in those. So you can go for free trade agreement immense. But it is very, very important at the same time that if you really want to make them, you know, contribute to your economy in a big way, you have to create your own capabilities. At the same time, it is very important. There is no substitute to this. Okay, so, uh, I mean, I am happy that India is now opening up in that way, but at the same time, there is a caution for that. So otherwise, we may lose out. It is very important. That sort of leads me to probably what’s my last question, which is, I think India has been obviously trying to do a lot of domestic capability manufacturing for a while. But the thing is, we live now, live in a world where everyone’s trying to build their own domestic capability manufacturing. I think a lot of people would probably characterize this as a return to industrial policy for everybody, so to speak. But in a sense, what I see that means is that everyone’s siloing themselves. The US is siloing themselves. The US has become inward looking. It has now decided that globalization is not in its favor. Of course, China has always prioritized building domestic capability over anything else and everything else. Like from what the news looks like, every country is trying to do what India is doing. How do you view this clash of efforts? Because at the end of the day, there are things that these other countries will do that will deliberately or inadvertently, at least like, of course, there’s a lot of deliberate cases, but there are inadvertent cases where it can hurt India’s own efforts of building capability somewhere or building global market share somewhere. How do you view this sort of clash of industrial policies between so many countries, and especially when US and China are concerned? You are absolutely right. Every country is asking the same question. And I mean, because I’m working for different countries and I find, I tell you that every country is asking the same question, how to build domestic capabilities, how to do this and how to attract investment and then how to really have this kind of spillover effect. So everybody’s asking the same thing and they are going for new policies. But at the same time, what is happening in most countries, manufacturing share has been declining. This is also a fact. So in India, what India actually can do, India can have a more focused— this is what my understanding is— more focused approach about where the competitive advantages are. They need to be reinforced and they need to be built up to really have some strength in the, in the, in the, in trade. You know, China has a huge strength at the moment. Okay, at the same time, there is something which is happening and which is actually is not being much talked about, and it is servicification of manufacturing. So more and more services manufacturing is now now through services. You know, after this AI has come, you know, much of this manufacturing is now replaced by AI. Okay, so I think that servicification of manufacturing, that can be leveraged by India because India has the strength in service sector. Okay, so I think we have to really build those capabilities in a big way. And then we— so every country actually, if say Cambodia says I want to get into that, you know, electric electronics, and they have a very clear path. They say that I’m going through EPZ, you know, they have these special economic zones. So they are very clear about it, that through that, that is our route. So that kind— I’m not saying that this is the best country to emulate. I’m saying that this is one thing that we have to really identify where our competitive strengths are and how we can, you know, achieve what we want to achieve. That is very important. But overall, actually, if you look at the manufacturing sector, it is declining in most of the developing countries. This is— I have looked at the figures myself. So there has been deindustrialization taking place despite all that efforts to promote manufacturing. So this is something which is very serious. And India, I personally feel India is the best candidate to promote about it. Because India has, I mean, it has become a sort of matured economy where you have vast scale population, you know, they are actually having, they are in the lead of many big companies in the world. So they are heading them. So I think India actually is in a very good space. But the only thing is that somewhere we are not really leveraging using our own advantages, our own human capital to develop those, uh, those things. So implementation part is— it needs to be really looked into, and we should have a separate section on implementation strategy of those policies and how we are— we have to continuously evaluate them and to have a sort of dynamic approach rather than a constant approach. So that is very important for us to understand. Otherwise, most countries are doing that. But India is in a very good shape. This is what my— is in a very good space. But we are not able to take the advantage of that situation at the moment. So I think that there should be separate implementation strategy, how, you know, that should include even the training of people who are implementing those policies. I mean, people don’t really know about the policies who are implementing them. And that was my actual experience when the SEZ policy came. People did not know what the policy was about, and they were implementing the policy. I won’t say that India will be a manufacturing hub, but we can promote manufacturing. But we need to be more— I mean, there should be greater political willpower to make it happen. So Make in India, as of now, has a very limited success. And I would say that we need really to have that kind kind of push from every quarter to make it a success. Thank you so much, Professor, for doing this. Lots of truth nukes, so to speak, have been, and immense amounts of knowledge on not just Indian development, but sort of how international economic development works. And I think that surely you’re going to be thinking about this conversation for quite a while. Thank you. Thank you so much. Thank you. Thank you for inviting me and for this opportunity. Thank you.