India bets big on 12 new industrial smart cities: Will this bold move revive private sector capex by 2025?

Manufacturing. the term has become a buzzword for policymakers in India over the past few years as they try to increase its share in the country’s GDP by revving up private sector investments and attracting investors to set up industries. The objective has been two pronged: to transform India into a global manufacturing hub, rivalling, if not surpassing, China; and creating employment for the country’s teeming workforce. But the goal has been elusive till now. Building on this ambition, the Union Cabinet had in August approved 12 industrial smart cities that involve an estimated investment of Rs 28,602 crore; have the potential to attract Rs 1.5 lakh crore of investments; and create 1 million direct and 3 million indirect jobs. “If the country has to become developed, it must be self-reliant, produce enough to meet domestic demand, expand its exports and achieve the target of $2 trillion by 2030, meet the ambitions of the youth and provide them new jobs, encourage start-ups, then manufacturing has to be boosted. It is most important,” Commerce and Industry Minister Piyush Goyal had said after the Cabinet’s nod. These 12 industrial areas are strategically located across 10 states and planned along six major corridors (see graphic ‘On the Anvil’). Combined with four industrial smart cities that have been built already and another four projects under construction, the aim is to have a network of 20 industrial smart cities around 11 industrial corridors that would act as infrastructure building blocks to set up industries and manufacturing plants, provide ease of doing business, and improve multimodal connectivity—all requirements for investors. “These can act as magnets or catalysts to accelerate the industrial growth in these areas,” says Amardeep Singh Bhatia, Secretary, Department for Promotion of Industry and Internal Trade (DPIIT), adding that these are envisaged as modern towns and eventually along with manufacturing, services will also pick up in these areas. The Plan “The philosophy of the government is that it is not just industrialisation, but also industry-led urbanisation,” says Rajat Kumar Saini, CEO and MD of the National Industrial Corridor Development Corporation (NICDC). In an interaction with BT, he explains that these industrial smart cities are announced after careful planning and preparation and involves the central government and the states as equal partners. They have plug-n-play infrastructure, with the implementing agency taking care of land acquisition and environmental clearance, enabling investors to set up plants easily. The 20 industrial smart cities are being set up under the National Industrial Corridor Development Programme that began with the launch of the Delhi-Mumbai Industrial Corridor. Value addition in manufacturing has picked up and sentiments around manufacturing have changed. More people are interested in entering the sector -- Amardeep Singh Bhatia, Secretary, DPIIT Driven by the PM Gati Shakti- National Master Plan for Multi-modal Connectivity and part of the Make in India umbrella, salient features of the greenfield smart cities include potable and recycled water supply, reliable 24-hour power supply, effluent treatment plants, gas pipeline, an online application process to approve building plans, integrated city planning, telecom and optical fibre cable (OFC) network, single-window clearance, and e-land management system. Construction of the 12 projects will start this year and is likely to be completed in three years. On purchasing land, investors would have to commence and complete production within three years. Each industrial park will cater to a specific sector based on the ecosystem around it. For instance, the Khurpia project in Uttarakhand will focus on automobiles and auto components and engineering and fabrication, while the Rajpura-Patiala project in Punjab will focus on sectors including electronics, food and beverages, fabricated metal products, chemicals, machinery and equipment, textiles and apparel, rubber and plastic, and pharmaceuticals. The focus areas for the Hisar industrial area will be aerospace and defence, engineering and fabrication, food processing and ready-made garments while for Kopparthy in Andhra Pradesh, it would be renewables, auto components, metallic and non-metallic minerals, chemicals, engineering goods and textiles. The Response “There’s quite a bit of enthusiasm around the industrial smart cities that have been completed and the offtake has been very good,” Bhatia tells BT, pointing out that Toyota Kirloskar is setting up a manufacturing plant at AURIC (Aurangabad Industrial City) in Maharashtra. “There are multiple examples of how they have helped in [attracting] companies to set up shop in these areas,” he underlines, pointing to Dholera as another success story of the scheme. “Not a lot of people are aware, but Dholera, the first semiconductor city of India, is also under NICDC,” says Saini, adding that the response from investors has been more than satisfactory and this is likely to continue for other industrial smart cities. “At Dholera, the Tatas have already announced a semiconductor plant that they are in the process of constructing. The semiconductor ecosystem is coming to Dholera. The Micron plant, which is in Sanand, is also close to Dholera. The whole of government is working towards making Dholera the semiconductor destination in India,” he says. Saini explains that this includes railways, which is constructing a rail link between Dholera and the western dedicated freight corridor; the NHAI which is constructing a greenfield expressway between Ahmedabad and Dholera; and obviously, the Gujarat government, which is investing a lot of money outside the project area to develop the social infrastructure, “to give water, power, transmission lines”. The four developed industrial smart cities are seen to have an investment potential of $20.5 billion and have already locked in investments from companies including ReNew Power, Tata Electronics, Tata Chemicals, Torrent Power, Hyosung, Haier, Piramal and Kohler. Officials say there have been inquiries for the upcoming four projects as well. Given the combination of the government incentives and the fact that the local markets are big enough to attract some of these foreign investors, we are quite optimistic that things will improve over time -- Mahesh Nandurkar, MD &amp; Head of Research, Jefferies India Soon after the Cabinet approval, Vedanta Group Chairman Anil Agarwal had announced that the company would set up two industrial parks, one for aluminium and another for zinc and silver, on a not-for-profit basis. “For India, industrial parks are a good way to achieve scale in different sectors and across the value chain,” he had said. Experts and policy watchers also believe that the industrial smart cities could see a positive response but caution that increasing the share of manufacturing in the economy could take time. Ramendra Verma, Partner at Grant Thornton Bharat, points out that such infrastructure will reduce setup times for businesses, making it easier for both domestic and international companies to establish operations in India. “The parks will be designed to support micro, small, and medium enterprises (MSMEs) by providing them with affordable and accessible industrial spaces. This will foster innovation and entrepreneurship, enabling MSMEs to scale up their operations and contribute more significantly to the economy. The presence of large anchor industries within these parks will also create opportunities for MSMEs to become part of larger supply chains,” he says, adding that they will also enhance logistics efficiency and help in reducing transportation costs and time. Suman Chowdhury, Executive Director and Chief Economist at Acuité Ratings &amp; Research, agrees that the industrial parks will add to the infrastructure facilitation that is already being done for new manufacturing ventures. “However, how quickly they lead to actual investments and setting up of manufacturing projects on the ground will have to be seen as this tends to be a gradual process,” he cautions, adding that apart from land and environmental clearances, fiscal benefits tend to add to the attractiveness of such projects. The Challenges However, there could be some stumbling blocks. An immediate challenge would be to create Adequate social infrastructure that will attract sufficient people to move to these industrial smart cities, say experts. This was also evident in the case of GIFT City in Gujarat and while officials concede that this can be a challenge, they are hopeful that at least some workers would find it meaningful enough to move homes once they get a job in one of these emerging townships. What could be more of a challenge is the mixed results from India’s previous initiatives to attract private investments as it tries to become a global manufacturing hub. The cut in corporate tax rates to 22% for domestic companies, a 15% concessional rate for new domestic companies (that has since ended), as well as measures under the flagship Make in India scheme such as the PLI have seen limited success. Investors remain concerned about ease of doing business and the several compliances that setting up businesses in the country mandate. Private sector investments have also been tepid in the past few years in the wake of the Covid-19 pandemic and concerns about private demand. The issues were highlighted in a recent report by credit rating agency Moody’s, which pointed out that the manufacturing sector’s share of economic activity has stagnated. “At 13% of GDP in 2023, manufacturing’s share of aggregate economic output has fallen compared with five or 10 years ago, despite prominent efforts to stimulate investment into the sector and diversify the economy and employment away from agriculture and low value-added services,” said the report, adding that aggregate FDI inflows have eroded since peaking in FY21 with manufacturing accounting for a smaller share of such flows. However, Bhatia is confident that manufacturing growth will pick up. “Services has remained a strong contributor the economy but the share of manufacturing sector has not gone down,” he says, adding that the sector is picking up despite the sharp impact of the Covid-19 pandemic. “Value addition in manufacturing has picked up and sentiments around manufacturing have changed. More people are interested in entering the sector,” he says, adding that the government is working on getting technology and technological upgradation along with investments. He highlights that investments in smartphone manufacturing, automobiles and semiconductors are just some of the success stories of these endevours. The DPIIT is also working on a framework to take manufacturing into Tier II and III towns where labour and land costs are lower and which could lead to more employment opportunities in these areas. Discussions are on with industry bodies and states in this regard, Bhatia explains. Mahesh Nandurkar, MD and Head of Research at investment banking and capital markets firm Jefferies India, warns that electronics could become the second oil given the rapid rise in imports in the sector. However, he adds that the private sector is already in the midst of a capex upcycle. Acuité’s Chowdhury says that while there has been some increase in private investments in manufacturing, it is still not significant. According to RBI data, banks had sanctioned new projects worth `3.91 lakh crore in FY24 of which roughly 55% were in infrastructure and the remaining were largely in manufacturing. “However, there has been huge fundraising by companies from IPOs this fiscal and debt Sanctions have also picked up. Taking all this into consideration, we expect private investments to see a significant pick up by next year,” he says. While experts may differ on the specifics, almost all agree that a pick-up in private investments and domestic manufacturing is in the works. Along with all the measures already in play, the ambitious industrial smart cities could well give wings to India’s manufacturing dreams over the next few years. @surabhi_prasad

India bets big on 12 new industrial smart cities: Will this bold move revive private sector capex by 2025?

The Indian government's recent approval of 12 industrial smart cities indicates that there is steady investor interest amid expectations of a revival in private sector capex by 2025. Will this latest effort tip the scales in India's favour?