88967 Prepared for: Department of Industrial Policy and Promotion Ministry of Commerce and Industry Ministry of Urban Development Government of India and Department of Infrastructure and Industrial Development Government of Uttar Pradesh © 2014 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, DC 20433 USA This report is printed on recycled paper. This paper is FSC certified and is thus 100% environment friendly with its pulp coming from sustainable forests. Disclaimer This volume has been produced by the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the Governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Ltd. www.macrographics.com Acknowledgements This report has been prepared by the World Bank in response to a request from the Department of Economic Affairs (DEA) of the Ministry of Finance (MoF), Government of India (GoI) to provide non-lending technical assistance (NLTA) to the Ministry of Urban Development (MoUD), GoI and the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry (MoCI), GoI towards the formulation of development options along the Eastern Dedicated Freight Corridor (EDFC). This NLTA became possible through funding provided to the World Bank by the Australian Agency for International Development (AusAID)–World Bank Partnership for South Asia and the Korean Green Growth Trust Fund (KGGTF). The World Bank team wishes to thank Dr. Sudhir Krishna, IAS, Secretary, MoUD, GoI for initiating the effort and Mr. Anand Bhal, IES, Economic Advisor and Ms. Nandita Mishra, IES, Director (MoUD), GoI for facilitating the work in the initial stages. The team acknowledges the leadership and support from Mr. Amitabh Kant, IAS, Secretary, DIPP, MoCI, GoI; Mr. Saurabh Chandra, IAS, former Secretary, DIPP, MoCI, GoI; Ms. Aditi Ray, IES, Senior Economic Advisor, DIPP, MoCI, GoI; Ms. Vinita Aggarwal, IES, Economic Advisor, DIPP, MoCI, GoI and Dr. Mohan Chutani, IES, Economic Advisor, DIPP, MoCI, GoI. The work in Uttar Pradesh would not have been possible without the interest and active inputs from the Government of Uttar Pradesh’s Mr. Alok Ranjan, IAS, Infrastructure and Industrial Development Commissioner; Dr S.P. Singh, IAS, former Principal Secretary, Department of Infrastructure and Industrial Development (DIID); Mr. Dheeraj Sahu, IAS, Secretary, DIID; Mr. Sumant Singh, IAS, Special Secretary, DIID; Mr. Manoj Singh, IAS, Managing Director, Uttar Pradesh State Industrial Development Corporation (UPSIDC); and Mr. Sushil Kumar Yadav, IAS (retd.), former Joint MD, UPSIDC. The NLTA received support and encouragement from Onno Ruhl, India Country Director of the World Bank, Jack Stein, Sector Director, and Jyoti Shukla, Senior Manager, South Asia Sustainable Development Network and Ming Zhang, Sector Manager of the World Bank’s South Asia Urban Unit. This report was put together by a multi-sector team of the World Bank consisting of Barjor Mehta, Peter Ellis, David Dowall, Mark Roberts, Songsu Choi, Sang Hyun Cheon, Augustin Maria, Ireena Vittal, Parul Agarwala, Vibhu Jain, Jon Kher Kaw, Sangmoo Kim and Jyoti Sriram from the Urban Unit; Yannick Saleman and Bertine Kamphuis from the Finance and Private Sector Unit; Ben Eijbergen, Atul Agarwal, and Rakhi Basu from the Transport Unit; Denis Medvedev from the Economic Policy Unit; and Vinay Vutukuru from the Agriculture Unit. The report is based on the work by M/s. CRISIL Risk & Infrastructure Solutions (CRIS) Ltd. for an Identification and Diagnostic Study of the six corridor states. Ms. Sheela Bajaj provided editorial services and M/s. Macro Graphics Pvt. Ltd. rendered graphic design and printing services. Acknowledgements iii Context The main rail corridors in India are part of the ‘Golden Quadrilateral’ connecting New Delhi, Mumbai, Chennai and Kolkata. They account for 16 percent of the railway network’s route length but carry more than 60 percent of its freight load. Recognizing that the rail sector urgently needs to add capacity to these routes, the Government of India has, therefore, approved a long-term plan to build dedicated freight-only lines, parallel to the existing Golden Quadrilateral passenger and freight mixed traffic routes. The new freight network will allow trains to carry more freight, faster, with greater reliability and at lower cost. The relief on the existing lines will allow improvements in passenger services. On completion, the total corridor railway capacity will double, thereby unleashing further economic activities and job growth. The first two Dedicated Freight Corridors (DFCs) to be built were the Western and Eastern Corridors. The Western Corridor (Delhi-Mumbai), which is 1,499 km long and funded by the Japan International Cooperation Agency (JICA), is in the early stages of implementation. The Eastern Corridor is 1,839 km in length and extends from Ludhiana to Kolkata, traversing the states of Punjab, Haryana, Uttar Pradesh, Bihar, Jharkhand and West Bengal. The World Bank support for the Eastern Dedicated Freight Corridor (EDFC) was conceived as a series of projects in which three sections (total length 1,176 km, including the Khurja-Dadri section) would be delivered sequentially, but with considerable overlap in their construction schedules. The first loan (EDFC1) in the EDFC Program was approved by the World Bank in May 2011 and is already being implemented. The second loan (EDFC2) for the line from Kanpur to Mughal Sarai was approved by the World Bank in April 2014 and is also being implemented. The table below provides information on the three EDFC sections which are supported by the World Bank. The remaining 663 km of the EDFC is proposed to be funded by the Government of India and Public Private Partnerships. World Bank Funded Eastern Dedicated Freight Corridor (EDFC) Projects Section Length (km) Number of Tracks Cost (US$ million) EDFC1 Khurja-Kanpur 343 Double 1,453 EDFC2 Kanpur-Mughal Sarai 393 Double 1,650 EDFC3 Ludhiana-Khurja-Dadri 397+43DL Single 1,399 Total EDFC Program 1,176 4,502 The Government of India believes that the large investments being made in developing the EDFC will lead to large-scale job growth and overall economic development in the six corridor states. Based on an initial concept note prepared by the Ministry of Urban Development (MoUD), Government of India, the Department Context v of Economic Affairs (DEA) of the Ministry of Finance, Government of India requested the World Bank to provide non-lending technical assistance (NLTA) to prepare options for developments along the EDFC. The initial work by the World Bank on the NLTA was directed and coordinated by the MoUD, Government of India. Subsequent work by the World Bank is being coordinated by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India. The Uttar Pradesh state-specific work is being conducted in close collaboration with the Department of Infrastructure and Industries, Government of Uttar Pradesh. vi Leveraging Spatial Development Options for Uttar Pradesh Contents Abbreviations ix Key Takeaways x Executive Summary xi 1. Introduction 1 A. Purpose and objectives 1 B. Structure 2 2. Overview of Uttar Pradesh 3 A. Population trends 3 B. How urbanization impacts economic prosperity 4 C. Key takeaways  5 3. Uttar Pradesh’s Economy and Infrastructure: A Synopsis  7 A. Overview of the UP economy 7 B. Infrastructure and connectivity in UP: Can the state foster networks of economic clusters? 8 C. Key takeaways  9 4. UP’s District Economies and Economic Potential Index: Key Factors 11 A. Introduction 11 B. Key approach and EPI for UP districts 11 C. Candidates for growth centers 12 D. Major contributors to district EPI and policy implications 14 E. Conclusion 15 5. Criteria for Locating Logistics and Industrial Hubs within Promising Sub-Regions in UP 17 A. Introduction 17 B. Summary 18 6. Moving towards Implementation 19 A. Next steps for moving forward 19 B. What UP needs to do to enhance industrial development 19 7. Conclusion 21 References 23 Contents vii Annexes Annex 1: Estimation of Key Growth Drivers for UP Districts: Determinants of Per Capita Income  25 Annex 2: Numerator GDJ - Level of Growth Drivers for District J  27 Annex 3: EPI Scores for All UP Districts  28 Annex 4: Major Contributors to a District’s EPI 29 Annex 5: ID and List of UP Districts for Figures A1 to A3 31 Annex 6: Institutional and Policy Review 32 Annex 7: Practical Lessons to Mitigate Zone Pitfalls in UP 34 List of Figures Figure 1: Population growth rate in UP districts between 2001 and 2011 3 Figure 2: Poverty concentrated in eastern UP, 2010 4 Figure 3: Urbanization and GDP per capita strongly related 4 Figure 4: Spatial concentration of economic activity and higher incomes go together 5 Figure 5: Distribution of district GDP in the primary sector as a percentage of the  7 state’s total primary sector output, 2011 Figure 6: Distribution of district GDP in the manufacturing sector as a percentage of the  8 state’s total secondary sector output, 2011 Figure 7: Distribution of district GDP in the tertiary sector as a percentage of the state’s  8 total tertiary sector output, 2011 Figure 8: Regional rail transportation network 9 Figure 9: Road density as ratio of length and area 9 Figure 10: Economic Performance Index Scores, 2014 14 Figure 11: Economic Potential Index Map, 2014 14 Figure A1: Contribution of market accessibility to EPI 29 Figure A2: Contribution of per capita industrial investment to EPI 30 Figure A3: Contribution of industrial diversity to EPI 30 List of Tables Table 1: High Economic Potential Index districts, 2014 13 Table 2: Sub-regional classification of candidate districts, 2014 13 Table A1: Log-linear OLS regression per capita income 25 Table A6: Comparisons between SITP and SEZ Act implementation 33 viii Leveraging Spatial Development Options for Uttar Pradesh Abbreviations AKIC Amritsar-Kolkata Industrial Corridor CONCOR Container Corporation of India Ltd. DIC District Industrial Center DIPP Department of Industrial Policy and Promotion EDFC Eastern Dedicated Freight Corridor EPI Economic Potential Index GDP Gross Domestic Product GoI Government of India GoUP Government of Uttar Pradesh ICD Inland Container Depot MoCI Ministry of Commerce and Industry MoMSME Ministry of Micro, Small and Medium Enterprises MSE-CDP Micro and Small Enterprise – Cluster Development Program NCR National Capital Region NIMZs National Investment and Manufacturing Zones NMCC National Manufacturing Competitiveness Council NOCs Non Objection Certificates PMCs Project Management Consultants SEZs Special Economic Zones SITP Scheme for Integrated Textiles Parks SMEs Small and Medium Enterprises UP Uttar Pradesh UPSIDC Uttar Pradesh State Industrial Development Corporation Abbreviations ix Key TakeAways ™™ An economic assessment of all 70 districts in Uttar Pradesh indicates that four sub-regions with 14 districts show promising economic potential for industrial estates and logistics hub development. ™™ This report is based on fundamental economic analysis that considers: zz Market accessibility zz Industrial diversity zz Commodity flow zz Per capita industrial investment zz Specialization in agriculture zz Social conditions ™™ Four promising sub-regions have been identified: zz Auraiya-Kanpur zz Ghaziabad-Gautam Buddha Nagar zz Aligarh-Hathras-Firozabad-Agra zz Allahabad-Varanasi ™™ Based on discussions with decision-makers in the Government of Uttar Pradesh and Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India and taking into consideration the World Bank’s India Country Partnership Strategy, the options paper suggests proceeding with Auraiya-Kanpur sub-region and, at a later date, focusing on Allahabad-Varanasi. ™™ Careful, systematic and financially viable implementation will be needed. x Leveraging Spatial Development Options for Uttar Pradesh Executive Summary The purpose of this report is to present a range of options paper recommends that the GoUP proceed options for regional development in Uttar Pradesh with Auraiya-Kanpur and, at a later date, focus on the (UP) by leveraging spatial development patterns Allahabad-Varanasi sub-region. along the Eastern Dedicated Freight Corridor (EDFC). The report reflects the Government of India (GoI)- This report is part of a larger three-phased project World Bank’s India Country Partnership Strategy that to identify industrial and logistics hub development promotes balanced regional growth. While this work options along the EDFC/AKIC. In phase one, extensive has important implications for economic development data was collected on each of the six states through and job creation, the latter is being covered in a which the EDFC/AKIC traverse. The report represents separate work by the World Bank. The EDFC which is the second phase of analysis, namely the focus on also known as the Amritsar-Kolkata Industrial Corridor the districts of UP. Finally, in the third phase, in-depth (AKIC) will soon traverse UP and generate significant assessments will be made of select sub-regions in UP, opportunities for economic development in well- examining their economic structure and patterns of located and resource rich areas. Uttar Pradesh is the industrial clustering and assessing infrastructure, largest state in India in terms of population and has industrial and logistics hub requirements in these a diversified economy, ranging from agricultural to sub-regions. manufacturing to tertiary activities. It also has a large population living in poverty that would benefit from The remainder of the report is divided into eight well-targeted and effectively implemented economic sections: (1) Introduction; (2) Overview of Uttar Pradesh; development projects. (3) Uttar Pradesh’s Economy and Infrastructure: A Synopsis; (4) UP’s District Economies and Economic The report focuses on identifying potential sub- Potential Index: Key Factors; (5) Criteria for Locating regions for logistic hubs and industrial development Logistics and Industrial Hubs within Promising Sub- in the UP districts and develops an Economic Potential Regions in UP; (6) Moving towards Implementation; Index (EPI) to assess the likely impacts of investments (7) Conclusion; and (8) Annexes. therein. Using this methodology, four sub-regions have been identified for economic development, Section 1: Introduction describes the purpose of the namely: (i) Auraiya-Kanpur; (ii) Ghaziabad-Gautam report and outlines its structure. Buddha Nagar; (iii) Aligarh-Hathras-Firozabad-Agra; and (iv) Allahabad-Varanasi. Based on discussions with Section 2: Overview reviews the demographic, poverty, decision-makers in the Government of UP (GoUP) and urban, economic and spatial structure of UP. the Department of Industrial Policy and Promotion (DIPP), MoCI, GoI, and taking into consideration the Section 3: Provides a synopsis of economic and World Bank’s India Country Partnership Strategy, the infrastructure trends in UP, reviewing development Executive Summary xi trends and describing the state’s economic set-up. groundwork for detailed studies of the selected This section also illustrates the diversity of economic sub-regions in phase three. The section reviews the structures across the state and describes its existing key factors that should be used to select districts for infrastructure and connectivity networks. logistics and industrial facility investment, namely growth potential, ability to generate spread-effects, Section 4: Describes the development of the EPI improve market access, increase network density, model and reports the results of the economic analysis ease of land assembly, fiscal capacity, and social and of UP’s 70 districts. The section further describes the environmental impacts. economic model developed for the options analysis and its main drivers (Annexes 1-5 provide detailed The penultimate section on ‘Moving towards background material on the model, district level Implementation’, outlines the next steps that EPI scores and explanatory material). Based on the should be taken in analytical work, reviews India’s model, 14 districts concentrated in four sub-regions experience with developing industrial estates and are identified as having promising development offers suggestions for improving implementation, as potential, namely Auraiya-Kanpur, Ghaziabad-Gautam elaborated in Annexes 6 and 7. Buddha Nagar, Aligarh-Hathras-Firozabad-Agra and Allahabad-Varanasi. Finally, the report proposes a set of options for fostering development along the EDFC/AKIC and outlines the Section 5: Reviews the criteria for locating logistics work proposed in phase three to support discussions hubs and industrial development. It lays out the between the GoUP, DIPP and the World Bank. xii Leveraging Spatial Development Options for Uttar Pradesh 1. Introduction A. Purpose and objectives This report is part of a three-phase examination of potential economic development along the EDFC. Uttar Pradesh is one of the most densely populated The first phase, completed in October 2013, compiled states in India with high rates of poverty. The state is detailed socio-economic data for the six states through a major contributor to the agricultural staples of the which the EDFC traverses (CRISIL, 2013). The second country and, at present, a large percentage of the state’s phase comprises the preparation of this report for UP labor force is engaged in low-productivity agricultural and the third phase, to be completed in late 2014, will activities with the agricultural sector employing consist of two in-depth economic and infrastructure 60 percent of all formal workers at the state level assessments of selected districts. (Census of India, 2011). With investments pending in rail and infrastructure, such as the EDFC, UP is evolving The report provides an overview of the UP economy, into the main economic growth corridor of North India. illustrating changes in its economic structure. It also This evolution is timely since recent trends indicate provides information on trends in urbanization, that the structure of the state’s economy is shifting to population growth and economic productivity. With the industrial and service sectors. Based on past and this background, the report presents the results of continued urban growth and investments in regional economic modeling to determine the best locations transportation networks, this transformation is likely to in the state to concentrate logistics hubs, industrial continue. It is important that the state recognizes how estates and infrastructure investments. The model is these changes in economic structure, urbanization and used to estimate the EPI, identify and rank the districts connectivity provide a major opportunity to advance likely to benefit from investments in industrial estates economic development, promote industrialization and logistics hubs. The modeling approach assesses six and eradicate poverty. characteristics in each district associated with variations in economic productivity, namely: (i) market accessibility; The purpose of this report is to provide the GoUP, GoI (ii) industrial diversity; (iii) commodity flow; (iv) per capita and the relevant state and local bodies with a district- industrial investment; (v) agricultural specialization; and wise examination to identify areas that would benefit (vi) poor social conditions. The analysis in phase three from more intensive economic, infrastructure and will assess economic clustering and the availability of connectivity research to determine the locations for infrastructure and industrial facilities. investment in industrial estates and logistics hubs. International experience shows that improvements On the basis of this economic analysis, the report in accessibility lead to economic expansion and thus, defines the sub-regions or geographical areas where with the EDFC, spread effects should result, with sub-regional investments in logistics hubs, industrial underdeveloped areas such as Auraiya and Allahabad estates and trunk infrastructure would have the greatest becoming more attractive for investment. impact in promoting economic development and 1. Introduction 1 enhanced productivity. Subject to a deeper analysis in B. Structure phase three, these sub-regions would receive targeted public and private investments in logistics centers, Apart from the executive summary, the report has industrial estates and critical trunk infrastructure. eight sections, namely: (1) Introduction; (2) Overview of Uttar Pradesh; (3) Uttar Pradesh’s Economy and In order to structure the phase three work, the report also Infrastructure: A Synopsis; (4) UP’s District Economies outlines the criteria for targeting investments in the sub- and Economic Potential Index: Key Factors; (5) Criteria regions. These criteria broadly focus on implementation for Locating Logistics and Industrial Hubs within and local government capacity to sustain development Promising Sub-Regions in UP; (6) Moving towards effort. The report also provides advice on creating Implementation; (7) Conclusion; and (8) Annexes. The logistics centers and industrial estates, as well as next section provides an overview of UP. pointing out common implementation pitfalls. 2 Leveraging Spatial Development Options for Uttar Pradesh 2. Overview of Uttar Pradesh With a population of almost 200 million in 2011, Without investments in connectivity, logistics centers, (Census of India, 2011), UP is India’s largest state in industrial estates and other infrastructure, UP can terms of population. Although 78 percent of the expect population growth to remain higher in areas state’s population is classified as rural, UP has the located in and around growing industrial districts such second largest urban population of any Indian state at as in the west, near the National Capital Region (NCR), 44.5 million. and in districts that have employment growth. Of the state’s 70 districts, only 10 had population growth rates exceeding 2.5 percent per year between 2001 A. Population trends and 2011 namely, Bahraich, Bahrampur, Chitrakoot, Gautam Buddha Nagar, Ghaziabad, Kheri, Lucknow, Over the last decade, UP’s annual population growth Moradabad, Siddharthnagar and Sonbhadra. Three rate has averaged two percent, higher than the districts had an annual growth rate above 3.5 percent, national average (Census of India, 2011). However, that is Bahraich (4.6 percent), Gautam Buddha as Figure 1 illustrates, on a district by district basis, Nagar (3.7 percent) and Ghaziabad (4.2). The largest the growth is uneven. International experience metropolitan area in the state, Kanpur Nagar, had a reveals that population growth and migration tend population growth rate of only one percent per year to move to areas with economic opportunities. between 2001 and 2011. Figure 1: Population growth rate in UP districts between 2001 and 2011 Bundelkhand Central Region Eastern Region Western Region Corridor District Population Growth Rate between 55% 45% 2001 and 2011 35% 25% 15% 5% -5% Etah Mau Basti Hardoi Ballia Agra Kheri Bareilly Bijnor Banda Jhansi Shravasti Jalaun Unnao Pilibhit Aligarh Sitapur Auraiya Gonda Lalitpur Deoria Rampur Buland Shahr Budaun Etawah Bahraich Jaunpur Kannauj Meerut Rae Bareli Fatehpur Varanasi Mathura Baghpat Faizabad Firozabad Mainpuri Mahoba Lucknow Ghazipur Allahabad Gorakpur Chitrakoot Balrampur Sultanpur Hamirpur Chandauli Mirzapur Azamgarh Bara Banki Ghaziabad Sonbhadra Kaushambi Pratapgarh Saharanpur Moradabad Kushinagar Mahrajgang Farrukhabad Shahjahanpur Muzaffarnagar Kanpur Dehat Kanpur Nagar Siddharthnagar Mahamaya Nagar Sant Kabir Nagar Ambedkar Nagar Jyotiba Phule Nagar Gautam Budhha Nagar Sant Ravidas Nagar (Bhadohi) Source: Census of India, 2001 and 2011. 2. Overview of Uttar Pradesh 3 As Figure 2 illustrates, UP’s poverty rates (headcount Figure 2: Poverty concentrated in eastern UP, 2010 levels) are higher in the center and eastern third of the state. The districts closer to the NCR and its exurban % population below $1.25 PPP developments have lower poverty rates. This suggests 0.32 - 0.36 0.36 - 0.39 that efforts to promote economic development in the 0.39 - 0.42 Meerut center and eastern portions of the state may be an Delhi 0.42 - 0.45 effective method for poverty reduction. Greater Noida 0.45 - 0.49 0.49 - 0.52 Shahjahanpur Uttar Pradesh is one of the six lagging states in Agra Firozabad India with 44.5 percent of its population below the Lucknow Faizabad poverty line (US$1.25 per person), almost 10 percent Kanpur higher than the national average. The World Bank has estimated that 33 percent of India lives below Jhansi Allahabad the poverty line measure of US$1.25 PPP. In sharp Varanasi (Benares) contrast to the western parts of UP, Bundelkhand and Lalitpur UP’s eastern regions have the highest concentration of poverty with almost 50 percent of the population living on less than US$1.25 per day (Figure 2). World Bank staff calculations based on World Development Source:  Indicators, 2010. How urbanization impacts B.  International experience indicates a strong correlation economic prosperity between urbanization and economic productivity. The data for UP also reflects this relationship. Urbanization Global comparisons show that urbanization is typically generates higher density economic activities, positively correlated with Gross Domestic Product such as firms in the same industry tend to cluster (GDP) per capita. Figure 3 shows that this trend also together and create localization economies, which occurs in UP as the districts with higher shares of tend to make them more productive. This is due to urban population such as Kanpur, Lucknow, Gautam the fact that firms can share factor inputs, draw larger Buddha Nagar and Ghaziabad also have higher GDP pools of labor and exchange knowledge, a pattern per capita. illustrated in Figure 4 which shows that districts with Figure 3: Urbanization and GDP per capita strongly related 4.00 Gautam Buddha Nagar Log of District GDP per capita 2010-2011 (normalized) 3.00 Baghpat 2.00 Basti Meerut Lucknow Kanpur Jhansi 1.00 Lalitpur Agra Ghaziabad Varanasi 0.00 -1.00 -2.00 -3.00 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Urban share of total district population in 2011 Source: World Bank staff calculations based on Census of India, 2011 and Directorate of Economics and Statistics, UP, 2010. 4 Leveraging Spatial Development Options for Uttar Pradesh Figure 4: Spatial concentration of economic activity and higher incomes go together 4.00 Gautam Buddha Nagar Log of District GDP per capita 2010-2011 (normalized) 3.00 Baghpat 2.00 Lucknow Kanpur Jhansi Agra 1.00 Ghaziabad Lalitpur 0.00 Varanasi -1.00 -2.00 -3.00 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Log of District GDP per sq.km. 2010-2011 (normalized) Source: World Bank staff calculations based on Census of India, 2011 and Directorate of Economics and Statistics, UP, 2010. higher spatial concentration usually generate higher C. Key takeaways productivity as measured by GDP per capita. Since UP is a large state with high variation in As the relationship between spatial distribution of urbanization, poverty rates and demographic GDP per sq km with GDP per capita in Figure 4 shows, growth trends, its industrial development can play many cities in UP are undergoing transformation. an important role in better balancing economic Thus, a significant number of cities have above prosperity and well-being. The next section provides average district GDP per capita and above average an overview of UP’s evolving economic structure district GDP per sq km (located in the upper right- and discusses the state’s current infrastructure hand quadrant of the graph). This indicates that endowments. This sets the basis for identifying infrastructure investments in strategic locations could strategic development options in UP and articulates potentially drive higher economic growth and better the need for better connectivity and market access if balance overall GDP per capita across UP, enhance the lagging districts are to develop. connectivity and balance spatial competitiveness. 2. Overview of Uttar Pradesh 5 3. Uttar Pradesh’s Economy and Infrastructure: A Synopsis This chapter reviews the district-wise economic and Statistics, UP). The second largest sector was the development structure and spatial patterns in UP, primary or agricultural sector at 29 percent, while based on UP state census data and data collected the manufacturing or secondary sector contributed during the phase one field work. 22 percent of UP state GDP in 2011. Uttar Pradesh is the largest producer of sugarcane A. Overview of the UP economy and wheat, and the second largest producer of rice. The districts in western UP are the main producers The economy in UP is led by the tertiary or services of agriculture and related goods. Muzzafarnagar, sector which comprised 50 percent of the total Saharanpur, Bijnor and Bulandshahar were the four district GDP amounting to Rs. 2,92,563 crore in leading districts specializing in the agriculture and 2011, at current prices (Directorate of Economics animal husbandry sub-sector in 2011. The location quotients for the agricultural sector in 2011 were 1.4 for Muzzafarnagar, 1.5 for Saharanpur, 1.2 for Bijnor, and Figure 5:  Distribution of district GDP in the primary 1.3 for Bulandshahar. In the central region, Lakhimpur sector as a percentage of the state’s total Kheri, Bara Banki, and Sitapur were the other districts primary sector output, 2011 specializing in agriculture. Figure 5 illustrates the Legend location of primary sector activities (agriculture) as a Primary Sector 0.0025 - 0.0075 percentage of the state’s total primary sector output. 0.0075 - 0.01 Meerut 0.01 - 0.012 Manufacturing activities contribute 22 percent of Delhi Greater Noida 0.012 - 0.016 UP’s GDP. This is the third largest sector and consists 0.016 - 0.024 of registered and unregistered manufacturing, Shahjahanpur 0.024 - 0.036 construction, and utility infrastructure. Even though this Agra Firozabad sector is not the primary driver of the state’s economy, Lucknow Faizabad there are several districts with a high concentration of Kanpur manufacturing activities. Gautam Buddha Nagar, Kanpur and Ghaziabad were the largest contributors to the Jhansi Allahabad state’s district GDP in this sector. The location quotients Varanasi (Benares) for manufacturing in 2011 ranged from 2.5 for Gautam Lalitpur Buddha Nagar to 1.3 for Kanpur, 1.5 for Ghaziabad, and 1.3 for Allahabad. The registered manufacturing sub-sector comprised a large proportion of economic Source: Directorate of Economics and Statistics, UP, 2010-11. activity in Gautam Buddha Nagar, Ghaziabad, and Agra, 3. Uttar Pradesh’s Economy and Infrastructure: A Synopsis 7 Figure 6:  Distribution of district GDP in the Figure 7:  Distribution of district GDP in the tertiary manufacturing sector as a percentage of the sector as a percentage of the state’s total state’s total secondary sector output, 2011 tertiary sector output, 2011 Length Secondary Sector Length Tertiary Sector 0.0007 - 0.0051 0.0032 - 0.0074 0.0051 - 0.0071 0.0074 - 0.0091 Meerut 0.0071- 0.0097 Meerut 0.0091- 0.0109 Delhi 0.0097 - 0.0131 Delhi 0.0109 - 0.0149 Greater Noida 0.0131 - 0.0227 Greater Noida 0.0149 - 0.0221 Shahjahanpur 0.0227 - 0.0836 0.0221 - 0.0563 Shahjahanpur Agra Agra Firozabad Firozabad Lucknow Lucknow Faizabad Faizabad Kanpur Kanpur Jhansi Allahabad Jhansi Allahabad Varanasi (Benares) Varanasi (Benares) Lalitpur Lalitpur Source: Directorate of Economics and Statistics, UP, 2010-11. Source: Directorate of Economics and Statistics, UP, 2010-11. while unregistered manufacturing was predominant The GDP data for these three sectors shows that UP in Allahabad. The construction sub-sector dominated is already making the transition from agriculture the activity in Kanpur and Lucknow. Currently, most to manufacturing to services, this being the global secondary sector activities are located along the pattern of economic development. With increased planned regional freight corridor. Figure 6 shows the connectivity and better market access, manufacturing distribution of secondary (manufacturing) activities has the potential to grow, while better accessibility across UP in 2011 as a percentage of the state’s total and mobility for workers makes it easier for them to migrate to employment centers. secondary sector output. The largest sector, namely tertiary activities (services),  nfrastructure and connectivity B. I which is composed of transportation, communication, in UP: Can the state foster railways, real estate, public administration, banking, and other services is the main driver of economic networks of economic clusters? activity in UP. These activities are located in the main The major cities in UP are connected by a regional urban centers in the state, namely Kanpur, Lucknow, network of railways and highways (Fig. 8 and Fig. 9). Allahabad, Ghaziabad, and Agra. In 2011, services However, the network coverage is incomplete and sector location quotients ranged from 1.2 for Kanpur congestion is highly problematic. While limited data Nagar, 1.4 for Lucknow, 1.1 for Allahabad and 1.2 for is available on connectivity and more data will be Varanasi. Transport, communication, and trade were gathered during the phase three studies, interviews the main sub-sectors across all large cities, while with businesses in the Kanpur region of UP indicate public administration was concentrated in Lucknow, a number of logistics challenges that firms face. First, Kanpur, and Allahabad. Figure 7 shows the distribution there is no rail access from Kanpur to the Mundra of tertiary activities (services) across UP in 2011 as a port in Gujarat, even though there is rail access to percentage of the state’s total tertiary sector output. Jawaharlal Nehru Port Trust (JNPT) in Maharashtra. 8 Leveraging Spatial Development Options for Uttar Pradesh Figure 8: Regional rail transportation network Figure 9: Road density as ratio of length and area Legend Length of PWD roads per 1000 sq.km EDFC-Proposed 299.86 - 742.10 Railway 742.10 - 1184.35 UPEIDA Highway 1184.35 - 1626.59 Meerut Meerut Delhi UP National Highway Delhi 1626.59 - 2068.83 Greater Noida Greater Noida 2068.83 - 2511.07 Shahjahanpur Shahjahanpur 2511.07 - 2953.32 Agra Agra Firozabad Firozabad Lucknow Lucknow Faizabad Faizabad Kanpur Kanpur Jhansi Allahabad Jhansi Allahabad Varanasi (Benares) Varanasi (Benares) Lalitpur Lalitpur UP Expressways Industrial Development Authority; State Atlas Source:  World Bank staff calculations based on district-wise development Source:  of UP, Survey of India. indicators, UP, 2011. The travel time to these ports ranges from six to nine have lower levels of local road infrastructure. Economic days, and five to seven days respectively. Besides, activities in these areas confront daunting congestion Kanpur’s only inland container port is located within challenges to move goods by road. The phase three the city in a highly congested area and is inadequate studies will collect more detailed data on congestion in terms of size and handling equipment. On the and connectivity challenges in select districts. average, 77 percent of the containerized cargo is shipped by rail and 23 percent by road. This perverse trend is probably due to high levels of road congestion C. Key takeaways along the feeder and trunk highways. The respondents indicated that the alignment of the EDFC should This chapter reviews UP’s three main economic sectors. either be shifted towards Odisha to facilitate goods Although they are spatially diversified, all three suffer movement eastwards or connector rail links added to from poor connectivity, by both road and rail. The key provide connectivity between the existing and future challenge to growing UP’s manufacturing and services industrial clusters and the EDFC. sectors is to increase connectivity and supporting infrastructure in areas where there are existing or Based on a study prepared by the National Manufacturing emerging clusters of economic activity. The next Competitiveness Council (NMCC), India’s logistics costs section reports on the development of an EPI to identify are considerably higher than China, Canada, France and promising sub-regions for investments in industrial Japan. Power outages disrupt rail services. Moreover, estates and logistics hubs. The following section will port clearance time averages 3 days in India and 16 then outline general options for strengthening clusters hours in China. These factors make doing business in through infrastructure and facilities development. India expensive and uncompetitive. Looking just at UP, Together, the development of strategic investments its regional rail network and the level of development in rail and road infrastructure, power and industrial of local road infrastructure does not even stretch across and logistics facilities forms the core of the options the districts. The western and eastern regions of the state that the UP government should consider. The phase have relatively higher road density. However, districts three studies will assemble additional data and use it with high shares of economic activity, namely Gautam to determine how to best overcome congestion and Buddha Nagar, Agra, Kanpur Nagar, and Allahabad poor connectivity challenges. 3. Uttar Pradesh’s Economy and Infrastructure: A Synopsis 9 4. UP’s District Economies and Economic Potential Index: Key Factors A. Introduction The methodological concept of the EPI is a gravity- type model that captures spatial interactions and This chapter identifies several sub-regions, comprised potential for development (Rodrigue, 2013). A of multiple districts, to locate growth centers in UP. In district’s attractiveness level as a growth center is order to find the best locations, the attractiveness of the weighted sum of the growth potential of the districts as growth centers is evaluated, and sub-regions district, where the weights are inversely proportional that warrant more in-depth analysis are identified. to the impedance in reaching other districts also The analysis ranks the attractiveness of the districts as experiencing similar growth potential. An essential growth centers by determining the degree to which feature of the EPI is its estimation of a district’s level they possess key attributes that would enable them to of key growth drivers discounted by the network achieve higher productivity and income if they were distance between districts. provided with better connectivity and infrastructure. The attractiveness of a district is also influenced by the First, each district is evaluated for its growth potential EPI of adjacent districts. The EDFC not only provides UP (the numerator of the EPI), which is the degree to districts with enormous opportunities for economic which it possesses the key growth characteristics. growth but also connectivity with other districts. Second, the growth potential for each district is adjusted by considering the district’s transportation Given these opportunities, this chapter evaluates network distance (the denominator of the EPI) to the potential of UP districts, based on key factors, to other districts with growth potential. Therefore, if a become growth centers. district has high growth potential of its own and good transport network connectivity with other districts Key approach and EPI for UP B.  having high growth potential, the district’s EPI score will be high. districts In order to measure the growth potential for districts, High potential locations are ranked by the extent to six factors that are highly correlated with the district’s which the districts can capture services and maximize economic growth are tabulated in Section (i). To their growth potential. In order to evaluate the measure the impedance of transportation network attractiveness of districts as growth centers and choose connectivity, network distances are presented in the best locations, this chapter describes and applies Section (ii). the EPI model. The EPI is constructed using two key district conditions: first, whether a district possesses The EPI is expressed as a gravity-type equation below: key growth drivers, identified in Section (i) and, second, the state of the current and future transport network or EPIi= ∑j (GDj/NDij) -------------- Eq (1), where transport network connectivity identified in Section (ii). EPIi = EPI of district i 4. UP’s District Economies and Economic Potential Index: Key Factors 11 GDj = possession of growth drivers of district j  enominator: transport network (ii) D (numerator) distance between districts (NDij) NDij= transport network distance to district j from district i (denominator) When a district scores high on key growth drivers or is close to a district that also scores high on growth drivers, it has higher economic potential and is more  umerator: district’s possession of key (i) N attractive as a potential growth center. In other words, growth drivers (GDj) the distance between districts impedes the creation of high economic potential. Evaluating the level of each district’s key growth drivers requires two steps: first, identifying the key In order to estimate the network distance between growth drivers or socioeconomic and policy factors districts, a network dataset was created by using that allow UP districts to increase their economic current and future major transportation infrastructure productivity; and, second, estimating an index to networks in UP. The ArcGIS Network Analyst and geo- quantitatively calculate the degree to which a district processing tools were used to prepare data, create the possesses the key growth drivers identified in the network dataset, and measure the network distance. first step. The following measurement was made to assess the impedance of the transport network. In order to identify the major factors that drive the economic productivity of district economies in UP, NDij a regression model is estimated (see Annex 1) to if i ≠ j: transportation network distance (km) between identify resources, capabilities, and policies of UP districts i and j districts that have generated high per capita income. The results suggest six key growth drivers (Table A1 if i = j: 10 km (t Standardized coefficient (β) Average market accessibility 00–05 0.051 3.300 0.002 0.342 (market potential) Container inflow 06–07 0.011 1.860 0.067 0.135 (commodity flow) Unmet needs for family planning 07–08 -0.418 -4.710 0.000 -0.320 (social conditions) Share (%) of area under rice production -0.003 -2.160 0.035 -0.149 (land use, industrial structure) % change in industrial diversity 06–11 0.036 3.390 0.001 0.224 (*2nd & 3rd industries only) Per capita industrial investment 0.039 1.430 0.159 0.120 Sugarcane production per area 0.260 1.510 0.136 0.099 (land productivity of agriculture) GDP per area 0.035 0.600 0.549 0.060 (density of economic activity) Night light per area 1999/2001 0.0001 0.180 0.859 0.012 (night light density, urbanization) School dropout rate -0.0001 0.000 0.997 0.000 (human capital) Constant 8.397 11.280 0.000 1. Number of observations = 70; F-Stat. = 27.9; adjusted R-square = 0.796. 2. For determinants: used log values of the variables except variables with % unit. Annex 1: Estimation of Key Growth Drivers for UP Districts: Determinants of Per Capita Income 25 Key growth driver: Market the industrial structure of a district economy is critical. In UP, the industrial and services sectors diversified accessibility, commodity flow, and more rapidly in high-income districts than those of logistics capacity low-income districts (see row ‘% change in industrial diversity’ in Table A1). One crucial factor in the economic growth of UP is the capacity to access markets and material Excessive focus by a district on agriculture does not sources effectively. For example, a district’s level positively influence the district’s economic growth. of market accessibility, or the degree of market In order to achieve higher income, a district first potential which a district can capture through its must carefully shift its land resources from intensive economic and industrial activities, is critical to its per agricultural uses such as rice production to high value- capita income growth (see ‘Market accessibility’ in added industrial activities, including secondary and Table A1). Economically, a district functions not only tertiary industries (see ‘% of area under rice production’ as an industrial base that imports raw materials but in Table A1). Even if land remains in use for an also as a market through which final products are agricultural purpose, restructuring ownership in order exported to other destinations. In general, proximity to to promote labor- and capital-productive methods of densely populated and high-income agglomerations agriculture should be considered. For example, having is associated with greater potential to reach markets too many landowners in a limited area depresses the at lower cost. This potential eventually can become a per capita income of a district’s economy, fragmenting core resource for district economies, leading to their agricultural production and making it difficult to strong capacity to promote exports to other UP and achieve economies of scale. non-UP districts. This market access-driven export capacity can eventually contribute to higher per In order to encourage conversion of land from capita income (Krugman, et al. 1999). agricultural to industrial uses, a district must mobilize capital investment to attract diverse, non-primary Commodity flow is also important in driving industries (see ‘Per capita industrial investment’ in growth and can boost or weaken a district’s market Table A1). High-income districts have successfully accessibility. In the case of UP, a district’s capacity secured investment in a range of manufacturing to support an efficient commodity flow positively industries, including metals, chemicals, food, textiles, influences its economic development (see ‘inflow’ and machinery. As a result, these districts have more in Table A1). In particular, the efficient inflow of coal industrial zones, working factories, and employees and inflow and outflow of containers and petroleum per capita than low-income districts. In addition, are important. An efficient commodity flow requires a high-income districts have seen the expansion of reliable transport infrastructure and sufficient logistics tertiary industries, including the trade, transport, capacity. It allows a district to fully reap the benefits communications, and real estate sectors, which of its location economies and export capacity, which generally generate greater added value. in turn encourages the migration of workers to the district. Key growth driver: Social capital Key growth driver: Industrial A district’s social attributes are critical to strengthening diversity and investment capacity or weakening its capacity to stimulate development because they serve high levels of human capital. For Among the major factors determining the per example, widespread poverty, inadequate health care, capita income level of UP’s districts are their unmet needs for family planning (seeTable A1), and high industrial characteristics, such as industrial diversity, levels of crime and illiteracy tend to make households specialization, and investment levels. In this regard, unstable, lowering their labor productivity. 26 Leveraging Spatial Development Options for Uttar Pradesh Annex 2 Numerator GDJ - Level of Growth Drivers for District J Std. (∑ β*μTj; μ = 1 if β > 0, μ = -1 if β < 0), where Std. = standardized value (t-score) β = weight or standardized coefficients of key driver variables higher than 1.2 and statistically significant at p < 0.2 from the model in Annex 1. Ti = standardized t-score (mean = 50, std. =10) of district i’s value for corresponding key drivers. Annex 2: Numerator GDJ - Level of Growth Drivers for District J 27 Annex 3 EPI Scores for All UP Districts (Mean EPI = 1858) Ranking District EPI Ranking District EPI 1 Kanpur Nagar 2446.955609 36 Hardoi 1855.848004 2 Unnao 2387.235771 37 Basti 1836.955298 3 Ghaziabad 2338.974598 38 Hamirpur 1830.327123 4 Lucknow 2338.047311 39 Jaunpur 1828.066308 5 Hathras 2286.698316 40 Sitapur 1827.090555 6 Kanpur Dehat 2260.879018 41 Baghpat 1818.077625 7 Aligarh 2226.447373 42 Shahjahanpur 1811.671225 8 Kannauj 2209.979577 43 Jalaun 1809.609961 9 Bulandshahar 2126.316844 44 Lakhimpur Kheri 1787.277135 10 Gautam Buddha Nagar 2111.103603 45 Gorakhpur 1770.565535 11 Bara Banki 2105.374836 46 Pilibhit 1746.03025 12 Firozabad 2083.072681 47 Ambedkar Nagar 1739.869728 13 Moradabad 2070.960489 48 Chandauli 1727.665839 14 Meerut 2063.076859 49 Sant Ravi Das Nagar 1710.842461 15 Sultanpur 2054.840091 50 Ghazipur 1709.337656 16 Etah 2017.151035 51 Mau 1696.276648 17 Mainpuri 2016.001189 52 Mirzapur 1691.988047 18 Farrukhabad 2013.654407 53 Banda 1661.832149 19 Faizabad 2007.701865 54 Muzaffarnagar 1659.80173 20 Varanasi 2001.808185 55 Shravasti 1633.909572 21 Allahabad 1996.976664 56 Bijnor 1629.756898 22 Jyotiba Phule Nagar 1987.776837 57 Balrampur 1606.463291 23 Mathura 1978.997021 58 Bahraich 1589.354758 24 Etawah 1965.519776 59 Sonbhadra 1568.047309 25 Badaun 1960.763579 60 Mahoba 1557.796657 26 Auraiya 1953.739013 61 Chitrakoot 1544.986517 27 Pratapgarh 1948.344458 62 Deoria 1542.143015 28 Agra 1943.031106 63 Siddharth Nagar 1527.26726 29 Gonda 1923.40249 64 Saharanpur 1515.286657 30 Rampur 1909.953518 65 Jhansi 1506.76813 31 Bareilly 1909.748669 66 Ballia 1484.424435 32 Kaushambi 1898.703776 67 Maharajganj 1475.205243 33 Fatehpur 1894.747945 68 Azamgarh 1402.091029 34 Rae Bareli 1894.542995 69 Lalitpur 1372.505347 35 Sant Kabir Nagar 1890.788778 70 Kushinagar 1371.921674 28 Leveraging Spatial Development Options for Uttar Pradesh Annex 4 Major Contributors to a District’s EPI Figure A1: Contribution of market accessibility to EPI 39 2400 69 45 28 46 40 2 2200 38 EPI (UP Average = 1858) 13 17 27 26 68 54 52 49 24 21 2000 3 23 79 34 50 7 22 30 57 5 1 25 14 59 62 5841 15 33 32 66 1800 36 6335 8 31 42 56 4 60 18 53 29 51 12 55 64 16 1600 11 9 48 67 19 20 65 61 37 10 47 1400 6 43 44 -7.5 -5 -2.5 0 2.5 5 7.5 Market Accessibility (UP Average = 0) Annex 4: Major Contributors to a District’s EPI 29 Figure A2: Contribution of per capita industrial investment to EPI 39 2400 69 45 28 46 40 2 2200 38 17 27 13 54 26 EPI (UP Average = 1858) 68 52 2000 21 49 70 23 24 34 3 50 5 57 22 7 1 30 59 58 14 62 41 25 33 66 15 36 32 1800 8 35 63 31 42 4 56 60 18 51 53 29 12 55 64 16 1600 11 9 48 67 65 19 20 37 61 10 47 1400 6 43 44 -3 -2 -1 0 1 2 3 Per Cap Industrial Investment (UP Average = 0) Figure A3: Contribution of industrial diversity to EPI 39 2400 69 28 45 46 40 38 2 2200 17 27 49 13 EPI (UP Average = 1858) 52 54 26 68 49 21 2000 23 24 70 3 50 34 57 7 22 5 30 14 59 62 58 25 41 33 36 32 15 66 8 1800 35 31 63 42 4 18 56 29 60 51 53 12 55 64 16 1600 9 11 67 20 65 19 48 37 61 10 47 1400 6 43 44 -5 0 5 10 % Change in Industrial Diversity (2nd & 3rd) (UP Average = 0.3%) 30 Leveraging Spatial Development Options for Uttar Pradesh Annex 5 ID and List of UP Districts for Figures A1 to A3 ID No. District Name ID No. District Name 1 Agra 36 Jaunpur 2 Aligarh 37 Jhansi 3 Allahabad 38 Kannauj 4 Ambedkar Nagar 39 Kanpur 5 Auraiya 40 Kanpur Dehat 6 Azamgarh 41 Kaushambi 7 Badaun 42 Lakhimpur Kheri 8 Baghpat 43 Kushinagar 9 Bahraich 44 Lalitpur 10 Ballia 45 Lucknow 11 Balrampur 46 Hathras 12 Banda 47 Maharajganj 13 Bara Banki 48 Mahoba 14 Bareilly 49 Mainpuri 15 Basti 50 Mathura 16 Bijnor 51 Mau 17 Bulandshahar 52 Meerut 18 Chandauli 53 Mirzapur 19 Chitrakoot 54 Moradabad 20 Deoria 55 Muzaffarnagar 21 Etah 56 Pilibhit 22 Etawah 57 Pratapgarh 23 Faizabad 58 Rae Bareilli 24 Farrukhabad 59 Rampur 25 Fatehpur 60 Sant Ravi Das Nagar 26 Firozabad 61 Saharanpur 27 Gautam Buddha Nagar 62 Sant Kabir Nagar 28 Ghaziabad 63 Shahjahanpur 29 Ghazipur 64 Shravasti 30 Gonda 65 Siddharth Nagar 31 Gorakhpur 66 Sitapur 32 Hamirpur 67 Sonbhadra 33 Hardoi 68 Sultanpur 34 Jyotiba Phule Nagar 69 Unnao 35 Jalaun 70 Varanasi Annex 5: ID and List of UP Districts for Figures A1 to A3 31 Annex 6 Institutional and Policy Review Industrial zone development in The recently introduced NIMZ policy, which the GoUP is planning to implement in Auraiya and Jhansi, is a major India: Relevant experience for UP attempt to draw lessons from the SEZ Act and improve on it, though it is still largely untested. For example, the Beyond location selection, there is a need to reflect new policy emphasizes the use of land already owned by on the instruments to be used by the GoUP, namely the government, thereby mitigating the challenges and Investment Zones, Special Economic Zones (SEZs) controversies associated with land acquisition. It also and National Investment and Manufacturing Zones focuses on the development of manufacturing, which (NIMZs), which are essentially cluster development is more likely to provide a large number of productive policies. jobs that the country needs (IT accounts for two-thirds of the operational SEZs so far), while at the same time There are important lessons to be drawn from past widening the scope to domestic production, away from experience with these instruments, which have been used extensively in India and elsewhere, with very the SEZs’ exclusive focus on exports. mixed records. Active cluster development policies focused on infrastructure development “are often Nevertheless, another Indian cluster development policy rightly criticized for producing white elephants; has already been tested successfully. The Scheme for eroding the tax base; creating vehicles for land Integrated Textile Parks (SITP) of the Ministry of Textiles, speculation; delivering hand-outs to favored firms; GoI is a notable exception to the implementation and funneling spending to favored districts. That is if challenge for zone and industrial park policies in India. the parks are even completed in less than a decade. The contrast is striking, in particular with the SEZ policy, More than one of these failures has afflicted industrial which was launched around the same time (Table A6). park schemes in India….Many of the most high- profile programs have….often delivered under-target, The SITP approach to implementation has been several years late and with low take-up” (Saleman and radically different from the traditional zone policies, Jordan (2013). in a manner that successfully got parks built and invested in. Most crucially, the government (at both The Indian SEZ program is the most significant of center and state) has taken a hands-off approach and these examples, with major shortcomings that have put the burden of location selection, land purchase been analyzed extensively. These include: (i) low and infrastructure implementation on the future users levels of manufacturing activity; (ii) difficulty of land of the parks, grouped in an SPV. This has appealed acquisition; (iii) dearth of infrastructure provision; and to entrepreneurs, who often shy away from these (iv) cost of the policy, which relies more on incentives policies for fear of being caught in bureaucratic than business climate reforms, and with little spillovers delays, and have the choice of location most suitable to the rest of the economy. to their businesses, a decision that only they can fully 32 Leveraging Spatial Development Options for Uttar Pradesh Table A6: Comparisons between SITP and SEZ Act implementation Metric SEZ Act SITP Official start date February 2006 July 2005 Number of projects formally approved by end 2011 580 40 Number of projects notified by end 2011 380 36 Conversion ratio 1: notified/approved 66% 90% Operational projects by end 2011 124 24 Conversion ratio 2: operational/approved 21% 60% Of which non-IT 44 24 Source: SEZ website (SEZs data), Ministry of Textiles, GoI (SITP data as of end 2011). appreciate. This automatically resolved the question for efficient implementation of the park projects. of demand for the parks once built. The size of the grants, critically, has incentivized the construction of parks of around 100 acres, On the other hand, the government has reinforced large enough to create significant agglomeration its capacity to monitor the development pattern economies, but small enough to allow private land induced by its policy, by focusing on the approval of purchase in most cases, without creating incentives project proposals and on the monitoring of project for political interference, and to allow functional development. Crucially, this has relied on Project organization of the entrepreneurs. Two key additional Management Consultants (PMCs) to support on- features of the grant are flexibility in its use, with the-ground monitoring, mediate with entrepreneurs no micro-management of how much should be and provide them with the capacity to leverage allocated to which part of the infrastructure, as government money for private financing. well as the discipline in the way it is disbursed, in stages synchronized with private funds. This Finally, the policy does not provide fiscal incentives means entrepreneurs have both more incentives to but offers grants to resolve coordination failures participate and perform under the scheme. Annex 6: Institutional and Policy Review 33 Annex 7 Practical Lessons to Mitigate Zone Pitfalls in UP The experience of industrial zones discussed in also expressed concern about actual implementation Annex 6 puts the use of zone policies in UP in perspective. of such an arrangement. Also, a side effect of the The design and implementation arrangements of the government buying as well as issuing notification of newly designed industrial zones along the dedicated such land could be an escalation of market prices in freight corridor should integrate the lessons from the surrounding areas. the past experience. A rigorous analysis of the SEZ experience and NIMZ features sheds light on some Both concerns point to the need for a detailed initiatives that should be explored by the GoUP to implementation plan to be devised well in advance for mitigate the most important zone implementation this program, in consultation with the private sector shortcomings, and help increase impact.1 while avoiding preferential treatment. Transparency in land availability and transaction prices would also reduce suspicion of favorable treatment and land speculation. Initiatives to ease the land location, sizing and acquisition An important step in further reducing land acquisition requirements is to specify the means for more efficient issues use of land already owned by the government. This is relevant in UP as the DIC and UPSIDC data point to high Procuring land appropriate for the industrial zone rates of vacant industrial plots, as well as a significant programs has been one of the most significant hurdles portion of allocated land not being used, even in areas to their implementation. As noted earlier, the programs of high activity such as Kanpur or Unnao.2 Removing have relied on acquisitions of vast swathes of land by hurdles and getting incentives to re-classify and re-use the states, creating delays and multiple controversies. land would also be critical, and making information on land holdings easily accessible would be a useful It is commendable that the GoUP is not set to buy all complementary measure. the land needed for the zones. It is the understanding that, instead, the GoUP would procure and acquire Even if the difficulties of state land acquisition and only 10% of that land, while the rest would be left to private sector procurement are resolved, location private promoters to procure and develop, following selection will remain a critical issue. As noted earlier, which the government would notify the area acquired. While this leveraging effect seems to have appealed in principle to private sector participants, they have 2 CRISIL (2013), Report written on request from the World Bank (unpublished), pointing to 28% of plots not being allotted, and 36% of allotted plots not being utilized in existing industrial parks and areas developed by UPSIDC in the Kanpur and Unnao districts, respectively; 1 Jordan, L.S. et al. (2012), Learning from SEZs, Report written as part of though a degree of vacant plots is necessary to allow for expansion Non–Lending Technical Assistance to the Planning Commission, GoI, plans, excesses in these should be avoided so as to minimize land on implementation of the manufacturing plan (unpublished). acquisition needs. 34 Leveraging Spatial Development Options for Uttar Pradesh the previous zone programs have faced many failures to companies. Given that existing industrial parks will not just in terms of getting the parks built, but also already have infrastructure in place, at least partially, of attracting demand, of which location is a strong experimentation can be done quickly, before zones determinant. However, the analysis has voluntarily requiring new construction come on line, allowing been made at the district level, without prescribing application of lessons learned. locations at a lower level. It has also stressed the importance of staying close to the nodes of latent Similarly, building a learning orientation in each newly comparative advantage. created zone would help accelerate implementation for later ones, since these new zones are not likely to This follows the observed pattern of entrepreneurs’ be developed at the same time. Starting with zones location selection, when given the choice, as in the that encompass some of the existing parks and estates SITP scheme. Balancing agglomeration economies, would help in the learning transition. These are also congestion and factor costs, entrepreneurs either likely to be the areas where capabilities for industrial choose to establish themselves near the largest growth are most developed, further facilitating cities, or near secondary cities with existing activity learning by focusing on less obvious hurdles. and capabilities in the sector – very rarely deciding on locations remotely placed from skilled labor and activity. Mechanisms for ongoing problem- solving and identification of state- This choice is best made by entrepreneurs themselves, wise regulatory reforms which advocates giving them the freedom to set up industrial sub-zones or parks that are not necessarily Though mitigation of the land issue will remove a major contiguous (and therefore also smaller, which in turn implementation hurdle, there have always been many reduces the land procurement hurdle), which could other, more specific, issues in the implementation of then be managed under the desired aggregate zone each project. When those are resolved, demand may framework. There is an opportunity for the GoUP not necessarily follow as the next hurdle could be the to explore this possibility of non-contiguity of land operating environment for firms within and outside parcels with the NIMZ policy. Though it is not clear the zones. This requires a built-in mechanism for that the policy allows this, it does not appear to be problem-solving and to provide specific state-wise specifically forbidden either and should be probed as policy reforms that help attract demand for the zones the contiguity requirement has held back a number and broaden their impact. Therefore, this mechanism of SEZ projects and encouraged land grabbing for should be centered on understanding issues from the speculative purposes. private sector’s point of view, since successful cluster development has almost always depended on an Finally, even if these concerns are successfully effective grievance redressal mechanism.3 addressed, the process of land procurement will realistically remain prolonged. This would prevent By focusing on regulatory aspects that have best the identification of hurdles further down the facilitated industrial growth, the redressal mechanism zone implementation process. Learning from and could be anchored to the zones, to help target experimenting with brown field parks would be an problems across the state. This would raise investor efficient way to get around this issue. Examining the confidence and enable linkages between the zones most critical hurdles to full implementation, healthy and the broader economy, as zone occupants could operation and further development for existing industrial parks, estates and zones in UP would enable identification of context-relevant implementation 3 Udyog Bandhu was initially set up by the GoUP’s redressal mechanism, challenges. Selecting a small number of parks within but the orientation seems to have changed recently, as exemplified by the tendering for consultant advice on land policy. However, the state, and then zoning them in varying ways, would the experience shared is meant as a general support to grievance help determine which regulations make a difference redressal, whether through Udyog Bandhu or another structure. Annex 7: Practical Lessons to Mitigate Zone Pitfalls in UP 35 source outside the zones to benefit from improved with an agreement on the measures to be taken, an business conditions. The power sector is one such implementation plan to apply these measures and the example, as a better balance between household sharing of responsibilities in executing this plan. Such and industrial tariff policy and flexibility in sourcing a process would have to be embedded in an effective can significantly improve the situation, even at grievance redressal mechanism. constant capacity.4 Such a mechanism could also unveil specific issues Most important of all, there should be confidence facing certain industries in UP. For example, in Kanpur in the private sector that its voice will be heard, a structured dialogue on specific issues of pollution and personal favours not granted. The structure of control in the textile and leather sectors could the public-private dialogue platform will be critical identify mechanisms for environmental protection in establishing a balance between private sector while improving the ability of entrepreneurs to run grievances and government views. This means a their businesses. Thus, better communication on the higher representation of the private sector but also, use of existing policies to support environmental within the private sector, a good balance between compliance (such as IIUS), and an understanding that business associations and individual entrepreneurs, authorizations would be promptly given following and between smaller and larger ones. It also implies satisfactory completion of upgrades and passing of the existence of operating procedures and a decision pollution standards would serve both goals. structure that incentivizes information sharing and compromises, rather than the imposition of views from one side or the other. Particular attention should be Initiatives to create goodwill given to whistleblower issues, where the obstructing around the zone projects behavior of local actors can be pointed out without fear of reprisal. Finally, goodwill needs to be created around the zone projects, including civil society and local The resolution of such grievances will often be a stakeholders in the zones, or else they could face precondition to taking advantage both of the new zone the same opposition and implementation hurdles as initiatives and the EDFC, based on primary data. For the SEZs and other zone programs. Land is again the example, a significant number of firms in the existing most contentious issue. Apart from the points made parks and estates suffered from long timelines covering earlier, the participating scheme for farmers selling land allotment to the provision of Non Objection their land, offered by some entrepreneurs and also Certificates (NOCs) to start construction and operation.5 mentioned by some state representatives, should be discussed with all stakeholders and the final details On the other hand, private sector participants have disseminated widely so as to create wide buy-in on shown interest in both projects. In their interaction the issue. with GoUP, questions were asked about zone rules, factory shell provision and Floor Area Ratio (FAR) Not restricting regulation improvements to rules. Some improvements have also been suggested the zones, as in the case of power sector reforms in labor management, to be applied state-wise. is another important step towards creating a However, this dialogue will be productive only if it right environment for thriving industrial zones. becomes a structured, systematic exchange ending Yet another step could be to use the zones as experiments and showcase best practice, as in the 4 CRISIL (2013) reported that many private sector stakeholders application of labor laws and the requirements for suggested that power supply be provided from the feeder rail lines environmental practices. This could become an of the EDFC, which was seen as an efficient way to reduce the power cut issue in the industrial areas. This stresses again how the EDFC additional attraction for international investors or needs to be leveraged by targeted, complementary policy measures buyers, as in the textile sector global value chain in critical areas for industry’s growth and competitiveness. 5 CRISIL (2013) cites estimates obtained from primary surveys (especially after the recent, tragic factory collapse in spanning 4-5 years. Bangladesh). 36 Leveraging Spatial Development Options for Uttar Pradesh Checks and balances in the zone governance account for their slower rollout.6 Finding ways to work structure, by adding members from local, industry, around these constraints will be key to replicating the and other stakeholder representatives apart SITP’s implementation success. from government officials would also facilitate acceptance of the special support within the wider Most critically, flexibility will be required and community, who could then learn how to create negotiated with the GoI in the application of linkages for spillover benefits. It would also add thresholds for allocation of grants to different new perspectives and create healthy dialogue that components of the projects.7 Micro-management by lead to more effective outcomes. Ultimately, it governments has been a major hurdle in effective would help mitigate the risk of capture, which is a and timely implementation of earlier policies. significant risk to implementation and impact that Similarly, the Micro and Small Enterprise – Cluster requires measures beyond ‘transparency’ and online Development Program (MSE-CDP) of the Ministry publication of project information. of Micro, Small and Medium Enterprises (MoMSME), GoI will require the full collaboration of the GoUP, especially for land acquisition. Encouraging alternative, successful industrial park design and Leveraging zones with the EDFC: implementation arrangements the crucial role of logistics, While these mechanisms and initiatives are being and policies and regulations to explored, policies using a bottom-up approach, such develop them as SITP should be encouraged, as they are most likely to be implemented quickly, and could build confidence Zone development will also have to be closely about the determination of the government to get coordinated with the EDFC, so that policy decisions things done – which in turn would help attracting such as location selection and zone rules are decided demand for the larger zones. The first SITP project in consistently and impact maximized. The creation UP was sanctioned in 2012, but implementation was of a coordination council would institutionalize the not prompt, as in other projects. It is also worrying discussions and help navigate the hurdles around that this is one of the few parks that took a vertical both programs which face risks commensurate with integration approach to the textile value chain, which their large size. at this scale might be sub-optimal, and might signal Leveraging the zone program with the EDFC will the perception of a difficult business environment and also have to rely on the development of logistics underdeveloped supply chain infrastructure. Creating infrastructure, both soft infrastructure, notably conditions for this project to succeed will attract more regulations around logistics, and hard infrastructure, such projects, but only in so far as there is a perception notably last mile connectivity and logistics parks. that this was done through a state-wise improvement in the business environment and connectivity and not 6 The MFPS is closest to the SITP in its design, but only one project has favored treatment. received in-principle approval in UP (in Sultanpur) as of April 1, 2013, since 2010, according to the MoFP website, with final approval still pending on that date. The delay between in-principle and formal Given UP’s comparative advantage in the food and approval has been approximately one year for projects in other states. This might point again to broader, business environment leather sectors, making the best use of the Mega Food issues that need to be solved for these schemes to perform fully, Park Scheme and Mega Leather Park Scheme will even if well designed. 7 The MFPS policy sets hard thresholds for allocation to ’core be even more critical. Both schemes have replaced infrastructure’, ’common facilities’, R&D, etc. The complexity is re- older, mildly successful versions to now function on inforced by size thresholds depending on the size of land for the project. The significant percentage of government assistance (70%) principles largely borrowed from the SITP. However might be the motivation behind these ’safeguards’, but this is likely to a close analysis reveals some variations in detail that be counterproductive. Annex 7: Practical Lessons to Mitigate Zone Pitfalls in UP 37 Recent research in India suggests that logistics is one CONCOR’s railheads).11 That a private park could still of the key binding – and yet unrecognized–constraints develop in Kanpur and compete with the public one to the growth of firms. In this context, the emergence was due to specific factors, which makes it an exception of modern, private logistics parks can transform a rather than the rule.12 firm’s competitiveness and growth opportunities, especially if this enables efficient connectivity with Even if these constraints are resolved, there is still the railways, thereby reducing the use of roads.8 Thus, a case for more active support to the development in UP, the establishment of a private logistics park of logistics parks, given the significant needs of the in Kanpur in 2001 triggered a rapid modernization GoUP (as compared to states in south India, which of practices, leading to strong growth of container are well endowed with logistics parks), especially traffic and enabling access to export markets.9 in less developed areas, and given the large capital requirements.13 This assistance may take the form of One specific hurdle that should be addressed on a grant-supported program with implementation priority to facilitate the development of private arrangements inspired by the SITP, allowing logistics parks is the availability of customs officers. entrepreneurs, grouped in an SPV, to decide on the An analysis of activity and processes at the private best location for the park and to buy the land.14 In turn logistics park in Kanpur revealed that this was a this would require financial and technical assistance clear binding constraint to their growth.10 Working in developing the required connectivity, since getting out a mechanism by which the state can provide a land close to railway lines is inherently difficult. number of customs officers depending on the level of activity, to be reviewed at an agreed frequency, should However, logistics efficiency will depend not just on the be discussed and devised in consultation with the existence and development of logistics parks. Some private sector. general concerns will need to be examined, such as the stealing and mishandling issues consistently reported At the regulatory level, the growth of the private sector by private sector players. The dedication to freight operators, allowed in the market since its liberalization should be an opportunity to ensure professionalization in 2006, has been hampered by dual policies in dry of infrastructure around the railway line. port and logistics parks development. State-owned corporations, notably CONCOR, were nearly always Given the significant potential for selling goods more given preferential treatment, through land pricing efficiently in the large domestic market (whether within and distribution, policies on dry port operation (in the state, or in nearby, densely populated hubs in particular, financial backing for loss-making public other states such as Delhi), policies will need to reduce parks) and policies on dry port connectivity (for restrictions in the movement of goods both within the example, heavy subsidies for the construction of state and with other states. Access rules to the EDFC along the railway should also be made flexible enough so that they do not restrain such trade. 8  World Bank (2013): Joint report by the PREM and FPD teams of The World Bank to Dr. Raghuram Rajan, then Chief Economic Adviser to Last mile connectivity is another pervasive issue in the the GoI (unpublished). 9  LML, one of the largest industrial firms in Kanpur, was almost private sector. This requires that enough feeder roads exclusively selling to the domestic market, for lack of reliable, timely be built to link not only the new zones, but all industrial access to ports. The private logistics parks enabled them to start exporting their products. In turn, this prevented their becoming bankrupt, and allowed them to invest in R&D to prepare for restarting 11 Ng, A.K.Y. and Gujar, G.C. (2009): Government policies, efficiency and domestic sales. Interestingly, the private park also seems to have competitiveness: The case of dry ports in India; Transport Policy 16 triggered the growth of container traffic at the adjacent public (2009) 232–239. logistics park, also linked to rails, but has put the much smaller public 12 What helped in particular was pre-existing ownership of adequate ICD, that uses only roads, almost out of business. land in the vicinity of the railway line. The contrasting case of the 10 This is especially true as most firms (70% for the Kanpur ICD) choose much larger private logistics park in Khurja, which faces significant ’factory stuffing’ as a means of sending their goods, whereby goods difficulties despite its strategic location, further illustrates this point. are loaded on a container trail sent by the logistics park to the factory, 13 Ng, A.K.Y. and Gujar, G.C., (2009). and then sealed in the case of exports, as opposed to sending the 14 An added advantage would be spreading the benefits to such a goods through trucks for loading and sealing at the park. group of SMEs, as opposed to a single, large entity. 38 Leveraging Spatial Development Options for Uttar Pradesh hubs, estates, parks and zones. Special truck routes, Conclusion for example between Kanpur and Lucknow, should be considered as trade will increase significantly with Zone policies have proved risky on multiple counts, improved road transport, even as the ratio of road to in India as elsewhere, and this should be borne in rail transport decreases. mind by the GoUP when implementing their own. Alternatives do exist, however, and have been effective Some further logistics issues could become known through innovative, bottom-up implementation and ironed out through the grievance redressal arrangements. mechanism. For instance, consultations with the private sector have shown that benefits to the food Lessons from earlier experience should therefore and food processing sectors from implementation of be learnt, especially regarding land policies, but the EDFC could increase manifold if accompanied by mechanisms should also be built to grapple with the development of a proper cold chain, including issues as they arise and use the new learning down the refrigerated warehousing and transportation. line to accelerate implementation. In the meantime, existing industrial parks and estates should be the Cold chain development was the object of many attempts preferred terrain for improvement, and industrial park in India, but often failed. Lessons should be learnt about policies that have been successfully implemented the cause of these failures, especially the incentives should be encouraged. required to implement the scheme effectively and with the required output quality. In that sense, the MFPS seems Coordination between the zone policies and the a worthwhile option, as well as the existing cold chain EDFC should also be a critical policy focus in order to scheme which has shown satisfying implementation maximize impact. However, this will entail providing results so far, according to government data.15 the necessary support and conditions to develop the logistics infrastructure, especially private industrial Other issues could similarly surface through this parks. This will include not only policies that facilitate mechanism, such as the EDFC discussion with firms in their establishment, but also more active support to the pets food and leather sectors, that might prevent their creation, through implementation arrangements industries from using railways, despite potential gains from that draw on the experience of the most successful increased selling capacity estimated at 20% to 30%.16 Indian industrial cluster development policies. 15 This stresses the need to resolve regulatory and capacity constraints in the power sector, already alluded to earlier, as 30% of cold chain operators’ costs come from energy use, as well as integration of the local market to allow the set up of large, centralized cold chains, since heavy fixed capital costs in the sector entail large-scale economies. 16 CRISIL (2013) reports odor and spillage as such factors. Annex 7: Practical Lessons to Mitigate Zone Pitfalls in UP 39 This report is printed on recycled paper. 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