Sezs In India

MACRO ECONOMICS

SEZs

HIGHWAY TO INDIAN ECONOMIC GROWTH?

SUBMITTED BY:

DEEPTI MITTAL

INTRODUCTION

There has been much debate about the role Special Economic Zones (SEZs) play in the economic growth of a country, and whether they should be the first option, or the next best policy.

The promise of Special Economic Zones (SEZs) has captivated entrepreneurs of all hues and sizes. At last count, 263 SEZs had been sanctioned, while another 169 had received in-principle approvals.

The SEZs hysteria is almost similar to what happened with dotcoms in the late 1990s- a hasty rush into sector that held out promise of untold gains. What came next is business folklore.

Are we seeing something similar in making over here as well? The best thing that goes in favour of SEZs is that the creation of infrastructure will shift into the hands of Private players. But are we realizing the serious implications of setting up SEZs and underestimating the risks involved with them. In the two instances where SEZs have worked globally, the Jebel Ali Free Zone in Dubai and Shenzhen in China, the government made the initial investments. The primary motive wasn't profits, but to create world-class infrastructure that would attract capital.

In contrast, In India it is Private sector who is putting in all the money. According to Industry estimates, Indian SEZs will soak up anywhere between Rs 330000 crore to Rs 550000 crore. This is more than what the entire industry has invested in the past five years- Rs 320000 crore. That is equivalent of pumping 15-175 of India's GDP into one grand reality development plan.

Along with Puerto Rico, India was one of the first countries in the world to set up an Export Processing Zone (EPZs) in Kandla, Gujarat in 1965. Four decades later India is again bullish on SEZs, and with the SEZ Act of 2005 in place, it is going all out to woo investors. But the question that arise here is Why SEZs now and why not EPZs? While EPZs are industrial estates, SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecommunication. The scope of activities that can be undertaken in the SEZs is much wider and their linkages with the domestic economy are stronger. Resultantly they have a diversified industrial base. Their role is not transient like the EPZs, as they are intended to be instruments of regional development as well as export promotion. As such, SEZs can have tremendous impact on exports, inflow of foreign investment and employment generation.

All said and done let us first see how and up-to what extent we have adopted the SEZs policy from our Chinese counterpart as both the countries are very different in term of Size, while China is a manufacturing driven economy India is services driven. I have tried to contrast the points of comparison in SEZs policy implementation between China and India and its implication here.

Comparison of SEZ policies of China and India

Issue China India

Size Very big. Typically in hundreds of hectares. Even 10 hectares will do.

Location Well thought out and located only on coasts. To facilitate exports and imports easily. Anywhere. No restriction.

Labour laws Relaxed in the SEZs. Flexibility is totally absent.

Policy regime Experimentation of liberal policies in the specified areas while insulating them from the rest of the country. Based on fiscal sops.

Investors * Government supported

* Basically foreigners who are wooed with sops and promises of stability in policy. * No Government support.

* Internal investment, Not foreign investor driven; which should have been the case.

Commencement In 1979 In 1965 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murali Maran announced the SEZ policy.

Number Only six: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Pudong Any where and any number. So far 28 operational. About 200 received approvals.

Tax holidays Present Longer and steeper than in China.

However, all that does not invalidate the relevance of EPZs. Even China, which pioneered the concept, has only five SEZs, in addition to hundreds of EPZ type zones variously designated as economic and technological development zones (ETDZs), open areas and even EPZs. Indian EPZs have not fared so well overall as these are so few and their areas small; for some, the location is inappropriate and they were subjected to cumbersome procedures. Therefore, the mere fact that India is switching over to the SEZ model may not per se guarantee success as demonstrated by China unless policy parameters and implementation strategy are planned carefully.

Against this background, it may be desirable to examine how far the key policy parameters that contributed to the success of SEZs in China have been incorporated in the Indian policy framework.

Size factor

First consider the size of the proposed SEZs. Chinese SEZs are like townships. India has not gone that far, but it is heartening that realizing that size does matter, the government has decided to have large sized SEZs. According to the guidelines, the area of an SEZ should be 1 000 hectares. This reflects a sea change in the government's perception because earlier the minimum size was 200 hectares.

Liberal incentives

The incentive package in India is quite liberal and may even be a shade better than that for Chinese SEZs. Duty free import of capital goods and raw materials, reimbursements of Central Sales Tax, tax holiday for a specified period, 100 per cent repatriation of profits for subcontracting facilities are allowed. The entrepreneurs will be free from routine inspections of import - export cargo. This can attract foreign direct investment for providing internationally competitive infrastructure.

Decentralization