Dwarf Zones

Written by SP Ketkar | Updated: Oct 6 2010, 16:34pm hrs
The SEZ Act 2005 was ambitious in its sweep. Its stated objectives were to generate additional economic activity, create employment opportunities, boost infrastructure development, attract investments, and promote exports. The Act was expected to correct the inadequacy of earlier policies and deliver a few SEZs (special economic zones or self-sustaining industrial townships) with vibrant manufacturing activity to raise exports. Concessions, exemptions and incentives were included in the policy to make SEZ investments globally competitive.

The initiative seemed to work, initially. Many large, medium and small businesses found the offer attractive and filed for building SEZs. So overwhelming the industry response was that it triggered debates on pruning the number and size of SEZs, potential misuse of land by SEZ developers, likely diversion of domestic industries to SEZs, imminent tax losses from fiscal incentives, etc. But implementation, as usual, was the biggest casualty. Still, out of 577 new SEZs formally approved by the government, 363 have moved to the next stage of notification and 95 have become operational by June 2010. With that, the count of operational SEZs, including the 19 set up prior to the Act, has gone up to 114.

These SEZs, however, seem to be special only in their count. In terms of land area, 114 operational SEZs together are just half the size of Shenzhena Chinese SEZ spread over 325 sq km. Also, if we add up the land requirement of all SEZs, in various stages of implementation and approval, the total would come to 2,041 sq km, or merely 0.15% of the countrys non-agricultural area. Still, land acquisition has been at the centre of most SEZ controversies.

Such a situation cannot be managed by approving and notifying a few buildings as SEZs, but has to be addressed comprehensively by expediting the Land Acquisition (Amendment) Bill. Even better, the government could demarcate two/three tracts of non-agricultural land, along our vast coastline, each measuring 500-1,000 sq km, for SEZs. Else, SEZs may never achieve the policy objectives of attracting investments and boosting infrastructure development.

Coming to the other objectives; SEZ exports are reported to have grown by 121.4% in 2009-10 to reach Rs 2,20,711 crore and account for 26.1% of total exports. Also, SEZs are said to have attracted Rs 1,66,526 crore investments in a short span of five years and provided employment to 550,323 people. But this is only one side of the SEZ story and paints a highly distorted picture.

First of all, a quick comparison with one successful Chinese SEZ shows that exports from all our 114 SEZs together are still lower than the output from that SEZ called Shenzhen. Second, as can be seen from export figures in dollars, a large part of increase in 2009-10 appears to be from the impact of exchange rates, rather than an increase in volumes.

Third, if exports of 19 older SEZs and one success story of Reliance Jamnagar are taken off the total, we are left with just Rs 40,000 crore as the exports from 94 new SEZs. That makes most of our special zones smaller than many mid-sized companies. Fourth, had SEZs really been a grand success, the composition of Indias exports over the last few years would have reflected that. But, the top-ten contributors to 2009-10 exports show that their earlier years contributions were different, primarily on account of exports under Chapter 71, 27, 26 and 99 and that does not point to any shift in favour of manufactured goods.

Finally, if we see the SEZ performance together with the countrys total exports; at least a part of the growth in SEZs appears to be coming from a drop in other exports. And, it further means that employment in SEZs would have also caused loss of jobs in non-SEZ export businesses. Will such growth of SEZs contribute to the objectives of generating additional economic activity, promoting exports and creating employment

(The author is an alumnus of IIM-Bangalore)