Give SEZs a chance

Written by Rohit Pandit | Updated: Jul 31 2007, 04:02am hrs
Geopolitics and diplomacy have an important economic dimension and the might of a nation is now increasingly measured in economic terms. India's recent induction into the world's high table is a result of its growing economic might. Therefore, even though exports cannot be the only engine of growth for an economy of India's size, they can contribute significantly. The evidence is the sustained double-digit growth in exports in the last four to five years, despite very adverse global market conditions.

Even though India started experimenting with export processing zones as early as in 1965, it took us 40 years to come up with the SEZ Act. World experience, especially China's, has shown that special economic zones can trigger rapid economic growth and development, given the right approach and policies. India is already very late in this race. But, if the SEZs can boost India's economic performance to the next level, they surely are worth trying. Unfortunately, the SEZ policy has become mired in a number of controversies, and once politics takes over in India, the economics is forgotten.

A major issue is that SEZs will lead to significant revenue loss. It must be understood that this revenue loss is notional as there would be no revenue if these SEZs are not put in place. Further, since most of the investment in these SEZs will be private, it will not lead to extra burden on the exchequer. All sales made by SEZs to the domestic tariff area (DTA) will be only after payment of full customs duty and, hence, will add to the exchequer.

Associated with this issue is the question of the fiscal benefits, which may lead to relocation of units in the DTA to SEZs. The upper limit of multi-product SEZs has now been fixed at 5,000 hectare, with the state governments free to reduce it further, and the minimum processing area has been increased to 50%. The area used for social infrastructure in SEZs would need the approval of the government's Board of Approval.

Associated with this issue is the concern of agricultural land being converted into SEZs. Barren land, or mono-crop land, is to be considered for proposed SEZs. Compulsory land acquisition has been stopped. Ideally, governments should get out of land acquisition, allow SEZ developers to negotiate directly with farmers, pay market rates and also some kind of stake to compensate them in the future as the value of land escalates. Policies on land acquisition and resettlement & rehabilitation are being drafted.

Another crucial issue is the surge in applications to set up SEZs, with more than 400 applications in various stages of processing. While 130 SEZs have been notified, 211 more have received final approval. Keeping in mind that China has only six SEZs, this does look excessive and implies potential excess capacity. Further, their relative size compared to the ones in China pose questions about scalability.

To be successful, SEZs have to attract foreign and domestic companies, which, through their scale of operations, can be globally competitive and export substantially to developed and emerging economies. Though the government has laid down net worth and minimum investment criteria for SEZ developers, the government should ensure that only serious players make the grade. Concern was also expressed in some quarters that domestic exporters would use the SEZ route for exports to avail of income-tax exemption. This has also been plugged by amending the rules and trading units in SEZs will get income-tax benefit only if they are engaged in international trading.

Another fear expressed is that it may lead to regional imbalances. This is a valid fear but balanced regional growth can be ensured through various other mechanisms and the government should desist from using this scheme for that purpose. We must, as a nation, strive towards removing all these problems so that this scheme can be smoothly implemented.

The promise of relatively better infrastructure, greater operational flexibility, single-window clearances and freedom from bureaucratic controls, some amount of labour flexibility, availability of finance at international rates in the proposed SEZs may be the right ingredients to attract both foreign and domestic investments on a never-before scale. This would boost exports, give an impetus to infrastructure creation, lead to the generation of employment and, through backward and forward linkages, positively impact the domestic economy and propel India's economic growth and development.

The writer is joint-secretary, PHDCCI. These are his personal views