SEZs should have a single-point agenda: greater excellence in manufacturing

Written by Shobha Ahuja | Updated: Dec 31 2009, 04:26am hrs
A question that is prominent among discussions is whether SEZs, especially those established after the SEZ Act 2005, would help stimulate world-class manufacturing capabilities in India. And, would the SEZ Act, in its present form, facilitate new manufacturing investments, harness production and augment merchandise exports

Preliminary investigations indicate that the business environment created within the zones has helped SEZs post an impressive performance. In fact, merchandise exports from these tax-free enclaves have nearly doubled from around Rs 35,000 crore in 2006-07 to Rs 63,000 crore in 2007-08. SEZs have provided special impetus to the production and export of gems & jewellery and electronic hardware industry. Sectors such as engineering, pharmaceuticals, textiles & garments, footwear, among others, have also benefited from SEZs.

Another positive is that the zones have drawn a spate of investmentsboth domestic and foreign. This has created huge outsourcing opportunities by generating forward and backward linkages in the domestic tariff area (DTA). Moreover, SEZ units have provided avenues for technology transfer, knowledge-sharing and skill-development.

However, success stories notwithstanding, a closer look shows that the contribution of SEZs in manufacturing production may not be as significant as is made out to be. No doubt, manufacturing accounts for more than 90% of total exports from the zones. Yet, a major chunk comes from SEZs established prior to the SEZ Act, 2005. A break-up shows that more than 95% of merchandise exports come from seven government multi-product zones and 11 units within private/state government SEZs. Only a handful of manufacturing units from the 39 notified SEZs for which data is available contribute to production and exports. Not surprisingly, 90% of Indias merchandise exports take place from units established outside SEZs.

A key reason preventing us from leveraging our manufacturing potential relates to the limited area demarcated for industrial production. Most SEZs are small in size, hindering the development of integrated infrastructure facility essential to attract investment, especially FDI. Investigations show that 65% of the notified SEZs involved in manufacturing are built in area of up to 200 hectares. Some SEZs are built in areas as low as 11 hectares. This is in sharp contrast to the infrastructurally superior, technology-intensive and business-friendly SEZ model of China, where multi-product operations spread over an average size of 20,000 hectares have helped transform the countrys manufacturing base.

In India, like in China, it is the multi-product zones which are known to provide a fillip to manufacturing and exports. This is borne out from the success of the Santa Cruz Electronic Export Processing Zone (SEEPZ). The SEEPZ, originally a uni-product zone established for electronic hardware units, became a relative success only after gems & jewellery units and IT service export units came up later. Indeed, the 111-hectare long SEEPZ has been instrumental in modernising the gems & jewellery industry and helped the sector gain access to the international market. Yet, the SEEPZ is constrained by lack of space and the surrounding road infrastructure. A larger zone would have accommodated more units, and created space for better infrastructure and value-addition in the zone. Other prominent government and private SEZs established prior to the Actsuch as MEPZ, NOIDA, Suratare also small in size. Hence, despite having multi-product operations, the zones are yet to realise their manufacturing potential and venture into non-traditional and more value added areas.

SEZs have little to show by way of investment creation. Many investments had been planned prior to the area being demarcated as SEZ. It is also reported that units have succeeded in getting their DTA units converted into SEZs, causing investment diversion in the zones. And many investors prefer to adopt a wait-and-watch attitude as only 60% of the proposed units have actually made investments in new SEZs.

All this is not to suggest that the concept of SEZ is flawed. A well-designed and carefully implemented SEZ has the potential to develop competitive production systems. Hence, SEZs should be freed from a multiplicity of objectives and instead made to focus on a single-point agenda of promoting excellence in manufacturing based on natural cost and logistics advantage. Issues such as employment generation could be the fallout, and not the core concern, of SEZs. This would naturally follow once the unit starts production.

Other things being equal, the setting up of large SEZ in best industrial locations should be encouraged. Priority should also be given to creation of quality infrastructure both within and outside the SEZs. Availability of skilled workforce in the vicinity would be another advantage. The policy framework should be simple, transparent and consistent. There should be minimum government intervention in the operation of the zone. Single-window clearance, good governance and liberal labour laws are crucial to attract large-scale production from well-known business houses. And, above all, a supportive state government that ensures smooth implementation of Centres SEZ policy, apart from liberal land ceiling laws, is also an important factor.

It is also desirable that the seven government-owned SEZs are given autonomy in decision-making. Once the policy is streamlined and shows results, it will have a demonstrative effect in terms of transforming the image of our country, just as Chinas has been showcased to the world through its pioneering SEZs.

The writer is a senior economist with the PHD Chamber of Commerce. These are her personal views