Policy Relook: Put SEZs back on track

Instead of giving up on SEZs, India must leverage their advantages in the present geopolitical & trade context. It can give production/employment linked incentives

By September 2018, the IT zones had generated more than 14.6 lakh jobs, significantly more than what they had proposed, and contributed 54% of the total SEZ exports.
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The recently introduced farm reforms have triggered countrywide protests. However, the SEZ ‘reforms’, which ended income tax breaks for SEZ units earlier this year, and for SEZ developers in 2017, have gone almost unnoticed. It is not surprising, considering the fact that barrels of ink have been spilt criticising SEZs as an exploitative, unjust and non-performing policy tool. As a matter of fact, SEZs have never been allowed to flourish in India. They had fallen out of favour soon after the Act came into effect in 2006 and sparked fierce protests. Rather than adopting an analytical approach to understand policy biases and an innovative approach to find solutions, the government adopted a muddled approach, affecting SEZs’ economic outcomes. The government’s flip-flop approach took its toll on manufacturing SEZs that could never meaningfully take off. As of September 30, 2018, the actual employment in manufacturing SEZs was 84% short of the proposed numbers. However, the IT industry proved to be resilient and continued to hold the baton. By September 2018, the IT zones had generated more than 14.6 lakh jobs, significantly more than what they had proposed, and contributed 54% of the total SEZ exports. This achievement is not trivial considering the fact that IT /outsourcing hubs (in particular, SEZs) that enjoy generous fiscal incentives have emerged in several countries in East Europe, North Africa and other parts of Asia.

Currently, globalisation is in transition. Industrial policies are back on the scene with a bang, even in advanced countries. There is a growing recognition of the importance of proactive government policies to diversify and upgrade economies beyond simply freeing up markets. Global business dynamics are changing due to the emergence of Covid-19, escalation of the trade war between China and the US, and emerging geopolitical tensions. It is expected that the multinational companies will diversify their supplier base by establishing shorter value chains and relocate from China. Governments of the emerging economies have launched an aggressive drive to promote their SEZs with attractive business conditions and massive investment incentives with the objective of attracting these investors to support their respective industrial policies. Indonesia, for example, is offering tax breaks for up to 24 years in its SEZs (KEKs). The UNCTAD World Investment Report 2019 reveals that out of 5,400 SEZs worldwide, more than 1,000 of were established in the last five years, and at least 500 more zones are in the pipeline with fiscal incentives being a critical element. In contrast, the government of India (GoI) is abandoning its direct role in economic policy. In industry, for instance, despite the calls of Make in India and Atmanirbhar Bharat, there is no strategic blueprint as to how to promote industry.

The focus has been on creating conducive business conditions in the whole country with a single-minded pursuit of improving ‘Ease of Doing Business’ (EoBD) ranking. Indeed, India has jumped several ranks from 142 in 2014 to 63 in 2020. But, to what end? It could not evoke confidence among private investors.

Private gross fixed investment, as a percentage of GDP, has declined from 27% in 2011 to 22% in 2018. This signals a lack of institutional trust, an outcome of policy uncertainties, bureaucratic controls, political interferences, the politics of vendetta, caste and religion, a continuous cycle of elections, and deep penetration of politics in every aspect of social life. It must be understood that the logic of SEZs is precisely to overcome the constrained effectiveness of EoDB reforms in the wider economy. However, India has almost written them off. The Baba Kalyani Committee submitted its report in 2018. But follow-up actions are still awaited. This is an opportune time to leverage the advantages of SEZs to revive the fragile economy. Some of the recommendations are as follows:

1 Systematically discuss the recommendations of the Baba Kalyani Committee report and develop appropriate follow up action to implement them. Break the recommendations down into two-time frames—short-term actions that are incremental and do not require extensive debate; and medium-term strategic changes that require consensus building before they can be implemented.

2 Build consensus for strategic changes in the SEZs to keep them relevant in the wake of WTO compliances. As proposed by the committee, reorient the objective of the SEZs from promoting exports to economic activity and employment generation, and focus on attracting large, foreign companies. Several developing countries are now following this strategy in their SEZs.

3 Offer employment/production linked incentives in reoriented SEZs. In Poland, a country running a successful SEZ programme, tax breaks are offered only if the companies meet the employment generation targets.

4 Allow all those benefits to SEZ units/developers that are offered in the wider economy. Complement them with additional benefits. Thailand offers massive merit-based incentives to priority industries, yet makes sure to offer additional benefits in the SEZs. There is strong evidence that if SEZs are successful, they become an instrument of revenue generation.

5 Ensure effective single-window clearances, stability in rules and regulations, and efficient administrative services. Several recommendations have been made in the Committee Report for this. A lesson can be learned from the Philippines, where the SEZ authority (PEZA) offers 24×7 one-stop services to investors. Even Ethiopia can offer a lesson in how to succeed in overcoming administrative hassles in SEZs to reap their benefits.

6 Promote logistics zones to contribute to a significant reduction in logistics costs by offering effective solutions. All manufacturing SEZs, ports and airports should be integrated with logistics parks. As per the GoI report of July 2019, India has only eight free trade warehousing zone; Indonesia has 91, Malaysia 22, and the US around 262.

7 Finally, bridge the trust gap by being committed to industrial growth, open to international experiences and congruent between words and actions.

The author is Professor, Copenhagen Business School and Visiting Professor at IMI, New Delhi
Views are personal

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First published on: 20-10-2020 at 07:10 IST