SEZs: Will They Work for Us, Too?

Ever since the Special Economic Zones Act was passed hoping that creation of such specially carved “capitalist enclaves” would attract the much needed investments in creation of excellent infrastructure—both from domestic and foreign sources—much dust has been raised both in the political and academic circles.

The current mood in the country well reflects in the question: “What role do you see for SEZs in accelerating India’s economic growth?”—that was put to no less than our Prime Minister by Naina Lal Kidwai at the “ET Awards for Corporate Excellence”, 2006 ceremony, held in Mumbai.

In his own characteristic candor, he responded: “Well, the special economic zones have come to be accepted as part of the new policy that we have evolved. So long as we cannot get rid of all taxes on goods and services, so long as we cannot have uniformly good infrastructure, I do believe that these special economic zones have a role in accelerating our growth and also to generate more employment opportunities, to generate more exports. In the recent weeks, several concerns have been raised…, and I do believe that they will play an important role in the next stage of development in our country.”

SEZs are not new, for Deng Xiaophing, by using them as tool to attract foreign investment and technical know-how into China as a part of its modernization program had made them quite popular all over the world. Indeed, they are not new even for us, since we did establish such enclaves in Kandla, Mumbai, etc., in the early 1960s. So, what this controversy is all about, now?

One criticism is that the government blessed SEZs with lavish tax breaks: they are exempted from Indian trade tariffs; granted 100% tax holiday for five years, a 50% tax break for another five years, and a further five year tax break on re-invested profits. Obviously, this raised alarms even within the North Block, for the revenue losses owing to these sops are estimated to exceed Rs. 1,00,000 cr. Even, Raghuram Rajan, the Chief Economist of International Monetary Fund commented that these tax holidays are likely to encourage businesses to shift their existing production to the SEZs. But the government has a counter: only the new investments are entitled for these tax sops. But the moot question is, who is to certify the new investment? The obvious result could be: increased corruption. Nevertheless, can we afford to forget the old axiom: if we have to have more of something, we have to necessarily give more of something somewhere else? Nevertheless, all these distill to a point: we need to have an effective and honest monitoring and review mechanism in place. 

As though to capitalize on these sops, no sooner was the Act passed than every business house in India jumped aboard the bandwagon: around 400 proposals were submitted to the Ministry of Commerce, of which according to latest reports, 260 SEZs have been approved so far. This raised the second concern about prime agricultural land being converted into SEZs as the land requirement for every multi-service SEZs is a minimum of 1,000 hectares and that of service sector SEZs is 100 hectares. As against this, academicians argue that success of SEZ depends on its “location, its connectivity with the outside world, capacity for huge investment for creating excellent infrastructure within the identified geography and a huge geographical spread of its own.” Incidentally, China’s SEZs are reported to have a spread covering as much as 150 sq km, while the average size of our proposed SEZs is said to be around 1 sq km and hence many academicians argue that they would be of no economic value.

Nevertheless, the question of converting prime agricultural land into SEZs merits attention for fertile land being nature’s gift cannot be created anywhere, while SEZs can be created everywhere. Hence, location of SEZs must be carefully chosen with due attention to the agro-socioeconomic considerations. 

The Reserve Bank of India raised another controversy when it asked banks to treat loans granted to developers as loans granted to real estate developers rather than for infrastructure creation for assigning risk-based capital, which means rise in cost of funding.

All these controversies may not really deter Indian businesses from investing in SEZs, for they are quite used to such fluidity. But academicians, looking at these controversies, very much doubt the ability of SEZs in creating world-class manufacturing facilities. Further, they, having had the experience of our urban infrastructure that is best represented by the likes of Dharavi—Asia’s biggest slum—also doubt our ability to create appropriate infrastructure in the new satellite towns around these SEZs. Another apprehension is: what if the businesses in a SEZ fail? And, most importantly, they are highly scared of our archaic labor laws, whose modification is now left to the discretion of State governments. Unless all these issues are sorted out and policy becomes clearer, they aver that the much sought after investments from the overseas investors may not flow into SEZs.

But we have no option: We have to make them work!

(November, 2006)