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Special Economic Zones: Model Ventures?

| 12/5/2011 5:32 PM Monday

After experimenting with various forms and version of economic zones that should have lifted growth in India through exports, the Special Economic Zone (SEZ) policy was announced in April 2000. The objective of forming SEZs was to put an engine for economic growth in place, supported by quality infrastructure and attractive fiscal packages, both at the central and the state levels, with single window clearance. These places were designed to act as islands of excellence, with a relatively superior infrastructure and policy environment, which served the purpose of implementing growth policies in an efficient manner. SEZs are supposed to be specially delineated duty-free enclaves for the purpose of trade, operations, duty and tariffs.
 
The first version of such a policy initiative dates back to the 1960s, when Asia’s first Export Processing Zone (EPZ) was set up in Kandla, Gujarat, in 1965. Following this, similar initiatives like EPZs, Software Technology Parks (STPs), Export Oriented Units (EOUs), etc. were implemented. However, none of these managed to have a significant impact on exports, or in generating employment or achieving any other objectives that they were supposed to.

Therafter, drawing lessons from other countries where SEZs have been fairly successful and have played an instrumental role in promoting private investment-led economic growth, India came out with the Special Economic Zones Act, 2005 which was notified on 10th February, 2006. This saw the conversion of seven EPZs set up by the central government at Kandla, Santa Cruz (Mumbai), Cochin, Noida, Chennai, Falta (West Bengal) and Visakhapatnam into SEZs. In addition to these, 11 new EZs that were set up during the period 2000-2005 were also conferred with SEZ status after the SEZ Act, 2005 came into force.

Currently, there are total 585 SEZs that have been approved, and of these, only 381 have been duly notified. However, the number of operational SEZs stands at just 133, which means that only 23 per cent of the total approved SEZs are operational. So, what has led to such a low performance?

As it turned out, much of the initial enthusiasm of SEZ developers was due to the anticipated real estate opportunity that these projects offered. However, in reality, wide protests by farmers have made land acquisition a problem, which eventually led to such a dismal performance. For example, in Andhra Pradesh, 75 of the said SEZs were notified, but only 27 are currently operational. The Andhra Pradesh Industrial Infrastructure Corporation (APIIC) has scrapped the MOUs with major defaulters, and has taken back the land assigned to them, including the land from Unitech and Caparo. The state government had allotted 42142 acres of land for the 75 notified SEZs. Of the total land that has been taken back, 1750 acres was recovered from Unitech in Vishakapatnam and 2000 acres from Caparo in Nellore.

Therefore, instead of going by the number of SEZs, the government should go by the quality of services provided to SEZs. For example, the average land area of an SEZ is very low in India, at around 130.13 hectares, compared to more than 500 hectares in China. Bigger SEZs help to attract more FDI.
 
If we look the performance of the SEZs with respect to achieving their primary objective of increasing exports, we find that they have failed miserably. Although the total value of exports from SEZs has increased at an astounding rate of 48 per cent on an annualised basis since FY02, this has not helped India to increase its share in the world export market, which was still at 1.4 per cent at the end of 2010. The total share of exports from SEZs is around 16 per cent at the end of FY09. If we were to remove the erstwhile EPZs and EOUs that were converted into SEZs and some of the STPs that migrated to SEZ status, the figure will come down further. Compare this with China’s exports from SEZs at 23 per cent, while that of Indonesia and Thailand is even more than 50 per cent.

If we take other parameters like investments attracted and employment generated by these SEZs, the picture again, is not very rosy. Till June 30, 2011, an investment of roughly Rs 2.13 lakh crore has been made in SEZs, and the total direct employment in SEZs is just of seven lakh persons. Also, if we look at the costs, including both quantitative losses (like revenue loss due to tax and other investment incentives) as well as qualitative losses (like relocation and substitution affect, loss of agricultural land, etc.), it seems that SEZs in India have yet to achieve a lot.

The total loss to the national exchequer due to tax incentives given to SEZs has been a cumulative Rs 43000 crore for the five years ending FY11. If you consider the losses as a percentage of the actual investment in an SEZ, they come to around 12 per cent, which is on higher side.

Hence, from the above cost benefit analysis of the SEZs, we believe that SEZs in India have not been able to meet their targets as yet, and require some more policy fine-tuning to make them more effective in achieving the said objectives. This includes the introduction of a performance-based exit policy for SEZ developers, legal institutions related to land acquisition, etc.
 
We believe that the creation of zones is not a panacea. Rather, we need to create a conducive environment to attract foreign capital, as well channel our savings through the capital market. In order to achieve this, the government should act decisively to resolve some of the issues relating to environmental clearances, land acquisition and more importantly, labour issues. One of the best examples that show the government’s sluggishness in swift acting is the six long years taken to give clearance to India’s largest FDI worth USD 12 billion to be invested by Korean Steel major, Posco.

Labour issues also need to be addressed – the recent strike in Maruti’s plant at Manesar has once again revealed the indefinite employment structure in India. If the government is serious about improving the share of manufacturing in the GDP and attracting more foreign investments, it needs to be serious in working out long-term solutions to the labour issues. As we can see, labour productivity in India has increased on an average of a mere five per cent or so in the last decade, as compared to China that witnessed a labour productivity increase of 12 per cent in the same period.

In addition to this, as a nation, we need to incorporate innovative manufacturing policies for enhanced competitiveness like Lean manufacturing systems, flexible manufacturing processes, etc., and increase the expenditure on R&D, which, is currently just around one per cent of the entire budget, compared to two per cent the world over

 

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