The Hindu Business Line : How export enclaves can deliver

IT IS heartening that India aims to garner 1.5 per cent of world trade by 2009. Notwithstanding a buoyant growth rate recorded by exports in recent months, the country can ill-afford to forget that a modest target of one per cent of world trade, set over 10 years ago, has been elusive. Not that the objective was far-fetched, or that the new benchmark set by Mr Kamal Nath, Minister for Commerce and Industry, is beyond grasp. Only, external trade requires a clearly enunciated, well-coordinated national level implementation of avowed framework conducive to facilitation across the entire supply and value chain.

India's propensity for crackle of ideas and articulation is well recognised. More formidable is its capacity to deliberate and dither, penchant to discuss and debate any initiative to death. Much has been made of the special economic zone (SEZ) scheme, for instance, for the last five years. But nothing tangible has materialised. The confusion has been confounded by upgradation or rechristening of export processing zones (EPZs) into free trade zones (FTZs) or SEZs. The UPA Government's new foreign trade policy envisions yet another reincarnation of free trade and warehousing zone.

Often, the votaries of the FTZ scheme visualise the potential which China has been able to harness inherent in a string of SEZs it set up. In India, the scheme remains stillborn on account of the serious reservations that have persisted in respect of comprehensive liberalisation and freedom inherent in the Chinese SEZ model.

The SEZ concept, first experimented in 1980, envisaged a territorial enclave of capitalism, a virtual test-bed for reforms, offering competitive advantages in critical sectors of labour, real estate, technology and capital. China's big bang SEZs at Shenzen, Zhubai, Shantou, Xiamen, and later at Hainan, were a clear manifestation of a hassle-free environment for global investors. A nondescript poor fishing hamlet soon became a sprawling SEZ over 320 sq. km, employing 3.5 million people. A relatively small Pudong SEZ spreads over of 1,30,000 acres. Some 30 million workforce is engaged in Chinese SEZs, which signified China's first brush with globalisation.

As in China, the 100 sq km Jebel Ali Free Trade Zone in Dubai, now home to over 1,600 companies from 85 countries, has triggered the economy and development of the Gulf entrepot. The zone allows free flow of capital and profits; there is no currency restriction; no corporate tax or personal income tax.

Again, the Sharjah Airport International Free Zone has the biggest air cargo hub in West Asia and Africa. The zone permits 100 per cent foreign ownership and repatriation of funds with no currency restrictions. There are no corporate or personal tax or import duties.

The SEZs at Sharjah, Jebel Ali, Fujairah and Hamriyah are well-known to Indian entrepreneurs. The West Asian and Caribbean free zones are favourably located close to air and ocean gateways; their size typically is large enough to attract private participation in building infrastructure. These free zones function virtually as large, multi-faceted international corporations. They facilitate not only manufacturing facilities but provide all infrastructure and ancillary services, including warehouses, transport, container parks, hotels and entertainment centres.

As philosopher William James said, wealth, like knowledge, grows in spots and spreads out from there. Instead of spreading the effort and the resources thinly across the whole country, it is considered prudent to determine the feasibility and expediency of reforms in a limited area, more so when normal laws and rules are perforce kept relatively stringent for the whole country.

The concept of EPZ/FTZ owes its genesis to this realisation. According to the World Trade Organisation, the outstanding trade growth in some of the developing countries is attributed to the expansion of their "processing trade". Among an aggregate of some 850 EPZs worldwide, a large number operates in developing countries.

Since the 1950s, commencing with the success of the Irish Shanon free zone, SEZs are virtually limited parts of an economy — geographical or functional — in which the rules and other institutions for the production and distribution of goods and services differ from those in the rest of the economy.

Some of the first EPZs founded across the world included Puerto Rica in 1962, Mexico in 1964, Kandla in 1965, Taiwan in 1966, Republic of Korea in 1971, the Philippines and Malaysia in 1972. The EPZ set up in Mauritius in 1970 is not a geographical but a functional concept. South Korea implemented two EPZs at Masan and Iri in the early 1970s.

SEZs in transition economies have been regarded as a runabout towards capitalism. In Poland, seven SEZs implemented in 1989 hardly proved to be catalysts of a systematic change. In Hungary, SEZs existed as single offshore enterprises since 1982. In Bulgaria, similar zones failed as instruments of transformation. The raison d'etre for India's EPZs has been the need for exemption from complex and irksome regulations as well as high tariff rates and taxation.

EPZs were envisaged as special enclaves, within which export-oriented investment could be attracted by overcoming the rigorous constraints of the trade and industrial policy. The successful models elsewhere essentially implied the free zones to be "foreign territories within the country", endowed with state-of-the-art infrastructure, free from the fetters of constraints and controls.

Whether the enclave is afforded the nomenclature of an EPZ, FTZ or SEZ, the cardinal factor is the provision of appropriate infrastructure and transport facilities, relatively low factor cost, favouring national framework including the guarantee of private property rights, flexible labour laws, a low degree of tariff protection, convertibility of currency, stable legal and administrative regime, besides a commitment to the canons of an open market economy.

A free trade zone is essentially a bonded warehouse facility to store imported goods ultimately destined for re-export without payment of duties. An entrepot centre usually offers dry-locking facilities, watering and bunkering for shipping. It is a global extension of the FTZ concept. A free port refers to an advanced offshore entrepot, an FTZ and EPZ, all combined into one. Inherent in the concept are infrastructural facilities for international level, transit port services, offshore banking, duty-free shopping and recreational areas.

A good example of India's truly first SEZ is the projected 200 sq km Positra zone. More than a score of aspirants have been in the queue, several States vying for the scheme, some of them not even fully cognizant of its imperatives.

Some others have been keen to get on the bandwagon, while they would qualify only for special clusters of industrial activity in need of concentrated attention and help for them to be transformed into dynamic and privileged centres of high growth for exports, for example, Tirupur, Ludhiana, Moradabad, Bhadoi, Agra, and so on.

Whatever the nomenclature or format, the need is to push the project with clear objectives and expedition. Essentially a national scheme that it is in character and implications, involving the Central and respective State governments, it would warrant a multi-disciplinary empowered Task Force to give it meaning and substance.

The Task Force would need to be designated with the mandate to deliver the goods within a definite timeframe. A great opportunity awaits the country — if only it can get its act together and enlarge the general scope of such a free zone to encompass refurbishing and re-engineering of goods in bond, received from different countries, for re-export.

(The author is former Managing Director, CONCOR.)