The Hindu Business Line : SEZ exports and MNCs — Seeking a privileged enclave

The news that MNCs are expanding operations in India expresses their confidence in the economy. What that means for the export-oriented strategy and the SEZ is something different.

It was only a matter of time before multinational companies began to view India with renewed interest considering the economy's record-breaking growth in GDP over the last two years and the prospect of ending fiscal 2005-06 with an 8 per cent growth. Cite a figure long enough and it acquires legitimacy beyond its apparent implication. An 8 per cent growth in times like these, with China the only competitor, places India bang on the radar screens of MNCs. A buoyant economy, strong business confidence and most of all, a surging consumption wave across urban India with the promise of an uncharted rural market would send any MNC board redrawing investment strategies. On the back of strong policy commitments to the neglected and potentially transforming sectors such as infrastructure, many MNCs that have resisted fresh investments in this country are now rethinking their plans.

According to news reports, companies such as Siemens, ABB, Wartsila India, Denso Corporation are planning major investments. Bosch Group recently announced an investment of Rs 1,800 crore through its Indian wing, MICO. Siemens, recently in the news for some scathing remarks on the quality of infrastructure in Bangalore, has announced expansion plans for a steam turbine plant in Vadodara.

GREY AREAS

Predictably, FMCG companies are also cashing in on the consumer boom but the development of note is the entry of fresh investments in what should become the hottest sector — if the government's oral commitment to infrastructure translates into concrete polices. So far a Special Purpose Vehicle has been set up to manage the funds for sector projects in what will become a public-private partnership. Some grey areas till remain; user charges for instance and an illiquid land market. The sooner these are handled the quicker will investments flow in.

As the economy enters the new fiscal the pattern of growth in existing sectors and the potentially lucrative but hitherto neglected ones will determine the flow of investments in the medium term given a government friendly to foreign investments. Since 2003-04 investments by MNCs have been on an upswing; this fiscal FDI, for instance, jumped 18 per cent between April and August over the corresponding previous period. This may not amount to much if one compares the flows with those into China. But the comparison is unnecessary except from an emotional viewpoint. China is a country we are mystified and certainly awed by. What matters more than the race in terms of numbers is the alacrity with which governments can tune policies to entice FDI to specific needs and the response of the investors.

Since 2003 India has become an attractive place for MNCs to expand operations in. But not for exports so much as to cater to the domestic market. India's GDP growth of 7 per cent for two successive years has not been predicated on exports, like China's growth has been. Much as Indian exports have done well it is the burgeoning domestic market for both capital and consumer goods that accounts for recent economic growth. MNCs have watched silently and since 2003 have turned more aggressive to take advantage of this boom in spending. MNCs in India are divesting their Indian partners in favour of wholly-owned subsidiaries; Wyeth USA, the American pharma giant, is setting up Wyeth Pharmaceuticals India to launch some of its popular drugs. More will follow as the economy provides the stimulus for direct investments and business expansion in the large but undeveloped infrastructure sector.

If the MNCs invest in this country for the specific goal of exploiting the domestic market, any policy aimed at directing them to exports will prove futile. In China it would succeed because the Chinese domestic market, restricted as it is to the coastal areas encourages investments to look outside for markets.

PALING IN COMPARISON

Even with a 24 per cent growth in exports — no mean achievement given the sluggish world trade — India's export oriented strategy, so much favoured in the 1990s has been quietly forgotten except in the corridors of the Commerce Ministry where its shining avatar is found in the Special Economic Zone. A little reflection on the pattern and sources of growth in the economy and, a glance back at the experience of the Export Processing Zones would have cast some light on how the SEZ, like the calculator, had its uses once but not any more. With all the odds stacked against them, poor infrastructure, high transaction costs, abolition of tax exemptions, traditional exporters from the Domestic Tariff Area have posted better results than all the SEZ units basking in the glow of all the concessions, tax exemptions and the like.

Indian and global companies operating in India and those waiting to get here have drawn the conclusions they should as business players; the domestic market is a humdinger.

The coalition-led government may have its headaches but it has its heart in the right place. Delhi is full of ministerial delegations from Ireland to South Africa and not all of them are looking to the IT sector or to pick up stakes in domestic financial institutions. They are not looking to source parts from or subcontract to India unless it is in the IT sector or for BPO operations. They want to sell in India everything from steam turbines to diapers or buy Indian companies, as Holcim has done, to sell products in India.

And the Indian market cannot get enough. The only exception is the IT sector which is like the Chinese equivalent of the manufactured good; services flowing from the Indian IT have global appeal, a competitive advantage like `Made in China' shoes or fridge parts.

Unlike the earlier Export Processing Zone, the SEZ is a makeover concept imported from China and it may yet succeed but for the wrong reasons. The Commerce and Industry Minister, Mr Kamal Nath, has hopes of drawing Rs 1,00,000 crore worth of investments over the next three years with an employment potential of over five lakh besides indirect employment during the constructing period of the SEZs; investments in sectors such as information technology, pharmaceuticals, biotechnology, textiles, petro-chemicals and auto parts. Many blue chip Indian companies have already bid for zones; Nokia has one in Tamil Nadu. What are the chances for exports from such zones even if the Commerce Ministry realises the "heavy" investments Mr Kamal Nath envisages?

TIGER TRAITS

It is possible that some companies will use the liberal provisions of the Act to become contract manufacturers for their foreign principals. This in itself is a foreign exchange earning activity. The South-East Asian countries became tigers by first being contract operation hubs for foreign companies.

Had the SEZ Act stipulated this as the main objective of units within the enclave the chances of exports shooting up would have been brighter even if India became a `periphery' to a MNC `centre'. Chances are that most large companies will find tax shelters and other concessions in the SEZ Act attractive enough to make the necessary investments thereby reduce their overall costs and probably `export' to the domestic area.

With the MNCs looking to expand their business operations for the domestic market the idea of a privileged enclave, a "designated duty-free enclave to be treated as a foreign territory for trade operations, duties and tariffs," as the official SEZ web site's flash intro proclaims, could not have come at a better time.

To help matters, the definition of `export' has been widened to include goods and services exports and `trade' whatever that means. Expect a lot more companies getting into BPO operations to justify their existence in SEZs while enjoying all the tax benefits and exemptions.

Perhaps the Commerce Ministry target is eminently reachable. What it will do for the Finance Ministry's drive to shore up tax revenues is another matter.

More Stories on : Infrastructure | Exports & Imports | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
THE ADC SWITCH

For Chidambaram's balancing act

Mysteries of Budget-making

Looking beyond the Budget

Justice thwarted

On rising trend

SEZ exports and MNCs — Seeking a privileged enclave

The pain of delegating

Rail Budget