The Hindu Business Line : Why the SEZ policy needs a re-think

Considering the confusion over the idea, the inter-ministerial differences and the doubtful nature of potential benefits, the Government must reconsider the policy framework governing the Special Economic Zones. It should perhaps constitute an expert panel to examine all aspects of the SEZ policy, says S. D. NAIK.

The Commerce Ministry notified the Special Economic Zones law on February 9, 2006 but the rush of proposals for setting up SEZs had begun much earlier and by November 2005 some 61 were already approved. According to reports, so far, the Government has clearedaround 150 SEZ proposals out of around 200 received. The rush of applications is, indeed, unprecedented.

Ironically, however, the overwhelming enthusiasm to set up new SEZs is accompanied by a raging controversy over the likely benefits to the economy from such zones. Also, serious inter-ministerial differences over the plethora of tax concessions, the minimum size of the zones in terms of area, as also the future of existing export-oriented units, Software Technology Parks (STPs), etc., have surfaced. The differences persist even after an Empowered Group of Ministers (E-GoM) tried to resolve them.

Heavy economic costs

The overwhelming consensus seems to be that the economic and other costs of SEZs are likely to outweigh the benefits. According to an internal assessment by the Finance Ministry, the Government may have to forego about Rs 90,000 crore in direct and indirect taxes over the next four years on account of SEZs. And a substantial part of this revenue loss would be from the existing export-oriented units shifting their businesses to these enclaves.

These giveaways will only increase significantly in subsequent years as the SEZ Act seems to have gone overboard on tax concessions — a five-year tax holiday, followed by a 50 per cent tax-break for the next five years, and a further 50 per cent tax-break over the subsequent five years.

Considering the low tax-GDP ratio and the crying need for resources for the development of infrastructure, social sectors, rural employment guarantee scheme and so on, such giveaways to create islands of excellence appear unjustified.

The new SEZ Act, if implemented to the letter, is bound to accentuate the regional disparities, both within and among States. Many experts have pointed out that the idea of such economic zones is the one whose time is already past with Customs tariffs having come down dramatically since 1991 and direct and indirect taxes rationalised and reduced progressively.

Now even China, where the SEZ model was said to be a great success, is worried about the huge economic disparities created by the experiment. According to reports, it is now focusing on broad-basing development in its next five-year plan.

Thanks to the increased competitive strength of the Indian manufacturing sector and the steady growth in outsourcing capabilities, the country's export performance has improved significantly.

Export growth in terms of dollar has been over 20 per cent for four consecutive years and the foreign exchange reserves have crossed $160 billion. Hence, there is no pressing need to develop SEZs to promote exports and that too by offering all kinds of incentives and sops. What the country needs at this juncture is a more balanced growth and development.

Size and location

Another contentious issue in the SEZ Act relates to the size and location of these zones. Though multi-product SEZs are required to have a minimum area of 1000 hectares, that specified for service sector zones is only 100 hectares. In the case of single product zones, such as IT and gems and jewellery, it can be as small as 10 hectares.

The Finance Ministry had opposed the move to fix the minimum floor area to just 10 hectares for single product zones, as it would lead to a scramble by most units to corner the available space and the huge tax benefits available to SEZ units.

Despite the Finance Ministry's opposition, the Commerce Ministry had its way with the Empowered Group of Ministers and managed to retain the minimum area for IT and biotech zones at 10 hectares.

For IT SEZs, the condition of minimum built-up area of one million square feet has been retained. Some experts, including Finance Ministry officials contend that property developers and unscrupulous businessmen would take advantage of the loopholes in the policy to corner prime land at concessional rates.

Since every activity within an SEZ will be virtually tax-free, real-estate developers have already rushed in. The major attraction for real-estate developers is that most of these SEZs are going to be located near big cities and towns where land is scarce and the State governments are supposed to offer it at concessional rates. No wonder the State governments are flooded with applications and they are finding it difficult to deal with them because of doubts over the quality of investments and the supplementary activities that these SEZs would generate.

Ideally, new SEZs should be located far from cities and towns to build new towns and should be spread over a minimum 1000 sq. km. Instead of offering all kinds of tax holidays and concessions, the Government should provide infrastructure support to such zones by building highways and expressways to connect them to ports, airports and other large towns and cities.

This would involve minimum displacement of population and help in developing some underdeveloped regions.

Fate of existing schemes

While there is euphoria over the new SEZ scheme, the fate of the existing Export Processing Zones, Export-oriented Units Scheme, Export Intensive Area Sub-Plan, Infrastructure Development Scheme (aimed at developing 93 `no industry districts') etc. is uncertain.

While these schemes have not made any significant impact so far, they will lose their attraction altogether once the new SEZs come into being.

What is more disappointing, even the fairly successful experiment of setting up Software Technology Parks (STPs) will suffer a major setback. The IT Ministry fears that many of the 6,500 companies located in the 47 STPs would prefer to shift to new IT SEZs, rendering the STPs across India unviable.

The companies located in these STPs have been exporting software worth about Rs 1,00,000 crore per annum and the software exports from these parks are set to increase further at a healthy rate in the coming years.

Against this backdrop, the National Association for Software Service Companies (Nasscom) has demanded SEZ status for the 47 STPs, but the Commerce and Industry Ministry has rejected this demand.

What is even more surprising is the statement from the Commerce Ministry that it is for the IT Ministry to decide the future of the STPs. The Empowered Group of Ministers should have been asked to study the proposal given by Nasscom.

Clearly there appears to be a strong case for extending the SEZ status to the STPs.

Considering the prevailing confusion, inter-ministerial differences and the doubtful nature of potential benefits, the Government would do well to reconsider the entire policy framework governing the SEZs. If necessary, it should constitute an expert panel to examine all aspects of the SEZ policy.

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