The Hindu Business Line : SEZs: An enclave of opportunity

The SEZs need to be given the benefit of doubt before they are criticised for the concessions given to them. That there has been a spurt of interest in developing SEZs demonstrates that sufficient ground work has been done to ensure that the basic remit of boosting exports, generating employment and putting in place a workable infrastructure within a limited area is fulfilled, says G. SRINIVASAN.

A disturbing imbalance in the current account and a wide trade deficit in recent years underscore the need for stepping up the country's exports, even as they crossed the $100-billion mark last fiscal. India's exports registered a growth of 20 per cent plus, in dollar terms, the last three years in a row. This led the authorities to ensure a stable policy regime to reduce the infrastructure deficit and other allied constraints that contribute to the high transaction cost to trade and industry.

One such initiative is the Special Economic Zones (SEZ) Act, 2005, which came into force in February. It is not that India only now discovered SEZs as a means to generate massive exports or to generate employment in manufacturing, services and other trade-related activities.

Even before the Tiger economies of East Asia roared ahead with export-led growth in the 1970s and the 1980s, India had recognised the effectiveness of the Export Processing Zone model. Indeed Asia's first EPZ was set up by India in Kandla way back in 1965 and six more zones followed suit. But, unfortunately, these export enclaves could not make a mark owing to the many controls and clearances, the absence of world-class infrastructure, and the unstable fiscal regime.

Background

In April 2000, after a visit to China, the then Union Commerce Minister, Murasoli Maran, announced the first SEZ Policy, incorporating some new features and correcting the infirmities of the EPZ model. The objectives of the SEZ policy covered, among others, a designated duty-free enclave to be treated as a foreign territory only for trade operations and duties and tariffs, requiring no licence for import, or permission for manufacturing, trading or service activities. Units in the enclave were to have full freedom of subcontracting and faced no routine examination by Customs authorities of export/import cargo. The domestic sale was to be subject to full Customs duty.

As there was not much response to the SEZ policy because of the reluctance by investors to develop or house units, the Government brought out a Central legislation, the Special Economic Zone Act, to impart stability to the SEZ policy regime. Units in the SEZs are required to be positive net foreign exchange earners over five years. Incentives and facilities provided to units in SEZs for promotion of investment, including foreign direct investment, cover duty-free import/domestic procurement of goods for development; 100 per cent income-tax exemption for SEZ units under Section 10AA of the Income-Tax Act for the first five years, 50 per cent for next five, and 50 per cent of the ploughed-back export profit for the next five; and exemption from the Central Sales Tax, exemption from service tax.

Response and criticism

Commerce Ministry officials contend that the response of the State governments and the private sector to the SEZ scheme has been encouraging. Under the SEZ Act, formal approval has been granted for setting up 106 new SEzs in the private/joint sector or by the State governments and their agencies. Of the 106 approvals granted, six SEZs are functional and have been notified.

With the issue of rules governing the functioning of the SEZs and the speedy approval of greenfield SEZs, the rationale of giving huge tax-breaks that is leading to land-grabbing has been criticised.

In response, the Finance Ministry has set the limit for notification of SEZs at 150. The Special Secretary in the Department of Commerce, who is also the Chairman for the Board of Approval for SEZs, Mr Gopal K. Pillai, told Business Line that, "we had eight SEZs for the last thirty years. The whole time, investors did not come, as there was no stability in policy regime. When we put in place a stable fiscal regime with defined activities and rules, people are still complaining" about faster clearance of new proposals and other likely abuses.

Referring to the limited processing area in these zones and the vast land being used for developing common services, infrastructure and other basic amenities, the provisions of which also qualify for tax-breaks, Mr Pillai said the processing area issue has been `settled' by an Empowered Group of Ministers on SEZs. Under urban land provisions for an industrial park, the processing area is only 20-25 per cent and the rest is available for infrastructure, he said.

The idea behind providing greater and serviceable infrastructure within the zone is to attract more units in the absence of a general improvement in infrastructure in the rest of the country.

As for the criticism that in the non-processing area there would be real-estate speculation, Mr Pillai said that all activities inside the zone are to be approved by the Board of Approval as per the Act. Where the building activity exceeds the approved capacity, tax concessions would end.

Investment potential

How the SEZs can attract massive investment and generate employment in large numbers is not difficult to imagine. According to Mr Pillai, a multi-product SEZ on 1,000 hectares will have an investment component of Rs 4,500 crore to develop. And with 35 mutli-product SEZs approved so far, the investment from these SEZs alone would exceed Rs 1.50 lakh crore.

A sector-specific SEZ (for instance, gems and jewellery or auto components) entails investment ranging from Rs 300 crore to Rs 3,000 crore. On the other hand, an Information Technology (IT) SEZ on 10 hectares would involve an investment of Rs 250-400 crore. Here, the investment will come faster.

Attracting investments

With the cost of developing two million sq feet amounting to Rs 500 crore, the 50 IT SEZs approved will bring in investments of Rs 25,000 crore within 18 months, as IT SEZs require only building and provisions such as uninterrupted power supply through captive diesel-gensets, and broadband connectivity.

So given that the developers have to negotiate with the units housed in the SEZs for the rent for the area they occupy and approach the financial institutions to take the advance after showing proof of ownership of land and other documents, it will be three-four years for the new SEZs to become operational and generate the type of activity and employment envisaged.

Considering the multiplier effect of the SEZs, Mr Pillai is optimistic about notifying all the 106 cases by the end of September, as he has another 100 proposals pending.

The gap between the high approval of SEZs and the slow notification for functioning SEZs is explained by the fact that the project owner must acquire the land and obtain a certificate from the local revenue authority about its physical possession and unencumbered status. This has to be vetted by the legal department as the Zone would be deemed foreign territory. Only then would it get the duty-free status to qualify for being notified as an SEZ.

The SEZs need to be given the benefit of doubt before they are criticised for the concessions given to them. The fact that there has been a spurt in interest from investors for developing SEZs demonstrates that sufficient ground work has been done by all stakeholders to ensure that the basic remit of boosting the country's exports, generating employment and putting in place a workable infrastructure within a limited area, is being fulfilled over the long haul.