The Hindu Business Line : SEZs: Bumpy road to economic prosperity?

Certainly, SEZs are not the only route to achieving superlative economic growth. There are many risk factors relating to the business model and their success in the Indian context.

When China wanted to experiment with economic liberalisation, it decided to set up four special economic zones (SEZs), referred to as "laboratories" for testing out the economic model, in 1979. China reaped large benefits from the laboratories and attracted large chunks of foreign direct investment (FDI).

India, despite having been much more advanced and liberal in its economic outlook vis-à-vis China, is only now adopting the SEZ model. The process of liberalisation in India began in 1991, and 15 years later we are trying to emulate the experiments of growth on a larger scale. Thankfully, the initiative to increase public expenditure for infrastructural development resulted in turning the cycle of economy, proving the merit of Keynesian model.

Experience with SEZs

Of the four laboratories set up in China, Shenzhen was successful. Korea achieved success from Masan between 1974 and 1979, though the growth was followed by a flattening curve.

Historically, SEZs have resulted in spurts of economic growth, which then flatten out to normal levels with time, save some exceptions like Shenzhen. In fact, experiments by Russia and North Korea have not resulted in anything exciting in terms of propelling economic growth.

The Indian experience with the SEZs has fallen short of expectations. The key to success lies in creating at least one Shenzhen and gaining more insights from it .

Shenzhen's development story has spanned over two decades; today it is a modern city of four million people (from a population base of 20,000) with per capita income of $4000. The process of development passed through periods of modest growth, and the continuous focus on revising strategies to achieve the targets is one of the key reasons for its success.

The local administrative authority of Shenzhen promoted industries with advanced technology and attracted the attention of well-known global companies. Their constant focus on improving higher value addition through investments into the region resulted in establishing sizeable and significant capacities. For instance, today Shenzhen produces more than 10 per cent of world production for certain category of products. The local authorities continuously offered incentives, provided facilities and improved the infrastructure to attract investors.

India has announced over 150 SEZs; the number may go up to 300. The Finance Ministry has put the potential loss to revenue in excess of Rs 1,00,000 crore, whereas the Commerce Ministry projects the possibility of increasing GDP to double digits through the SEZ route.

If one were to draw a comparison to the Modigliani and Miller model illustrating the dividend neutrality to valuation of an organisation, then the notional computations of non-realisation of revenue cash flows from the trade/ventures of SEZ is more appropriate for academic discussions than any real loss of cash flow to the country's fiscal balance.

On the contrary, one Shenzhen can bring India FDI in excess of $20 billion with per capita income touching $5,000. This means India can become debt-free, with surpluses on its balance of payments.

The risks

However, there are several risk factors associated with the proposed SEZ initiative. They are: Number of SEZs announced is very high compared to the international experience, probable ratio of success and the size of investments to be committed in each SEZ.

In many cases, the credentials of the developers are not so good as to enable economic financial closure, nor do they show pronounced organisational capabilities of leading high-impact business entities.

The euphoria of SEZs has created disorder in the real-estate market and this has been attracting speculative investor interest. This is where the RBI has expressed serious concern.

The period of gestation in the development of infrastructure, attracting industry and investments into the SEZ would take a minimum of five years. This would expose the SEZs to cost and time overruns and continuous revisions in the economics of the business plan.

SEZs are becoming vehicles for domestic industries to shift their export segments and this could nullify the advantage of incremental growth in country's exports.

The economics of SEZs may not hold great comparative advantages for an investor vis-a-vis the domestic tariff area with due incentives for exports. In Shenzhen, too, the land costs surged after a point of time, forcing a number of industries to re-examine their strategies for shifting base.

Key aspects

From the uniqueness of business advantage point of view, accessibility to inexpensive human resources would be a key advantage for a global player wanting to shift capacities to an Indian SEZ. However, in terms of technology, except in IT, SEZs would have to depend on imports, like Shenzhen, which, as a strategy, ensured high-value-added technologies space in the SEZ. The regulatory guidelines have incidentally not addressed any such aspect and this may lead to SEZs becoming logistics hubs rather than real value-creators resulting in a incrementally higher gross domestic product.

The role of local authorities managing the SEZ becomes one of the key aspects for attaining success.

As per the SEZ Act, a public limited company would be floated to act as the SEZ Authority for specified areas, with the Development Commissioner as one of the members of the board. Although the constitution of SEZ Authorities would be identical, the level of efficient functioning of these bodies would become a crucial benchmark in the success or failure of the SEZ.

Shenzhen has become a model to a number of economists and politicians. The policy of SEZs will earn dividends if we are successful in creating at least one Shenzhen. However, this requires focus and concentration of energies. Certainly, SEZ is not the only route to achieving superlative economic growth, as perceived by many sections of the society. There are a number of risk factors associated with the business model and the probable factors for success or failure of SEZs in India as well.

(The author is a Vice-President with Bharti Airtel. The views expressed are personal.)

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