The Hindu Business Line : SEZs can provide growth push

SEZs can play a major role in making India a major platform for manufacturing exports, especially in labour-intensive manufacturing, which will help the country create millions of jobs, attract large-scale foreign direct investment and boost its export earnings. But, first, certain basic issues need sorting out, cautions NIRUPAM BAJPAI.

It was the late Murasoli Maran who, as Minister for Commerce and Industry in the BJP-led NDA Government, in the 2000 Exim Policy allowed the setting up of Special Economic Zones with a view to providing an internationally competitive and hassle-free environment for exports. The SEZ units were to be net foreign exchange earners and the policy provided for setting up such Zones in the public, private and joint sectors, or by State governments.

SEZs are critical if India is to sustain high rates of economic growth in the years and decades ahead. These zones can play a major role in making India a major platform for manufacturing exports, especially in labour-intensive manufacturing, which will help the country create tens of millions of jobs, attract large-scale foreign direct investment and boost its export earnings. But none of this is likely to happen with the way SEZs are being conceived and developed.

Look at development

First, India should be looking at developing, say, a dozen or so large SEZs, rather than giving approvals for setting up hundreds of very small-scale SEZs as half of the projects that have been approved cover less than one sq km, against an average of 150 sq km in China. As per the Ministry of Commerce and Industry, India has 14 functional SEZs, of which seven were previously called EPZs and converted into SEZs. Seven are new SEZs. Then, there are 61 SEZs (average size 4.2 sq km) that are being set up. Against these, there are only five SEZs in China — Shenzhen, Zhuhai, Santou, Xiamen, and Hainan — but they are all huge in terms of the area covered.

Second, India's SEZs should provide for liberal labour laws and exit policies or else they are unlikely to succeed as their Chinese counterparts have. Since labour laws fall under the Concurrent List of the Constitution, both the Union and State governments can legislate on areas under this List. However, the Union Government has not been able to mobilise enough political will to reform laws such as the Industrial Disputes Act, leaving such decisions to the State governments. Only a handful of State governments have attempted to make modest changes to the country's stringent labour laws.

Reforms necessary

If India is to become an attractive destination for FDI and a major platform for labour-intensive manufacturing exports, reforms in India's labour laws and exit policies are essential, especially for units located in the SEZs. China's experience suggests that while workers in that country's state sector are accorded generous job guarantees, those in the non-state sector (including the SEZs) are not guaranteed employment.

By contrast, in India, workers in both the public and the private sector, once employed, cannot be laid off without governmental permission. In India, for firms of 100 employees or more, reductions in the workforce can only happen with the permission of the local government, which is almost never granted.

Labour legislation should be revised to allow managerial flexibility in the hiring and dismissal of workers in SEZs. Alternatively, at a minimum, this limit of 100 employees could be raised to 500 or, better still, to 1,000 for units located in the SEZs.

Furthermore, the reservation of labour-intensive sectors for small-scale enterprises should simply be scrapped. This could sound the death-knell for effective international competitiveness in labour-intensive exports.

As a result of liberal hire and fire policies in China, there has been rapid growth of employment, as firms can hire workers without fear of being stuck with unwanted labour due to restrictions on dismissals. Formal sector employment in China has increased dramatically, from 95 million in 1978 to 158.5 million in 2000.

In India, however, there has been but a meagre increase — from 22.9 million in 1978 to 27.9 million in 2000, of which 19.3 million are employed in the public sector. A mere 4.6 per cent of India's working-age population of around 600 million is employed in the formal sector.

Exit policy

Similarly, reform to put in place an exit policy for firms is vital to the profitability of Indian SEZs. An exit policy needs to be formulated such that firms can enter and exit the market freely. While the policy should recognise the need and potential merit of certain safeguards, if wrongly designed and/or poorly enforced it would turn into a barrier that may affect the health of the firms.

Third, SEZs should be located, by and large, in the coastal States, close to the ports rather than in the landlocked States unless, of course, they are for the services sector. Since all the Chinese SEZs are in the manufacturing sector, they are located along the southern provinces of coastal China. In India, approvals for setting up SEZs have also been given in the landlocked States. Finally, most, if not all, of the SEZ land should be earmarked for setting up manufacturing or service sector units, rather than for developing residential or commercial properties.

Export-led growth, largely in the labour-intensive manufacturing sector, has been the fundamental difference in India's and China's economic performance during the past two decades. Similarly, most of the South-East Asian countries, such as South Korea, and Malaysia, grew rapidly due to their export zones.

China achieved rapid overall growth on the basis of rapid manufacturing export growth, while India managed only moderate success in exports and moderate overall growth, though the growth rate has picked up considerably over the last few years. In 2004, China was the world's fifth largest exporter of merchandise goods, with a share of around 5 per cent of world exports.

Merchandise exports

China's growth in the share of merchandise exports has been exceptional, more than quadrupling over the last two decades. India, on the other hand, was as far behind as 30th in world merchandise trade, with a mere 0.8 per cent share in 2004, which represents a growth of only 60 per cent over the last two decades.

Nothing more clearly accounts for the mismatch in growth performance of the two countries than the difference in export growth. And this is explained, to a large extent, by the remarkable performance of China's SEZs relative to that of India's Export Processing Zones (EPZs).

At the centre of China's export strategy were the SEZs, in all of which favourable export conditions were assured. These SEZs, along China's coastline, were designed to provide foreign investors and domestic enterprises with favourable conditions for rapid export promotion. All key aspects of the export environment were secured. Exporters, for example, were allowed to import intermediate products and capital goods duty-free.

They were given generous tax holidays. They were assured quality physical infrastructure, often through the provision of land, power, physical security, and transport to the ports, within specially created industrial parks.

In the SEZs, China invited foreign direct investors to provide the capital and the expertise to achieve export competitiveness in a wide range of sectors, including electronics, apparel, plastic toys, stuffed animals, ceramics and many other labour-intensive sectors.

Low-cost labour force

In each sector, the key was to link foreign investor capital and expertise with the large and low-cost Chinese labour force.

The foreign investors brought in the product design, specialised machine tools and capital goods, key intermediate products and knowledge of global marketing channels.

China assured these foreign investors certain key conditions for profitability, such as low taxes, reliable infrastructure, physical security, adequate power, effective logistics for import and export of goods, and so on.

Even as India tries to emulate the Chinese model in trying to create in SEZs premier enclaves that help attract investment, create jobs and promote exports, the results are unlikely to be very encouraging unless the various concerns listed above are addressed, and at the earliest.

(The author is Senior Development Adviser and Director, South Asia Programme, Columbia University.)

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