The Hindu Business Line : India needs a unique SEZ model

Special Economic Zones continue to make waves. Designed to promote manufacturing, enhance exports and entice foreign capital, SEZs have proved a great success in China — the pioneer of the concept — as also Poland and the Philippines. But in India, they have stirred up a hornet's nest.

The policy has been on a roller-coaster, especially post Nandigram and Singur with fears raised by the people that the SEZ may well be a route to grab land.

The key elements for the success of SEZs are: Political will, better infrastructure, zero bureaucratic hassles, relaxed labour regulations, better fiscal incentives, and domestic and international linkages. Do all these parameters hold good in India?

China and Poland experiences

The SEZ concept proved a success in China and Poland. In China over 20 per cent of Foreign Direct Investment (FDI) flows into SEZ and generated 10 per cent of exports. Poland's SEZs received 35 per cent of FDI flows. The success of SEZs in China stemmed from their foreign-investor-friendly nature. China provided the whole package that ensures success of SEZs. These include: unique location, large size, attractive incentive packages, liberal Customs procedures, flexible labour laws, strong domestic market, and allowing local governments to administer the SEZs.

Chinese vs. Indian SEZs

China has accumulated considerable experience with SEZs. The first Zone was set up in 1980, as soon as the nation decided on economic reforms. India's SEZ policy was incorporated in the EXIM policy of 2001-02, a decade after the launch of economic reforms, and considerably lagging China.

China's approach has been gradual; it has so far set up only five SEZs. But India simply seemed to approve left and right, raising scepticism over the real intent behind setting up these zones.

China established the SEZs at strategic locations, that is, close to ports or major industrial locations. But in India, SEZs have been approved across the length and breath of the country.

In China, all the five SEZs were developed by the government. In India, only nine SEZs have been developed by the Government. None of the 234 SEZs that have formal approval is to be developed by the government.

China's SEZs are huge. Shenzhen, the most important SEZ, covers 32,000 hectares. In India, there are just two or three privately developed SEZ, exceeding 1,000 hectares. Most of the others approved are less than 100 hectares.

China's SEZs have attracted many Fortune 500 companies. An Indian SEZ is still to attract one.

Role of SEZs in Indian economy

In its fact sheet, " SEZs at a Glance", the Government painted a pretty picture. The Government was euphoric that the contribution of SEZs will be on a par with the Chinese enclaves. The Government forecast that the exports from SEZs would reach Rs 67,300 crore in 2007-08. This meant that exports from the SEZs would almost grow four-fold over 2005-06. Assuming the current level of annual export growth rate of 20 per cent, India's total exports may reach Rs 654, 912 crore in 2007-08. This means that exports from SEZs will account for 10 per cent in total exports in 2007-08, as in China.

But are these forecasts realistic? Can India's SEZs achieve such growth when most are at the pre-natal stage. The 63 new SEZs, which were given approval since March 2006, are yet to develop infrastructure and start manufacturing. The SEZ units set up before the SEZ Act of 2006 are mostly small scale with export growth of around 20 per cent.

Further, FDI flows into the SEZs have been erratic and miniscule. Only seven SEZs of the 63 attracted foreign capital. Of these, just one accounted for more than 77 per cent foreign capital participations. One of the main objectives of SEZ is to attract foreign capital and use the MNC platform to enhance the exports of the country.

Can the domestic units in the SEZs by themselves spur their exports to achieve the goal?

Lastly, the recent political impasse over SEZs is not over. The uncertainty continues to loom even after the Government imposed certain restrictions, such as ceiling on land acquisition. These restrictions have slowed, if not discouraged, the private sector developing the SEZs. The impasse has also affected FDI flows into the SEZs.

Surely, SEZs alone cannot be the answer to rapid growth. They can only be supplements. India cannot replicate the Chinese model. Even though exports was the main objective of the Chinese SEZs, imports into the five zones outstripped their exports.

Indian must re-design the SEZ policy to suit its needs and not borrow the Chinese model. In India, 52 per cent of the total land area is under agriculture and 57 per cent of the workforce relies on farming. In India domestic consumption is a major factor than in China. The household consumption ratio to GDP is 68 per cent in India compared to 38 per cent in China. This is what the policy must leverage.

(The author is Adviser, Japan External Trade Organisation. The views are personal. )