The Hindu Business Line : Why investment-linked sops make better economic sense

Linking fiscal incentives to companies investing a minimum sum within a stipulated time-frame — as is being proposed by the Centre to kick-start domestic manufacture of semiconductors and other microelectronic hardware — may seem a novel idea.

But it has a precedent, that too in a totally unrelated industry: sugar. Uttar Pradesh and Bihar have, in recent times, announced sugar policies granting liberal sops conditional upon a minimum level of investment happening within a defined period.

The UP Government's Sugar Industry Promotion Policy, 2004, allows mills to claim full refund of purchase tax on cane and cane society commission, exemption from entry tax on sugar and trade tax and administrative charges on molasses, reimbursement of transport cost from the factory up to 600 km outside the State's borders and remission in stamp duty and land registration charges.

These incentives are to be given for a five-year period to any company that invests a minimum Rs 350 crore and for 10 years in case of investment of Rs 500 crore and above. Moreover, they are subject to commercial production starting within three years from the date of the policy's announcement, that is, by March 31, 2007.

Incentive package

The Bihar Government's Sugar Policy 2005 is a virtual copy of UP's. The only major difference is that the incentive package applies to any new mill having a minimum daily cane crushing capacity of 5,000 tonnes.

The Centre's policy — currently under finalisation — to attract investment in manufacture of silicon and semiconductor wafers, flat LCD/OLED/plasma panel displays, storage media and other micro and nano-technology devices, is also apparently on the same lines.

Thus, it is proposed to have a 10-year tax holiday on profits, 30 per cent tax credit to investors, 26 per cent cash equity support from the Centre, five-year interest-free loan of up to Rs 400 crore, excise concessions to user industries, etc. Again, these are linked to companies investing at least Rs 1,000 crore in three years' time, with the sops being more for projects costing Rs 4,000 crore or more.

Rush of investments

In sugar, the policy approach to link incentives to minimum time-bound investments has certainly worked on the ground. In the last two years, over Rs 5,000 crore worth of investments have come into UP, with the likes of Bajaj Hindusthan, Balrampur Chini, Triveni Engineering and DSCL creating fresh capacities. Similarly, Bihar has seen a rush of investment applications, including from South-based companies such as Rajshree Sugars.

Policy favours big mills

Of course, the UP sugar policy has invited criticism for favouring big mills at the expense of those who cannot afford to spend Rs 350 crore or more. Also, it can be argued that setting up sugar mills is not inherently capital-intensive or complex as a semiconductor fab unit and, hence, sops of the kind being extended merely to reward select players.

The counter though is that sugar, by virtue of its powerful linkages to the rural economy, is as strategic to UP and Bihar, as the Centre sees merit in promoting basic chip manufacturing to complement the country's software advantage.

But there is little doubt that incentives policies designed to attract large industry-specific investments in a stipulated period make more fiscal and economic sense than open-ended initiatives such as the special economic zones.