The Hindu Business Line : Disadvantage SEZs

No policy in recent years has shown up a government in a poorer light than that on the Special Economic Zones not the least because of the difference of opinion it has generated between the Finance and Commerce Ministries. While the former has voiced its concerns, rather belatedly, about possible revenue losses from the tax privileges for the SEZs, the latter is stoutly defending the policy with statistics suggesting minimal losses and highlighting the eventual gains in terms of employment and revenues. Since these are all, at this point in time, notional, one can only marvel at the figures trotted out by both sides.

The battlelines have, as it were, been extended with the Reserve Bank of India joining the Finance Ministry in expressing concern about revenue losses. To its credit the central bank made the more fundamental point that the SEZs may lead to a diversion of resources from the less developed areas without creating the necessary linkages that could benefit them. Part of the reason for the differences among policymakers lies precisely in the immense popularity of the concept; so far more than 160 applications are with the Commerce Ministry and the number is growing. From the viewpoint of the developer, the SEZ is a sure winner; from the economy's perspective, the gains are doubtful. This dichotomy is embedded in the very notion of the SEZ and in experience.

Inspired by the highly successful Chinese zones, such as Guangdong, the SEZ Act 2005 morphed the existing Export Processing Zones into SEZs and opened the door to newer developers with more liberal concessions and looser mandates than those enjoyed by the EPZs. Thus, the Act affords tax exemptions, captive infrastructure and minimal transaction costs but expects far less in return. For instance, SEZs will enjoy complete freedom to subcontract abroad, thus encouraging global rather than domestic linkages. In a word, the SEZ will be "a designated duty free enclave to be treated as foreign territory for trade operations... " Small wonder the Commerce Ministry is inundated with applications.

The economic benefits of the SEZs are debatable. Revenue losses will certainly accrue in the period of the tax holiday and indirect tax exemptions. Studies have shown that the EPZs with all the tax exemptions generated far fewer jobs than expected and there is little to suggest the SEZs will do so given liberal labour laws and the current productivity concerns. The SEZs will encourage the relocation of existing resources and production activity, as did some State-level excise duty exemptions, thus rendering non-SEZ areas that much poorer or disadvantaged. Clearly, tax exemptions for specific locations are perverse incentives and the SEZ Act goes further down that road by the exclusive promise of facilities that should be available for the entire country but are not. Opponents of the SEZ focus on one or other of its aspects. It is time to view them as islands of privilege untenable in an era of competition and fair play.

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