What SEZ?

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With problems galore, there’s nothing so special about special economic zones

What SEZ?
If ever there was a grandiose plan that saw more promise than delivery, it must be the special economic zone (SEZ) scheme.

No less than 586 SEZs had approvals as at the start of this month; the number of notified SEZs was 386; the number of valid in-principle approvals 49; the number of SEZs that are in business 160.

There are more SEZs on paper than on ground -- a sad reflection of not what has been achieved, but what could have been.

Never mind that exports from SEZs rose from Rs 22,840 crore in 2005-06 to Rs 3,64,478 crore in 2011-12, and investments in them stood at Rs 2,01,875 crore as in March this year from Rs 2,793 crore in the March of 2006.

The data barely hide the fact that the factories of the world, as SEZs are often called, have fallen into a phase of ennui. Let alone the SEZs that may or may not ever come up, the ones that are there just about manage to exist.

Many plans have failed to see the light of day, two prominent ones being the SEZs at Navi Mumbai and at Jhajjar in Haryana (proposed by Reliance Industries). Several SEZ expansions, such as at Mundra (belonging to the Adanis), DLF Cyber City in Gurgaon, Mahindra World City in Chennai, K Raheja Universal and Flagship Infrastrucutre in Maharashtra, are facing difficulties.

What has gone wrong? It is easy to point to a bad market (a bleeding euro market and all that). But equally to blame is our own government’s muddle-headedness. Policy twists and turns like the minimum alternative tax, dividend distribution tax and the seemingly insurmountable land problems have combined with red tape to turn the SEZ dream sour.

A Reliance official says their Jhajjar SEZ plan was based on the idea that companies would set up factories there to produce for the world market. But global demand in the pits has put paid to the plan. Reliance now hopes to create an industrial township at Jhajjar jointly with IL&FS.

Adani Port and SEZ, said to be India’s largest SEZ sprawling over 6,000 hectares, can’t expand because of problems in acquiring an extra 1,500 hectares. Some of the acquisition problems stem from government’s position on land.

DLF cannot proceed with expansion at the Gurgaon City Centre SEZ because the expansion has been denotified, though company spokesperson Sanjay Roy claims all its buildings in SEZs across India are operational.

The truth is, developers have not moved an inch on their SEZ plans since the global economy (and thus demand) went into a tailspin. They are reworking the feasibility of these projects, specially in the IT & ITeS segment. Multiproduct SEZs have their own set of issues of infrastructure, road, rail and port connectivity, forcing many to think of shifting to other locations.

Vikram Bapat, PwC executive director of tax and regulatory services, says a lot of IT and ITeS companies are shrinking their plans in a poor demand environment.

IT & ITeS firms tend to inhabit mainly urban areas where land is scarce and at a premium; so expansion is problematic. They loath to go to non-urban centres as getting talent to move there is not easy.

Minimum alternate tax (MAT) and dividend distribution tax are particular imponderables, forcing people to go slow. Bapat says many PwC clients say that had they known the taxes were coming, they would have seen if it were feasible at all to set up SEZs.

The two taxes are a recurrent theme in discussion on why the SEZ plans are not taking off. B K Subbaiah, COO of Jaipur’s Mahindra World City, is clear that the two taxes cast a shadow on SEZs.

He has another grouse: Export-oriented units (EOUs) and export incentives to factories in the domestic tariff areas. These, he says, do nothing to encourage companies to move to SEZs.

The mood is decisively sombre, a sharp contrast to the high expectations and promises that the SEZ policy unveiled in 2005-2006 had sired.

Corporate India sought to jump on to the SEZ bandwagon, and announcements flew thick and wide. Six years down the line, the SEZ dreams mostly lie shattered. Many good SEZ plans foundered as farmers on whose land they were supposed to come up refused to cede an inch.

There has been a clear disconnect between the centre’s grand plans and the states’ fear of losing vote banks if land was forcibly taken. In the face of such opposition, the policy of state acquisition lies in tatters. Till this day land remains an open wound.

“India has lost a very good opportunity to draw foreign investors into SEZs,” says Ajay Nijhawan, convenor of the panel of SEZ developers in the Export Promotion Council for SEZs and senior vice-president of Reliance’s Jhajjar project. Our lackadaisical and uncertain policies are entirely the cause, he adds.

Manufacture is one key plank of the SEZ policy. The objective was to create jobs, both skilled and semi-skilled, especially for rural masses. This is better delivered by factories than the IT/ITeS work. But IT/ITeS still dominates the SEZ scene.

Of the 160 functional SEZs, 91 are for IT/ITeS. On the other hand, only 17 are for multiproduct manufacture. Of course, there is manufacture associated with other SEZs too which are specific to engineering, electronic hardware, textiles, biotechnology and gems & jewellery manufacture.

Multiproduct SEZs were to come up on large tracts of land -- 2,500 acres or more -- to spawn manufacturing clusters for several industrial product groups. This has not happened.

Multisector SEZs are few and far between. IT/ITeS and petroleum sector contribute roughly two-thirds of all SEZ exports. Non-petroleum manufacture contributes the other third. “It is clear that the SEZ sector has not fully addressed the concerns of boosting manufacture,” agrees a commerce ministry official.

A comparison with China is inevitable. The Indian economy began to rise in 1999-2000 when foreign investors started to look at India as a possible destination. In the meantime, of course, China had already gone far ahead. “But the foreign investor was not comfortable with the limitations on repatriation of investments from China and was looking at India,” says Nijhawan.

Sensing this, India decided in 2005-06 to give its old SEZ policy of 2000 a dusting and give it statutory backing. At the time the policy seemed alluring enough to make many Indian investors come forward and to create SEZs. The service sector was keen to migrate from the software technology park of India (STPI) policy and SEZs provided continuation of export benefits to them.

Manufacturing companies too were interested in SEZs. But, unlike in the IT sector where global quality resources of manpower and telecom infrastructure was available, manufacturing lacked good ports, roads, water and power connectivity. These were to be provided by the Union and state governments. But most state governments gave no priority SEZs, delaying their creation inordinately.

So, how did the IT/ITeS SEZs thrive? They were the ones who responded the fastest. It helped that they needed very short gestation periods; they were manpower driven with easier entry and exit models. Manufacturing, on the other hand, was slow to react and act. It takes much longer to set up a manufacturing factory than an IT facility.

So IT/ITeS companies came into SEZs by hordes. No wonder these units, among all SEZ units, are the most prolific employers, which have helped the overall employment numbers of all SEZs. In 2006 the collective employee strength was 1,34,000; today it is 8,44,916. A huge portion of that is in IT/ITeS units.

A side effect of most SEZs catering to IT/ITeS coming up in or near major cities is further urbanisation, straining the available infrastructure which cannot be augmented easily or quickly.

As a result, the original objective of locating SEZs at least 50 to 100 km away from cities and creating infrastructure for the purpose has ill-served, according to Ramesh Subramaniam, president of Sri City, a multiproduct SEZ, near Tada in Andhra Pradesh but just about 80 km from Chennai.

Inclusive economic growth for all as a goal of SEZs has thus been elusive. But manufacturing still remains the only way to all-inclusive growth, says Sunil Rallan, president of Tamil Nadu Association of SEZ Developers.

The centre has given a broad platform; it is for the state governments to take this forward with a focused approach. “But this is missing,” says Rallan.

The national manufacturing policy is long on ambition: 100 million jobs in next 10 years and 25 per cent of GDP coming from manufacture by 2020, up from 13 per cent now. The point is, unless manufacture grows, jobs cannot be created. And manufacture does not grow unless there is a competitive advantage.

“Had Nokia not come to India and set up a factory near Chennai, we would have lost out on the jobs created and the resultant economic benefits,” adds Rallan.

Ravindra Sanna Reddy, CMD of Sri City, says many foreign companies, especially from Japan, France, Germany and Italy, are looking at India and India should go all out to get them in, as it would create jobs in the rural hinterland.

About 80,000 Japanese companies have factories in China, especially in its SEZs. In Thailand too, over 17,000 Japanese companies have factories in notified zones. In comparison, India has only 840 Japanese companies. The Jetro office in Chennai gets 250 enquiries a month. Clearly the potential is huge. “We need to create the right eco-system to convert the potential into real factories,” adds Reddy.

Nijhawan does not want to compare the SEZ stories of China and India: “SEZs in India have been set up by the private sector; in China the state established them.” A greater difference is that in India the government has not really supported land acquisition. China, being a totalitarian system, steamrolled all opposition to land acquisition.

Moreover, China has concentrated on manufacture; Indian SEZs have mostly leant toward services sector. China’s exports are 30 per cent of its GDP with almost all of the exports coming from SEZs. Indian SEZs contribute only 20 per cent of our exports.

Also, China gave fiscal benefits to coastal SEZ factories for a long period of 20 years, before extending the same incentives inland to motivate transition of industry.

In India, fiscal benefits did not even last beyond four years. Companies which thought of creating factories in India decided not to. Things are so static that investments in SEZs have been stagnant for 18 months.

According to P C Nambiar, chairman of the Export Promotion Council for SEZs, the objective of the SEZ Act is to offer a comprehensive and long-term policy for developers and units to invest and accelerate export.

But MAT and dividend distribution tax came as spoilers last year. “The Union government has backed out of the long-term policy offered in the SEZ Act. And many states have still not enacted their own SEZ laws. Consequently, fiscal incentives expected from the state governments have not come,” Nambiar adds.

Worse, the states are slow in creating support infrastructure for SEZs that have come up far away from cities. Sri City expects to employ 1,75,000 people in five years. But if the governments fail to create adequate infrastructure to take the employee load, chaos is guaranteed.

To top it all, most states are not keen on SEZs. West Bengal has, in fact, withdrawn the policy and is not encouraging any SEZs. Haryana has officially said the policy is not bearing fruit; Maharashtra seems to have lost interest and has not yet been able to pass its own laws for SEZs.

Just what kind of problems SEZs face was highlighted when Shiv Sena leader Bal Thackrey died. Mumbai was paralysed for three days. Several global banking platforms guided from India were forced to shift work and move manpower to alternative locations to keep the process going. This is easier said than done, as the units are required to seek approvals at every stage.

To make SEZ creation less daunting, the commerce ministry in February proposed some SEZ reforms, including reducing the minimum size for a multiproduct SEZ from 1,000 hectares to 250 hectares.

The commerce ministry is on the same page as SEZ players on most issues. But mostly, the ministry is waiting and watching. It sympathises with the SEZs on the matter of the two taxes.

“We asked for the removal of MAT as it impacts the overall investment climate. There is barely any tax incentive now to set up shop in an SEZ,” says the anonymous ministry official quoted earlier.

But, according to him, the finance ministry has objected to all the suggestions. “We are also waiting to see some reforms but when these will happen nobody knows,” he says.

(With inputs from Yogima Seth Sharma)

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