The best policy would be to have no SEZs

 
MANOJ PANT

 The recent removal of caps on the number of SEZs to be registered followed a spat between the ministries of finance and commerce. The argument of the ministry of finance that this will lead to a loss of revenue on excise, etc sounds rather simplistic. After all, any increase in exports from SEZs would lead to an increase in incomes and GDP within the country which may more than compensate for the loss of revenue. The latter argument is, of course, purely speculative. An additional argument against a cap on SEZs is that it gives an unfair advantage to the first applicant and can be construed as anti-competitive.
However, to me the real question is whether any increase in exports from SEZs can be attributed only to the creation of SEZs. This to me is really the issue rather than short-term revenue gains or losses. The purpose of SEZs is well-known. Infrastructure is a crucial constraint on exports. Since providing this in the short run is prohibitively expensive, it is better to concentrate on regional ‘clusters’.
 
The role of production clusters is also supported by economic theory: these clusters lead to external economies to all units in the form of good roads, power, etc which no manufacturing unit by itself would be inclined to provide. Finally, by inviting the private sector to set up these SEZs, they would also be an example of public-private partnership in development.

Yet, the SEZ goes far beyond merely providing infrastructure for exports. It also provides for a host of other concessions. These can be listed as administrative measures and economic incentives. Among the former are waiver of routine custom shipment ins-pections, no licensing for production reserved for SSIs, etc. Economic incentives range from time-bound income- tax exemptions under Section 10A and zero duties on domestic and imported inputs.

What are India’s principal exports of manufactures and services? These are gems and jewellery, textiles and clothing, automobiles and parts and IT services.

Yet, all these exports are coming out of naturally developed clusters in areas like Chennai, Bangalore, Tirupati, Delhi and Surat. In IT, for example, there is no evidence that the government did anything special to develop the Bangalore or Delhi clusters.

There is an additional problem. Given the enormous economic incentives available to units in SEZs, there would be an incentive for existing units to switch locations. The government move to prevent this makes no sense: why should incremental exports be given preferential treatment? It is also a question of time before such incentives run afoul of WTO restrictions. This has already happened to income-tax exemptions under section 80HCC.

A good trade policy is one which is trade neutral: it gives no special preference to either exports or imports. The SEZ incentive scheme violates this provision. A survey of incentives for FDI in South Asia done by this author (International Studies, vol.43,no.1,2006) illustrates this point. No country in this region has calculated the cost-benefit of giving incentives to FDI and these incentives might often cost more than the benefits from the activity.

This is where one can have some sympathy for the ministry of finance’s argument, but for different reasons. There is no evidence that clustering of units follows granting of incentives rather than the other way round.

In fact, granting of incentives after the development of clusters is less costly and cost-benefit analysis is easily done. Recall the Cash Compensatory Scheme (CCS) of the 80s which showed that most units were registering exports only to avail of the CCS benefit and would be otherwise unviable export units.

The bottomline? A cap on SEZs then at least survives as a second best policy, the first best being no SEZs. While there may be a case for reducing administrative costs on exporters, there can be no case for costly economic incentives.

—The writer is a professor in the School of International Studies, JNU
 
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