Will India recreate China’s SEZ magic?

AMITI SEN

TIMES NEWS NETWORK[ TUESDAY, NOVEMBER 14, 2006 12:46:36 AM]

NEW DELHI: Indian policymakers' ongoing fascination with special
economic zones was inspired by China's roaring success with these
enclaves of galvanised production. New Delhi has sanctioned close to 200
SEZs. Guess how many SEZs China has since kicking off the policy in
1979? Exactly six: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Pudong.

Is India getting something wrong in its SEZ policy, or should we merely
conclude that India will soon be 33 times as successful as China?

China’s success in attracting oodles of foreign direct investment and
becoming one of the top exporting countries of the world hinged on the
careful implementation of its SEZ policy. More than two decades later,
India, too, is trying to tread on the same ground.

There are, however, certain fundamental differences in the Indian and
Chinese approaches to SEZs, which make it difficult to say for sure that
Indian SEZs will be able to recreate the Chinese magic. Size, location,
flexible labour laws and stable policies are the factors primarily
responsible for making Chinese SEZs attractive to foreign investors.

In India, it is the fiscal sops being offered to developers and units
which are the primary driving force. The Chinese government started
building SEZs way back in 1979. The idea behind the SEZs was to
experiment with liberal policies in certain ear-marked regions while
insulating the rest of the economy from their influence. The government
identified huge tracts of land, near the coastal region, and started
building mega cities with all required infrastructure.

Stringent labour laws applicable in China were relaxed in the regions
and foreign investors were wooed with sops and the promise of stability.
Though India had a head-start in the direction by building its first
export processing zone in 1969 with certain minimum infrastructure and
fiscal sops (seven more followed later), it could not muster enough
political will to build full-fledged SEZs with foreign territory status
in the matters of international trade till the turn of the century.

In ’00, former trade minister late Murasoli Maran announced that India
should try to replicate the Chinese success story in SEZs and announced
an SEZ policy. However, when five years later the SEZ Act was passed by
Parliament and rules were framed, what India had was a policy very
different from China’s.

As opposed to five mega SEZs built by the Chinese government (the
largest being Shenzhen built over 49,500 hectares), India opened its
doors to private players and allowed sector-specific SEZs to develop on
just 10 hectares of land. As a result, India has as many as 28
operational SEZs with about 200 more having received approvals. The
economies of scale, which seems to have worked so well in China by
reducing production costs, may not have the same effect in Indian SEZs.

In China, the government chose the location for SEZs with a lot of
thought with all five located near the coastal region. This makes it
easier for SEZ units to export their products and import inputs. In
India, SEZs are being built all over the country, wherever land can be
acquired by developers. This has also led to allegations of
land-grabbing and conversion of productive agricultural land by
developers. This had led the Centre to make it mandatory that all
proposals should have a certificate from the state government notifying
that the land being used is non-agricultural for at least 90%.

Flexibility in labour laws, which played an important role in attracting
foreign investors, is absent in Indian SEZs. This is one of the prices
India is having to pay for the advantages of a federal democratic
government.

India has, however, tried to make up for all the disadvantages by
offering attractive fiscal sops. Tax holidays for SEZs in India are
longer and steeper than those given by China. This had given rise to
some dissent from the finance ministry which had complained that the
fiscal loss would be immense.

However, the commerce ministry’s argument that the gains would be larger
than the losses had prevailed. One has to now wait and see whether the
interest shown by Indian companies in Indian SEZs translates into more
jobs, exports and revenue for the country. While some foreign investment
is also flowing in, it is not clear yet whether SEZs will be able to
attract large-scale FDI as in China. It is too early for anyone to pass
a judgement on Indian SEZs. One can only wish India luck.

http://economictimes.indiatimes.com/articleshow/432604.cms