The right road to healthy SEZs

We need a suitable productivity criterion for the evaluation of proposals

SP KETKAR
DATELINE

The special economic zone (SEZ) policy is the government’s initiative to
attract export-oriented investment and, therefore, cannot be faulted on
its intent or the spirit. However, concessions allowable to developers
and the units are not linked to the achievement of SEZs’ ultimate
objectives: driving economic activity, boosting exports and generating
employment. This makes the policy contentious and throws up four major
concerns, viz., the size and number of zones, type of land used and
usage within the zones, loss of revenue to the exchequer, and generation
of employment.
The initially approved 150 SEZs entail a total area of only 268 sq km,
indicating that most of these are merely units or mini zones, perhaps
floated for the tax benefits. The central and state governments will
find it difficult to implement efficient clearances and procedural
simplification at so many locations simultaneously.

Also, hundreds of SEZ fragments cannot offer world-class infrastructure
at competitive rates. Gains from “positive spillover effects” can be
realised only by a healthy concentration of resources in a few mega
SEZs, each capable of at least $50 billion in exports by the fifth year
of operation.

Second, some developers are already being accused of grabbing
agricultural land. Others could be charged with acquiring land with rich
mineral resources or large groundwater reserves. Also, allowing a large
part of SEZ land for non-core activities has been an apprehension.
However, there is no talk whatsoever about land productivity. It is
worth noting that Shenzhen the first Chinese SEZ, with an 321 sq km
area, boasts a ‘GDP’ of Rs 286,500 crore (494 billion yuan). Singapore,
an island of 699 sq km, has a GDP of Rs 572,000 crore ($123 billion).

Both have airports and seaports, rail and road networks, power plants,
warehousing, residential, education and recreation facilities, banks,
post offices and much more than what our SEZs would have. Even with
large areas for non-core activities, overall productivity per sq km in
both the cases exceeds Rs 800 crore per annum. With such benchmarking of
output, we need to evolve a suitable productivity criterion for the
evaluation of SEZ proposals and making decisions on land use priorities.
Such a norm would also take care of non-core land usage within the zones.

Thirdly, the finance ministry estimates a revenue loss of Rs
70,000-1,00,000 crore in the first five years owing to the concessions
allowed to SEZ units and developers. This concern is best addressed by
linking the concessions to actual exports from SEZs. Suppose, ten-year
cumulative output projected for a zone is $500 billion and tax
concessions to developers of that zone are estimated to add up to $20
billion (4%), then instead of any upfront incentives, developers can be
allowed a tax credit of say 5% on the zone’s exports every year. Tax
credits could be made transferable and usable for any of the duties or
taxes, viz., customs, excise, sales, service or income-tax. This will
ensure that developers use the maximum area for productive activities,
will endeavour to get the best companies to set up units in their zones
and make available world-class infrastructure at competitive prices.

Finally, the net foreign exchange earner criterion for units in SEZs can
be skilfully modified to ensure that either the units progressively
attain higher level of “local value addition” from the third year
onwards or begin to lose out partially on the tax concessions in
subsequent years. Such an amendment requiring higher value addition
would be very effective in employment generation, directly in these
units or indirectly at vendors supplying inputs to these units.

Bringing in land productivity norms for proposal evaluation, making
developers earn their concessions as a percentage of their zones’ annual
output, and ensuring a progressively higher level of local value
addition can put us on the road to healthy SEZs and export-led growth.

—The writer is an alumnus of IIM, Bangalore. These are his personal views

http://www.financialexpress.com/fe_archive_full_story.php?content_id=149270