SEZs: Govt must re-do the homework

S. Srinath

With many an un-resolved issue, the SEZ policy needs a re-think. Merely
transplanting an idea that succeeded in another country may not work.

The Government recently approved 44 Special Economic Zones (SEZs),
bringing the total approvals so far to 236 with only 36 having been
notified. The setting up of SEZs was to decentralise infrastructure
development, which cannot be provided with ease across the whole country
simultaneously. Though the SEZ gained impetus as a result of the success
of the concept in China, there are variations between the Chinese and
the Indian models. While China's SEZs are restricted to five (each like
a mega city), the Indian Zones are scattered across the country and
quite small.

Chinese SEZs are strategically located close to ports and date back to
the 1980s when the country was looking for private and foreign
investment. India's SEZs come 15 years after it started liberalising its
economy and have multi-dimensional goals of providing infrastructure,
creating employment opportunities, and promotion of investment —
domestic and foreign.

Though laudable there are certain thorny issues vis-à-vis SEZs.

Land

Land acquisition for SEZs has drawn marked criticism, the core issue
being huge blocks of agricultural lands allocated for SEZs without
adequate resettlement and rehabilitation programmes. This has prompted
the government to issue guidelines that fallow and uncultivable land
alone should be acquired for SEZs. And that if fertile land was
involved, it should not be more than 10 per cent of the total area with
a rider of providing adequate compensation and rehabilitation.

But, the farming community is still apprehensive, especially over the
lack of clarity on rehabilitation and resettlement. The Reserve Bank of
India is also worried about the overheating of the real-estate market as
there is a rush to acquire land.

SIZE of SEZ

The main objective of the SEZ is to secure a long-term benefit of
quality infrastructure that would lead to export growth. Zoning of SEZs,
as in China, with geographical links to the ports would enable India
take advantage of economies of scale. But when India has 236 SEZs,
small, medium and big, it is important to make a more rigorous
cost-benefit analysis. More than half the SEZs approved would need less
than 40 hectares, and again almost half these have sought 20 hectares
mainly for IT-related projects.

A 20-hectare SEZ would be like an industrial unit. Then, is it
justifiable to provide quality infrastructure with a mega investment to
such small enclaves? Does a huge outlay on roads justify this size?

There is also a cry for development of SEZs in non-urban areas so that
Bharat Nirman and the Rural Employment Guarantee can be taken care of.
But the geographical positioning is very important from the point of
view of exports; for instance, the SEZ set up at Nanguneri in interior
Tamil Nadu did not do too well. Again, after much criticism, the
Ministry of Commerce and Industry has increased the processing area in a
multi-product SEZ to 35 per cent from 25 per cent.

Revenue

The fiscal policy in promoting SEZs should be such that a zone generates
more revenue than an industry would. According to the Budget, the sundry
tax exemptions for SEZs would cost the exchequer Rs 1,58,000 crore.
Recently, the IMF chief expressed concern about the volume of revenue
losses the SEZs could lead to.

Many IT companies are joining the fray. Why? Because their tax benefits
under the current incentives will come to an end by 2010 while the SEZ
sops would extend the benefit regime for two more decades. Already IT
companies are earning foreign exchange through exports. What will their
contribution to the exchequer be after netting tax sops in an SEZ? After
much criticism, the Government has decided to go slow on IT SEZs.

The Commerce Ministry has appointed an independent agency to conduct a
comprehensive study on the potential losses and benefits. Such an
exercise, that should have been done long ago, must look at many issues,
such as the savings that would accrue to the Government because of
private investment in infrastructure. It is estimated that in the next
five years investment in SEZs would be Rs 3, 60,000 crore. The financial
burden on the Government will be reduced.

Another issue is the employment generation and the personal income-tax
that would accrue to the government. The tax revenue from sales by SEZ
units in the domestic markets, also needs to be considered.

Routing of domestic exports through SEZs is another issue to be
considered. To allay fears on this count, the Commerce Ministry added an
explanation to Rule 76, which states that for income-tax purposes
trading would mean "import for the purposes of re-export." However, the
Ministry should take care that sale from SEZs to domestic markets does
not put domestic industries at a disadvantage. The RBI's Annual Report
also calls for an SEZ policy that would have effective backward and
forward linkages.

Off-shore Banking Units

To be internationally competitive, the interest element plays an
important part in the cost. Access to finance at competitive rates from
international markets must be made available to SEZs. So far, there has
not been any successful effort on this score.

So many unresolved issues suggest that enough groundwork has not been
done before launching the SEZ issue. Perhaps, the Government should
re-think the concept rather than just transplant the Chinese idea and
expect it to work.

(The author is a Chennai-based chartered accountant.)

http://www.thehindubusinessline.com/2006/12/06/stories/2006120600060800.htm