Save our SEZs

Reshape the idea, don’t reject it

Posted online: Saturday, January 27, 2007 at 0000 hours IST

It would be a pity if the Special Economic Zone (SEZ) baby were to be
thrown out with the bathwater of real estate scams and tax sops. Given
our inability to improve our infrastructure and administrative services
across the board, SEZs can prove a haven for manufacturers that, but for
such worries, are keen to set up shop in India. The current exercise by
the group of ministers (GoM) could, however, correct some distortions
that may have crept into the policy. At the outset, it is important to
reach clarity on the purpose of SEZs. The finance ministry seems to
indicate that SEZs are intended to provide a hassle-free environment for
exports, with net foreign exchange being their major obligation. But,
SEZs are not export promotion zones (EPZs). Their metric for success has
to be the growth of manufacturing and employment. The zones may export a
large portion of their output, but that is incidental to their core
purpose. Indeed, the grand-daddy of SEZs, Shenzhen, has not had a
particularly good record on ‘net foreign exchange’ earnings but it
helped shift almost all of Hong Kong’s manufacturing to mainland China.
However, a large number of the proposed SEZs, many of them specialised
for the IT sector, are less than a square mile in area, hardly the stuff
from which internationally competitive environments for manufacturing
are built. One cannot blame the finance ministry for confusing them with
EPZs and suspecting them to be tax havens masquerading as manufacturing
hubs. Indeed, many of these tax sops could be rationalised.

Sector-specific SEZs are also a curiosity, given that it is common for
diverse manufacturing activities to co-locate in good locations. But, it
is not clear whether we are prepared for large SEZs as world-class
manufacturing hubs, which will need extensive land acquisition. Leaving
it entirely to the private sector runs some risk of exploitation
allegations, and use of state power brings its own problems. A good
first step would be more transparency on the business plans of various
SEZs, so that their projected benefits are in the public domain. The
other neglected aspect of large SEZs is urban management. Large,
successful SEZs will shape into India’s new cities. If managed like our
existing cities, their benefits are likely to be that much lower.
Whether SEZs become real estate scams or not could well depend on how
this is addressed.

http://www.financialexpress.com/fe_full_story.php?content_id=152843