Thursday, April 05, 2007

For a homegrown SEZ model

For a homegrown SEZ model 
There are good reasons for the legislation on special economic zones to be revised
Posted online: Thursday, April 05, 2007 at 0000 hours IST
 I am amazed at the wide-ranging public debate on special economic zones (SEZs) in India, involving the highest authorities in the public and private sectors. I had, of course, expressed reservations in my earlier FE pieces about the futility of experimenting with traditional SEZs that are antiquated in today’s liberalised world. India’s SEZ law, by and large, followed what the Chinese did in the 1980s with a fledgling private sector. India today is not in that situation. The role of the government should have been just that of a facilitator.
Who needs SEZs? Why and what is the track record? What kind is suitable for India? These are the questions that should have been addressed before the law was enacted.


Who needs SEZs? Countries do them to jumpstart global integration faced with high tariffs, red tape, rigid labour laws, low export and FDI bases, complex import regimes and forex regulations, and government control over all aspects of economy. Most of these problems have been tackled in India. Labour laws remain rigid, but these are not addressed even under the SEZ law. Some tax and credit incentives that are included are out of place.

Why does India still need SEZs? It needs them to help generate higher exports and FDI, and provide employment to the masses. SEZs are a good vehicle to achieve these objectives by creating enclaves with first world infrastructure, a greater ease of doing business with minimal government control, and low transaction costs. But the SEZ law falls short of overcoming these problems. There seems to be central government control in several spheres, making the SEZ developers and operators run to the ministry of commerce and industry (MOCI) for a wide range of approvals. We did not learn from our mistakes with earlier experiments with special zones, which were bedeviled by too much government control.

What kind of SEZs makes sense for India? We should move towards the broader concept that covers a large area, provides integrated development and is consistent with the objective of becoming a developed country. SEZs must offer an environment with minimal restrictions/interference, streamlined procedures, sound infrastructure and easy access through world-class sea and airports. All industrial activities should be eligible, with no export requirements. Sales to domestic tariff areas should be allowed, subject to payment of national duties. Permanent visas must be allowed to qualified investors. It should be demand-driven, with bulk of the investment coming from the private sector. Singapore, Hong Kong, Gibraltar and Jebel Ali in Dubai are well-known examples of these large SEZs, also known as freeports. Newer ones are Subic Bay in the Philippines, Labuan in Malaysia, Pudong in China, Batam in Indonesia and Aqaba in Jordan.

In the April 11 meeting of the empowered group of ministers, a decision should be taken to revise the SEZ law in the light of the experience with the modern concept of large SEZs/freeports and growth clusters
To succeed, the head of the SEZ must wield considerable autonomy. This is a far cry from the proposed Indian SEZs where the head is likely to be appointed by the MOCI. The issues of land acquisition, displacement of farmers, fair price to landowners, flexibility in labour laws, safeguard of monetary policy and national security should feature in an SEZ legislation with guidelines based on the best global practices.

To cut our losses, in the April 11 meeting of the empowered group of ministers, a decision should be taken to revise the SEZ law in the light of the experience with the modern concept of large SEZs/freeports and growth poles/clusters. The Shanghai-Suzhou growth pole is currently exporting over $200 billion of merchandise, and $15 billion of services. This is what we need, not a plethora of small, government-controlled SEZs.

For the SEZs in the pipeline, final clearance should be conditional upon the promoters and developers taking the lead in resolving all thorny issues, such as land acquisition, directly with the affected parties. The government should stay away from these contentious issues.

—Jayanta Roy is principal advisor, CII. These are his personal views
Sudarshan Rodriguez




Sudarshan Rodriguez,

Marine Conservation Analyst

Project Coordinator,

Post- Tsunami Environment Initiative


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