The Hindu Business Line : Infrastructure or SEZ investment?

IT COULD be another `chicken-and-egg' story. The Finance Ministry seems to believe that infrastructure investment would follow investment by SEZ (special economic zone) users, or at least that it could happen simultaneously. The Commerce Ministry, on the other hand, is convinced that infrastructure outlay is mandatory if potential SEZ investors are to commit money to these special zones.

This argument divides those who stand for the `sunset clause' in SEZs and others who feel it is an unfair law that would stifle foreign investment. While the Finance Ministry argues that the proposed clause would hasten the pace of investment in the SEZs — the cut-off period being 2009 against 20 years that was on the cards — some of the players setting up greenfield SEZs say such a move would result in at least 25 per cent of the proposed investment in SEZs failing to materialise.

"The investment in basic infrastructure has to be in place before the SEZ users begin to park funds. Given that basic infrastructure will take two-three years to be put in place, the sunset clause will shorten the investible period for users to less than two years. The investment in pipeline for some five greenfield SEZs is $3 billion while the estimated user investment thereof would be around $15 billion," said an infrastructure analyst tracking SEZs.

At a ratio of 1:5, this would be among the lowest co-relation between investments in basic infrastructure and those made by user units in SEZs across the globe. China is at the top of the heap with a infrastructure-user investment ratio of 1:40, while countries such as the US are way behind with a 1:15 conversion rate. Given the immense potential to generate employment, with the SEZs expected to give jobs to over five lakh workers, India should not get stuck with such statistics at this point of time, the analyst said.

The flip side is that the SEZs in China have had almost 25 years to ensure such a healthy correlation between investments in basic infrastructure and user investment. That too, at a time when the concept of SEZs was new and the avenues for such investment were limited to a few shores. Meanwhile, India is poised to frame a law that will not allow investors, mostly the offshore variety, little more than a couple of years to have funds parked in Indian projects. Parliament has approved the Third Patents (Amendment) Bill but not before the Commerce Minister promised that neither the people nor the industry would be affected. April 1 is expected to see the ushering in of the VAT (value added tax) regime, but the Finance Minister has his task cut out with a number of State governments expressing their unwillingness to go the full distance. The one Act that has been hanging fire, due to the infighting within the Government, is the SEZ Act. The twist in the tale came from the Finance Minister by way of his Budget proposal to introduce the `sunset clause' that enjoins prospective investors to bring in the money by March 31, 2009.

The Finance Minister, Mr P. Chidambaram, feels this is a fair deadline for an SEZ unit to start production for availing itself of the tax holiday available under sub-section 1A of Section 10A of the Income-Tax Act. Coming in the backdrop of a meeting of Group of Ministers, headed by Defence Minister, Mr Pranab Mukherjee, which had cleared the draft SEZ legislation that seeks to extend the tax holiday period from SEZ units from 10 years now to 20 years, the Finance Ministry decision has put a damper on those who had been working the last one year to get the SEZ legislation through.

Even as the Commerce Minister, Mr Kamal Nath, has sought the intervention of the Prime Minister, Dr Manmohan Singh, to get the Budget proposal withdrawn, some of the promoters of the greenfield SEZs that are set to come up, say that the five-year sunset clause is fine provided the basic infrastructure is in place. Just as India is looking to replicate the Chinese model of wooing sizeable foreign investment, mostly in manufacturing, the minimum requirement would be world-class infrastructure, it is pointed out.

For example, for the SEZ planned in Navi Mumbai, it would have to come by way of the 22-km Trans Harbour Sea-Link that will take three years to come up. The potential investors in the Navi Mumbai SEZ would prefer to ensure that the Rs 4,000-crore investment by way of the connecting bridge really takes off before putting in money.

The SEZ Act proposes 100 per cent FDI (foreign direct investment) in the manufacturing sector through the automatic route barring a few sectors for establishment of units in the SEZs; 100 per cent foreign investment to develop townships within the SEZs; setting up off-shore banking units in the SEZs; external commercial borrowings by SEZ units up to $500 million in a year without any maturity restriction through recognised banking channels, and the flexibility to keep 100 per cent of export proceeds in an EEFC account.

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