The Hindu Business Line : Infrastructure, the key

India should identify special economic zones with adequate critical mass and develop them with public-private partnership, with full commitment of the Centre and State Governments, to promote single or multiple product(s) or service(s). Infrastructure is the main determinant of SEZ success. And besides ensuring the quality of infrastructure for SEZs to improve productivity, crucial are speed and reliability of operations.

With the objective of attracting an investment of Rs 1,00,000 crore over the next three years, and creating an employment potential of over 5,00,000, the Commerce and Industry Minister, Mr Kamal Nath, laid out the details of the Special Economic Zone (SEZ) scheme on February 9. The Special Economic Zone Act, 2005 was promulgated some nine months ago, and the concomitant Rules have now been announced. An SEZ rush raises fears of the exchequer losing huge amounts of revenue, and of the scheme being manipulated by tax evaders.

The SEZ rush

It is not only the private sector companies that are jumping on to the SEZ bandwagon. Several PSUs too are in the fray. A number of leading industrial houses — Reliance Industries, Essar Group, Adanis, Bajaj Auto, Bharat Forge, Wipro, Biocon, Mahindra and Mahindra, Reliance Energy, have unveiledambitious plans. Also interested are scores of others for specific industrial or product sectors such as IT, jewellery, automobile, pharmaceuticals, textiles, besides many multi-product projects. Intel and Nokia have sought the SEZ sops for their production projects. Singapore has expressed intent to set up an SEZ in India.

Another dimension envisaged for the scheme is that of "virtual SEZ" pursued by automotive components units. It is not unnatural that a number of industrial areas across the country will then clamour for SEZ status, for tax advantages. A number of enterprises now operating in an EPZ (export processing zone), an EHTP (electronic hardware technology park), for example, are keen to become an SEZ. They are not eligible for a tax holiday, and the Finance Ministry has been constrained to amend the Income-Tax Act, lest any loophole is exploited.

The SEZs as a rule have been established in different countries as a test for implementing the market economy — as an instrument to enhance the acceptability and credibility of transformation policies, to attract domestic and foreign investment, and generally for opening up the economy. In a way, the SEZs become obsolete as an instrument of growth-oriented policy as the overall economy catches up with international competition.

China's SEZ success

The policy-makers and entrepreneurs in India believe that the SEZs will bring economic miracles as they did in China. In China, three of the four original SEZs came up in Guangdong, often cited as the fastest growing region in Asia, and perhaps the world. China designated a number of limited areas as open economic zones (OEZs) and used them as laboratories for experimenting with market-oriented reforms, offering competitive advantages in regard to labour, real estate, technology and capital. The four SEZs constituted the first stage in 1979-80, followed by 14 coastal cities authorised in April 1984 to establish `open zones.' In the third stage Hainan was established as an SEZ in 1988. This was followed by the opening of the Pudong New Area of Shanghai; established to develop and open the Yangtze river valley. Shanghai has now emerged as a major economic, trading and financial centre in China, indeed Asia. An important framework for the Chinese SEZs has been the preferential rates of income-tax contingent on foreign investment flows, not the export turnover.

An overwhelming emphasis in China's SEZ enclaves was the state-of-the-art infrastructure, simplified and streamlined procedures, convenient and cost-effective operating environment. Its big bang SEZs at Shenzen, Zhuhai, Shantou, Xiamen, and later at Hainan became a clear example of hassle-free environment for global investors. However, the prosperity in SEZs has created social tensions in an otherwise patient and disciplined Chinese people. Some have warned of labour abuse in some SEZs.

Creating the right environment

Direct fiscal concessions, or tax-breaks, are the driving force as is the promise of simpler labour laws in States such as West Bengal, Gujarat and Maharashtra. SEZs can significantly help in capital being made available at lower cost, as also infrastructure and raw material. Infrastructure ends up becoming the main determinant of SEZ success. Experts have argued that in addition to the quality of infrastructure being duly ensured for SEZs to improve productivity, speed and reliability of operations, there must be a durable mechanism to screen the SEZ proposals and projects. It would be appropriate to have adequate infrastructural support created in certain limited clusters and regions instead of indiscriminately scattering the public-private partnership resources across the country. One school of thought also firmly believes the SEZ is an idea whose time is gone.

Numerous incarnations of export processing zones, growth centres and industrial parks have proved to be of little value to the economy, be it the Export-Processing Zones/Export-oriented Unit scheme, Export Intensive Area Sub-plan, Infrastructure Development Scheme (aimed at developing 93 `no industry' districts), or the Export Promotion Industrial Park (EPIP) Scheme.

In spite of tax and other fiscal concessions extended to units under the EPZ/FTZ/SEZ schemes, so far their export performance has been lacklustre. During 2004-05, exports from the erstwhile EPZs, now termed SEZs, registered a level of $4 billion, that too largely on the strength of jewellery exports from SEEPZ.

NRI STUDY

At the Prime Minister's instance, a small group of NRIs looked at why Indian EPZs/SEZs have failed, whereas China's have succeeded brilliantly. The group made a strong case for stress on the quality of the infrastructure instead of fiscal incentives, and recommended that only a few regions of sufficient critical mass be successfully developed simultaneously.

It is also critical for the investment region to attract talent by developing quality housing, education, health and security facilities, besides power, telecom, and transport (port, airport, road and rail connectivity). Labour law flexibility can similarly be tried. For all this, a competitive environment can be created for States to compete to host an investment region.

As in China, India should identify special zones with adequate critical mass and develop them with public-private partnership, with full commitment of the Centre and State governments to promote single or multiple product(s) or service(s).

The rules and regulations, incorporating the essential features of single-window clearance, simplified procedures, besides efficient and transparent practices should be implemented in letter and spirit. The familiar hiatus between precept and practice that has generally characterised Indian pronouncements has to be avoided scrupulously.

(The author is a former Managing Director of Concor.)