Business Daily from THE HINDU group of publications
Wednesday, Oct 04, 2006
SEZ idea must be re-visited
Historically, the context for the kind of discriminatory policies that encourage SEZs has lapsed. The SEZ Act has to be revisited, not only to iron out operational glitches but to reassess the kind of sectors that qualify for special privileges.
Contrary to the logic of discourse, the more the concept of Special Economic Zones (SEZs) is debated, the more does its real purpose get lost in ambiguity. Like the palimpsests of old, the original definition of the SEZ has been written over with every argument for and against its existence on the economic landscape.
Ironically, the authors of the Act that enshrines it have contributed to its obfuscation; the Commerce Minister, Mr Kamal Nath, for instance, on a TV channel defended the zones as vehicles of employment and quality infrastructure in the hope that these sterling attributes would smother all opposition. They have not.
With his back to the wall, Mr Kamal Nath is battling on various fronts; those within the government, like the Agriculture Ministry, and without, such as the CPI(M), which claims that farmers will be short-changed by developers, and the Reserve Bank of India, which has asked banks to treat SEZs as real-estate projects. The Finance Ministry, on its part, fears revenue losses on account of tax exemptions.
With the central bank frowning on credit growth to the retail sector, the message that banks will pick up is certainly not encouraging for SEZ developers. As if that were not bad enough, the Congress president, Ms Sonia Gandhi, has been guarded in her approval of the concept without raising any clear objections. In desperation, it seems, Mr Kamal Nath has appealed for help from the arbiter of the penultimate resort the Prime Minster.
The SEZ debate is not without purpose; every issue under discussion throws light on some aspect of its operation. It is quite feasible, and rational, for the developer to treat the zone as a piece of real-estate. Land is the most precious asset in this country because it is the most illiquid; more so than labour, which is a freely available commodity. Given their lack of bargaining power, farmers may be forced to offer their most precious asset cheap on the promise of jobs; with farming especially for the small cultivator an unprofitable venture, the sale of even irrigated land may just be a liberating choice.
Revenue losses are inbuilt, at least for the period of the tax holiday; 10 years and then a phased introduction over the next five years. The Finance Ministry's argument carries the weight of an immediate outcome while the Commerce Ministry's promise of revenue gain appears probable. Yet, the debates, important as they may be, hide the central problem of the SEZ that is located in the very reason for its creation.
The China Experience
The Special Economic Zone is about exports and forex earnings. In China, they provide, on an exclusive basis, goods for the developed markets with the combination of cheap contractual labour and world-class facilities funded by foreign investment. The philosophy behind the SEZ, the first of which came up in Guangdong Province on China's south-east coast near Shenzhen in 1980, was to sacrifice equity for growth. The hugely successful Shenzhen SEZ was replicated over the next decade because SEZs turned the country into the world's largest factory.
But almost all SEZs and their variations, including open free-trade zones along the Pearl river and on the Yangtze delta, are on the eastern coast, for obvious locational advantages for exports, and all are in cities. Preferential treatment, the hallmark of economic growth, is focused on the city, not the countryside.
The first Chinese SEZ was, however, pre-dated by the Indian EPZs or Export Processing Zones by a good decade or so. The Indian EPZ was set up in an era of rigid controls over scarce foreign exchange and was expected to focus solely on exports on the basis of special privileges not available to the rest of the country. For a host of reasons the EPZs failed to boost exports and earnings in the way that the domestic tariff area did, despite all the pains of shortages and controls.
The SEZ Act of 2000 was the work of Murasoli Maran, the then Commerce Minister who, inspired by Guangdong SEZs, made the concept a central part of the 2000 Exim Policy. The SEZ Act of 2005 was the result of various efforts at honing the concept to suit local needs. But over the same period, a combination of policy and economic revival made the SEZ irrelevant.
The five years since the first mention of SEZs in the Exim Policy have measured the distance the economy had moved without the SEZs. By 2005, every indicator of growth was peaking, including exports and forex earnings.
One could argue that success cannot be capped and that the SEZ can generate ballistic growth. But five years of liberalisation of Customs duties, exchange controls, freer float of the rupee and a rapidly restructuring industry have shown that one cannot have enough of an enabling environment on an inclusive scale, not an exclusive one.
As more areas of economic activity have been freed of greater control, they have expanded. Economic reforms have to have externalities, backward and forward linkages. The SEZs do not have that quality because they were not meant to.
The Chinese SEZs generate global linkages. They are built and developed by foreign investment for global end-markets; they are also, in this sense, self-serving for the end purpose. The Indian SEZs will be simply self-serving, without the necessary commitment to global end-users because that charter, exports, has hardly figured in the debates or, as one suspects, in the approvals so far.
Ironically, this laxity of purpose is embedded in the Act itself.
The earlier EPZs were self-explanatory; the word "processing" bound export and zone together to a tight commitment. The current SEZ Act makes life easier for the SEZ developer and units that can export goods and services or, simply, trade for the privilege of being considered a "designated duty-free enclave to be treated as foreign territory for trade operations and duties and tariffs."
An argument could be made that the race for double-digit GDP growth brooks no delay, and that like in China, the SEZs could haul India into the fast lane. Consider the cost. China took the "growth without equity" path, a choice that has exacerbated inequalities between the town and country, and between cities. India can do without further exacerbating historical inequalities. Further, it needs to consider "equity" to mean equality of opportunity as much as equality of incomes.
The SEZs create discriminating fields of opportunity, not merely between economic producers but across regions. By its very definition, the Act encourages the relocation of existing and new investments (and jobs) to the "designated duty-free enclave." Discriminating tax-breaks, blindly followed by the backward States to woo investments, hurt higher tax States.
Historically, the context for discriminatory policies is past as the various arms of government search together for answers to the three main obstacles impeding economic growth poor infrastructure, the lack of a fiscal regime that is transparent and non-competitive between regions and the absence of an empowering bureaucracy for every level of productive activity.
The SEZ Act needs to be revisited, not just to plug the operational loopholes in it, but to redefine its qualifying terms by targeting privileges for specific industries. Information Technology, those export warhorses of textiles, gems and jewellery, and any other segment with a visible export advantage should qualify for the special status. The idea of hubs for these sectors is in the air; it worked for the IT sector that has put Bangalore on the world map; it is certainly more relevant than the SEZ, which had its moments and failed.
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