The Hindu Business Line : SEZs: Govt must re-do the homework

The Government recently approved 44 Special Economic Zones (SEZs), bringing the total approvals so far to 236 with only 36 having been notified. The setting up of SEZs was to decentralise infrastructure development, which cannot be provided with ease across the whole country simultaneously. Though the SEZ gained impetus as a result of the success of the concept in China, there are variations between the Chinese and the Indian models. While China's SEZs are restricted to five (each like a mega city), the Indian Zones are scattered across the country and quite small.

Chinese SEZs are strategically located close to ports and date back to the 1980s when the country was looking for private and foreign investment. India's SEZs come 15 years after it started liberalising its economy and have multi-dimensional goals of providing infrastructure, creating employment opportunities, and promotion of investment — domestic and foreign.

Though laudable there are certain thorny issues vis-à-vis SEZs.

Land

Land acquisition for SEZs has drawn marked criticism, the core issue being huge blocks of agricultural lands allocated for SEZs without adequate resettlement and rehabilitation programmes. This has prompted the government to issue guidelines that fallow and uncultivable land alone should be acquired for SEZs. And that if fertile land was involved, it should not be more than 10 per cent of the total area with a rider of providing adequate compensation and rehabilitation.

But, the farming community is still apprehensive, especially over the lack of clarity on rehabilitation and resettlement. The Reserve Bank of India is also worried about the overheating of the real-estate market as there is a rush to acquire land.

SIZE of SEZ

The main objective of the SEZ is to secure a long-term benefit of quality infrastructure that would lead to export growth. Zoning of SEZs, as in China, with geographical links to the ports would enable India take advantage of economies of scale. But when India has 236 SEZs, small, medium and big, it is important to make a more rigorous cost-benefit analysis. More than half the SEZs approved would need less than 40 hectares, and again almost half these have sought 20 hectares mainly for IT-related projects.

A 20-hectare SEZ would be like an industrial unit. Then, is it justifiable to provide quality infrastructure with a mega investment to such small enclaves? Does a huge outlay on roads justify this size?

There is also a cry for development of SEZs in non-urban areas so that Bharat Nirman and the Rural Employment Guarantee can be taken care of. But the geographical positioning is very important from the point of view of exports; for instance, the SEZ set up at Nanguneri in interior Tamil Nadu did not do too well. Again, after much criticism, the Ministry of Commerce and Industry has increased the processing area in a multi-product SEZ to 35 per cent from 25 per cent.

Revenue

The fiscal policy in promoting SEZs should be such that a zone generates more revenue than an industry would. According to the Budget, the sundry tax exemptions for SEZs would cost the exchequer Rs 1,58,000 crore. Recently, the IMF chief expressed concern about the volume of revenue losses the SEZs could lead to.

Many IT companies are joining the fray. Why? Because their tax benefits under the current incentives will come to an end by 2010 while the SEZ sops would extend the benefit regime for two more decades. Already IT companies are earning foreign exchange through exports. What will their contribution to the exchequer be after netting tax sops in an SEZ? After much criticism, the Government has decided to go slow on IT SEZs.

The Commerce Ministry has appointed an independent agency to conduct a comprehensive study on the potential losses and benefits. Such an exercise, that should have been done long ago, must look at many issues, such as the savings that would accrue to the Government because of private investment in infrastructure. It is estimated that in the next five years investment in SEZs would be Rs 3, 60,000 crore. The financial burden on the Government will be reduced.

Another issue is the employment generation and the personal income-tax that would accrue to the government. The tax revenue from sales by SEZ units in the domestic markets, also needs to be considered.

Routing of domestic exports through SEZs is another issue to be considered. To allay fears on this count, the Commerce Ministry added an explanation to Rule 76, which states that for income-tax purposes trading would mean "import for the purposes of re-export." However, the Ministry should take care that sale from SEZs to domestic markets does not put domestic industries at a disadvantage. The RBI's Annual Report also calls for an SEZ policy that would have effective backward and forward linkages.

Off-shore Banking Units

To be internationally competitive, the interest element plays an important part in the cost. Access to finance at competitive rates from international markets must be made available to SEZs. So far, there has not been any successful effort on this score.

So many unresolved issues suggest that enough groundwork has not been done before launching the SEZ issue. Perhaps, the Government should re-think the concept rather than just transplant the Chinese idea and expect it to work.

(The author is a Chennai-based chartered accountant.)

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