At a critical juncture

We must urgently address the gaps in the SEZ policy to encourage, incentivise and support the growth of the manufacturing sector, writes Ravindra Sannareddy.

Special Economic Zones (SEZs) have been the most effective drivers of growth for developing Asian economies especially China over the last few decades. The key objectives of most SEZ programmes are to attract foreign investment, earn foreign exchange, boost industrial development, generate employment, and upgrade technology. India passed the SEZ act in 2006 and has made a significant progress in the service sector. However, the manufacturing sector growth is well below expectations.
Today, nearly 70 per cent of SEZ exports are IT related whereas large scale employment high of educated people can only be generated in the manufacturing sector. The need to get more manufacturing units into SEZs is evident but with the introduction of MAT and changes in tax benefits, SEZ enquiries have fallen by more than 50 per cent thus causing uncertainty. The silver lining is for operational SEZs such as Sri City which will enjoy the same tax benefits available to units operational before 2014.

The Hurdle – Land acquisition

Due to their catalytic role in promoting economic growth, SEZs must be considered as national enterprises and treated accordingly. Land acquisition is difficult and getting large parcels land in one location is tougher.

The recent proposal by the Commerce Ministry to reduce the minimum area for multi product SEZs from 1,000 hectare to 250 hectare and multi-service/sector specific from 100 hectare to 40 hectare is a welcome decision and this will reduce the problem drastically. Contiguous land acquisition will remain a problem as the availability of such land is very rare unless the SEZ is located in the tier II or tier III areas. However, this decision has been pending for over a year and people have lost faith that reforms will happen.

Create a vibrant city

The purpose of having townships in an SEZ is to have facilities so that people do not have to commute large distances to go to work and have easy access to shops, doctors etc. Being near to the SEZ with such facilities will reduce commuting costs.
The need of the hour is to revive interest in SEZs to make the SEZ Policy more buoyant. Exports this year have dropped from $201 billion to $189 billion and the trade deficit is $175 billion. This is a scary scenario and may take us back to pre 1991 period.

Some suggestions:

• Large multiproduct SEZs that invest in creating new infrastructure must be given a stable policy window of a minimum of 10 years so that they are not crippled while still learning to walk. The stability must be extended to units entering the SEZ so that they are also not affected by changes to policy.
• Better support and encouragement must be provided for the development of manufacturing industries. Incentive wise employment creation and investment.
• It must be ensured that fiscal reforms like the proposed Direct Tax Code will not adversely affect industrial development and growth.
• Minimum standards for infrastructure development must be defined. Environmentally sensitive systems for waste collection, recycling, and disposal must be encouraged.
• Notified SEZs must be given adequate support by all relevant government departments, and high quality infrastructure must be provided up to the periphery of the SEZ. Speedy approvals with defined time frames are critical.

The Chinese way

It is a well known fact that China’s growth is primarily a result of its long term perspective, compre­hensive, and long-term planning combined with clinical execution. The Chinese government in the 1980s established five SEZs in strategic locations throughout the country as part of its economic reforms package. These were very large projects spread across hundreds of square kilometres, each located in proximity to an established city or region that would act as a natural gateway for goods manufactured within the zone. Although the Chinese SEZs were initially meant to experiment with liberal policies within a localised setting by insulating the rest of the economy, they turned out to be extremely successful and became the engines for China’s rapid growth.

In India, though the concept of SEZs is the same like China, the model cannot be replicated as there are many differences, be it political or even social.

Though the advantages and disadvantages are numerous in each country, the key advantage that India has over China is the manufacturers are more quality conscious compared to the Chinese. It is the influence of the Japanese principles of quality management that ensured quality is the key to success.

Multiproduct SEZs must be away from cities but with good connectivity. They should generate large scale employment and reduce migration to towns.

The way ahead

India is at a critical juncture as far as its manufacturing sec­tor is concerned. Our capabilities have been demo­nstrated by the success of many multinationals that have set up facilities in India. We must urgently address the gaps in the SEZ policy to encourage, incentivise and support the growth of the manufacturing sector.

We must use the SEZ policy as a potent tool to offer these companies a strategic and sustainable competitive advantage by investing in India. Ultimately, we must focus on reinvesting the benefits of growth to create world-class infrastructure and facilities throughout the country so that location choices need not be confined to industrial enclaves, except maybe to extract cluster benefits and leverage economies of scale. Eventually, that should determine the success of our SEZ policy.

Differentiated policies for those industries creating large scale employment and others involving modern technologies are essential.