Promises Unmade

Our central bureaucracy has been highly optimistic in its forecast of growth from our SEZs. Even today, the Special Economic Zones look incredibly lucrative… on paper. A visit to the SEZ website of the Department of Commerce lists 14 juicy incentives, six for developers and eight for investing units. Three of those “major incentives and facilities” among them should no longer be there: “Full Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for [varying periods for developers and investors]”; “Exemption from minimum alternate tax under Section 115JB of the Income Tax Act” for both developers and units, and “Exemption from dividend distribution tax under Section 115O of the Income Tax Act” for developers.

Exports out of SEZs in 2010-11 moved up over 43 per cent over the previous year to Rs 3.16 lakh crore, but much of that spurt is clearly because the gestation period for a majority of them ended last year. Since SEZs are only five years old, a steadying up was expected this year. Instead, even before the first real fruits of labour were relished, pat comes MAT—and over two Budget announcements, all of the above three incentives will cease to exist. Along with the Dividend Distribution Tax, Direct Taxes Code and a confusing history of exits, SEZs in India are hardly at the stage that developers, investors and financiers would have liked to see them today.

SEZs are not meant to be a real estate game. If they peter out to be just that, the game would be played differently. Yet the Ministry of Commerce, in its wisdom, seems to assume it is: Investors in the SEZ who would like to exit stakes over 49 per cent are often only seen as people who want to sell land. This rather narrow thinking deters investors beyond 49 per cent, which needs Ministry approval. While it is possible to understand that approvals may be needed to regulate investors who, indeed, are real estate players, the government needs to demonstrate that its decisions to allow investors to exit are based on objective rationale, not speculations. Exits and new investments are necessary processes in the healthy growth of a company, and the SEZ business is no different.

Today, unit owners are heard saying that without the incentives, they would not like to be tied down locationally. It is therefore ironic that the government should appeal, as it has recently, for developers to go beyond the Metros and the few high-investment states of Haryana, Maharashtra, Gujarat, Karnataka and Andhra Pradesh. It would be a fair call only if connectivity and other forms of external infrastructure are in place.

Unkept promises by governments lead to a confidence problem, which a high-growth, developing country may not realise immediately. However, discontent among investors about policies that are either obfuscated, reversed or plain unimplemented eventually result in the kind of trust deficit that we cannot afford. Given another global economic slowdown hovering over our heads, India needs a special boost to exports, not more roadblocks that thwart their growth. If the future of SEZs turns out—as expert after expert in our cover story believes—a dead end because investors no longer believed the promises our government made to them, it would reflect a sad state of policy management.