SEZs in Limbo

In order to push the growth engine of the country, the National Democratic Alliance (NDA) Government has taken the initiative of pushing the country´s manufacturing sector through the ´Make in India´ campaign. This step of the government can become a huge success, particularly, if it focusses on reviving the Special Economic Zones (SEZs). The original intention behind the establishment of these zones was to bring export-oriented growth to the country, ultimately providing further scope for employment generation and earning of precious foreign currency.

But, was the basic purpose behind the setting up of SEZs really served? The outcome has been, at best, dubious. Taking a cue from China´s success in SEZs, the government brought in the policy framework for Indian SEZs. After the enforcement of SEZ Act in 2006, the developers explored this opportunity for boosting their land banks. Through this, they acquired the land and many of them even didn´t start the projects even after getting in-principle approvals and extensions from the government. In our opinion, SEZs have been a relative failure in India, despite the claims of success from some of the states, industry players, and policymakers. According to the developers and units within these SEZs, levies of Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT) spoiled the attractiveness of these duty free enclaves as these taxes swell their cost structure, ultimately making them lose their competitiveness in global markets. Although the Finance Ministry may have their own compulsions of Revenue Generation Targets, the government needs to analyse the reasons behind such conflicting policy directions which cause these failures.

While developing SEZs in China, the government there played an active role in framing conducive policies aimed at attracting investors. The government developed mega SEZs on huge tracts of land, changing socio-economic landscape of cities like Shenzhen, Chengdu, etc. On similar lines, the Indian Government may also be well-advised to concentrate only on the development of a few strategically located SEZs, having world-class infrastructure and competitive manufacturing ambience. Last but not the least, the government must demonstrate consistency in policy formulation, and having exempted the SEZs first, should not make an about turn and impose DDT & MAT on them. Talking about infrastructure related to manufacturing, it will be of interest to our readers to recall the grandiose concept of NIMZs (National Investment and Manufacturing Zones) rolled out by the previous government, promising 5000 hectares of industrial estates and townships along the DMIC, and it will be of further interest to all of us to know how this plan is progressing. Not much has been heard about these zones lately!

Moving on to the infrastructure sector as a whole, a fall in the number of tenders issued during FY2014-15 for the development of infrastructure projects such as roads and highways, railways, mining, water supply systems, and power plants has happened as compared to FY2013-14. According to Emkay Research, the real estate sector witnessed a slump of around 72 per cent in releasing tenders, while railways experienced a fall of around 19 per cent. The road and highways sector noted a decline of 11 per cent. Meanwhile, the tenders issued for water supply segment are around 55 per cent lower in FY2014-15 as compared to FY2013-14. These numbers are quite revealing in so far as they reflect the real situation on the ground. We think that the tall talks of economic revival have to be taken with a pinch of salt.

Finally, on the monetary front, the Reserve Bank of India (RBI) has given the much needed medicine, albeit in a very small dose, to the real-estate sector by reducing the policy repo rate by 25 basis points from 7.5 per cent to 7.25 per cent. The rate cut, when passed on by the banks to the borrowers, will definitely act as a catalyst for the housing market. We only hope it is not a case of ¨too little, too late¨.